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2016 Financial Report of the United States Government


A Citizen's Guide to the Fiscal Year 2016 Financial Report of the United States Government

Where We Are Headed

An important purpose of this Guide and the Financial Report is to help citizens understand current fiscal policy and the importance and magnitude of policy reforms necessary to make it sustainable.  A sustainable policy is one where the ratio of debt held by the public to Gross Domestic Product (GDP) (the debt-to-GDP ratio) is stable or declining over the long term.  GDP measures the size of the Nation’s economy in terms of the total value of all final goods and services that are produced in a year.  Considering financial results relative to GDP is a useful indicator of the economy’s capacity to sustain the Government’s many programs.

To determine if current fiscal policy is sustainable, the projections discussed in this Guide assume current policy will continue indefinitely and draw out the implications for the growth of the debt-to-GDP ratio.1 The projections are therefore neither forecasts nor predictions. As policy changes are enacted, actual financial outcomes will be different than those projected.

Receipts, Spending, and the Debt

Chart 5 shows historical and current policy projections for receipts, non-interest spending by major category, and total spending expressed as a percent of GDP.

This site requires the Adobe Flash Player to view the charts. If you don't have flash or Flash is not available, you can download the chart's data source here in XML format.
  • The difference between the receipts and non-interest spending shares of GDP (the primary deficit-to-GDP ratio) grew rapidly in 2009 due to the financial crisis, the recession, and the policies pursued to combat both. The ratio remained high from 2010 to 2012, despite shrinking in each successive year, and fell significantly in 2013 and 2014.

  • The primary deficit is projected to shrink further in the next few years as spending limits called for in the Budget Control Act (BCA) continue and the economy continues to recover, becoming a surplus starting in 2020 that peaks at 0.3 percent of GDP in 2021.

  • After 2021, however, increased spending for Social Security and health programs2 due to the continued retirement of the baby boom generation and increases in the price of health care services is expected to cause primary surpluses to steadily deteriorate and become a primary deficit starting in 2025 that reaches 1.0 percent of GDP by 2029 and peaks at 1.6 percent of GDP in 2038.  After 2038, the aging of the population continues at a slower pace, causing the primary deficit to gradually decrease to 0.2 percent of GDP in 2091.
    • In these projections, the Affordable Care Act (ACA)3 provision of health insurance subsidies and expanded Medicaid coverage boosts federal spending, and other ACA provisions significantly reduce per-beneficiary Medicare cost growth.

    • Overall, the ACA is projected to substantially reduce the growth rate of federal expenditures for Medicare over the next 75 years. However, as noted in the Financial Report, there is uncertainty about the extent to which the ACA’s provisions will result in reduced health care cost growth. Even if those provisions work as intended and as assumed in these projections, Chart 5 still shows a persistent gap between projected receipts and total spending.

The primary deficit projections in Chart 5 and 6 (left axis), along with those for interest rates and GDP, determine the debt-to-GDP ratio projections shown in Chart 6 (right axis).

This site requires the Adobe Flash Player to view the charts. If you don't have flash or Flash is not available, you can download the chart's data source here in XML format.
  • The debt-to-GDP ratio was 77 percent at the end of FY 2016, and under the long-term fiscal projections of current policy is projected to be 71 percent in 2026, 122 percent in 2046, and 252 percent in 2091.  The debt-to-GDP ratio rises at an accelerating rate despite primary deficits that flatten out because higher levels of debt lead to higher net interest expenditures, and higher net interest expenditures lead to higher debt.  The continuous rise of the debt-to-GDP ratio after 2026 indicates that current policy is unsustainable.

  • These debt-to-GDP projections are generally higher than the corresponding projections in the FY 2015 Financial Report, but still lower than those in the FY 2014 Financial Report.  For example, the debt-to-GDP projection for 2089 (the final projection year for the 2014 report) is 246 percent in this year’s Financial Report, was 220 percent in the FY 2015 Financial Report, and was 321 percent in the FY 2014 Financial Report.

The Fiscal Gap and the Cost of Delaying Policy Reform

  • It is estimated that preventing the debt-to-GDP ratio from rising over the next 75 years would require some combination of spending reductions and receipt increases that amount to 1.6 percent of GDP on average over the next 75 years, 0.4 percentage points greater than the 1.2 percent estimate in 2015.

  • The timing of changes to non-interest spending and receipts that close this “75-year fiscal gap” has important implications for the well-being of future generations.
    • For example, relative to a policy that begins immediately, if action is delayed by 10 years, it is estimated that the magnitude of reforms necessary to close the 75-year fiscal gap will increase by about 18 percent; if action is delayed by 20 years, the magnitude of reforms necessary will increase by about 50 percent.

    • If policy changes in the near term were to go in the reverse direction, by reducing revenues and/or increasing spending, the policy changes needed to close the fiscal gap would be made all the larger.
    • Future generations are harmed by a policy delay of this sort because the higher the primary surpluses are during their lifetimes, the greater is the difference between the taxes they pay and the programmatic spending from which they benefit

Conclusion

  • The Government took significant steps towards fiscal sustainability by enacting the ACA in 2010, the BCA in 2011, and the American Taxpayer Relief Act (ATRA) in 2013. The ACA holds the prospect of lowering long-term per beneficiary spending growth for Medicare and Medicaid, the BCA significantly curtails discretionary spending, and ATRA increased revenues. Together, these three laws substantially reduce the estimated long-term fiscal gap.

  • But even after enactment of these laws, the Government’s debt-to-GDP ratio is projected to remain relatively flat over the next ten years, and then commence a continuous rise over the remaining projection period and beyond if current policy is kept in place. This trend implies that current policy is not sustainable.

  • Subject to the important caveat that changes in policy are not so abrupt that they slow continued economic growth, the sooner policies are put in place to avert these trends, the smaller the revenue increases and/or spending decreases will need to be to return the Government to a sustainable fiscal path.
  • If policies are put in place in the near term that increase the fiscal gap, then even more dramatic fiscal adjustments will be necessary in the future.

Footnotes

1Current policy in the projections is based on current law, but includes extension of certain policies that expire under current law but are routinely extended or otherwise expected to continue. (Back to Content)
2The 2016 Medicare Trustees Report projects that the Hospital Insurance (HI) Trust Fund will remain solvent until 2028 ( two years earlier than noted in last year’s report), at which point, HI revenues are projected to cover 87 percent of program costs.  This percentage is projected to decrease to 79 percent in 2040, and then increase to about 86 percent by the end of the projection period.  As for Social Security, under current law, the Old-Age, Survivors, and Disability Insurance (OASDI) Trust Fund reserves, considered on a theoretical combined basis, are projected to be depleted in 2034 (unchanged from last year’s Financial Report), at which time the projected share of scheduled benefits payable from trust fund income is 79 percent, decreasing to about 74 percent by 2090.  The Disability Insurance (DI) Trust Fund alone is projected to become depleted by the end of 2023, at which time 89 percent of scheduled benefits would be payable, rising to a somewhat higher level through 2040, then declining to 82 percent by 2090. The projections assume full Social Security and Medicare benefits are paid after the corresponding trust funds are exhausted.  See the 2016 Trustees Report for Medicare (pp 5, 29) and Social Security (pp 3, 6, 13, 24).(Back to Content)
3The ACA refers to P.L. 111-148, as amended by P.L. 111-152.  The ACA expands health insurance coverage, provides health insurance subsidies for low-income individuals and families, includes many measures designed to reduce health care cost growth, and significantly reduces Medicare payment rates relative to the rates that would have occurred in the absence of the ACA.  (See Note 22 and the Required Supplementary Information section of the Financial Report, and the 2015 Medicare Trustees Report for more information). (Back to Content)

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