Trump Administration Greeted by New Challenging Federal Fiscal Outlook

The U.S. Government Accountability Office (GAO) has begun a new effort to examine the nation’s fiscal heath at the start of each calendar year and inaugurated the effort by issuing its first annual outlook on the nation’s fiscal future. According to the press release announcing the new report, The Nation’s Fiscal Health: Action Is Needed to Address the Federal Government’s Fiscal Future, “discusses significant changes to the nation’s fiscal condition in fiscal year 2016, long-term simulations of the federal debt, and fiscal risks placing additional pressure on the federal budget.”

The new report, based on the FY 2016 Financial Report of the U.S. Government and GAO’s audit of the government’s FY 2016 and 2015 consolidated financial statements, also includes GAO’s recommendations on steps that federal agencies can take to improve the fiscal situation, including “reducing improper payments; closing the tax gap; eliminating duplication, overlap, and fragmentation in federal programs; and producing better information on program and fiscal operations to strengthen decision-making.”

GAO notes that federal spending continues to outpace revenue—by $587 billion in 2016—and, absent policy changes, the structural gap between revenues and spending puts the federal government on an unsustainable long-term fiscal path.

Findings include:

• Federal Deficit – According to the 2016 Financial Report, the federal deficit in fiscal year 2016 increased to $587 billion—up from $439 billion in fiscal year 2015. This marked a change from 6 years of declining deficits.
• Taxes vs. Spending – The federal government’s receipts (taxes and other collections) increased by $18.0 billion (0.6 percent), from $3,248.7 billion to $3,266.7 billion, but this was outweighed by a $166.5 billion increase in spending from $3,687.6 billion to $3,854.1 billion. The fluctuation in tax receipts was attributed to changes in individual and corporate income tax rates.
• Federal Debt – Total federal debt rose to $19.7 trillion during fiscal year 2016, an increase of $1.4 trillion from fiscal year 2015. This change reflected an increase of intragovernmental debt of $0.4 trillion and an increase in debt held by the public of a little over $1.0 trillion to $14.2 trillion.

Debt-to-GDP Ratio

A key measure in fiscal health is the debt held by the public as a share of Gross Domestic Product (GDP). The U.S. historical high of debt-to-GDP was 106% in 1946. The figure below shows that under the various scenarios the debt-to-GDP ratio would remain somewhat stable over the next few years, but would then increase and surpass its historical high of 106 percent within 15 to 25 years and would continue to grow after that point.

GAO concludes that this fiscal path – driven largely by health care spending and net interest on the debt – is unsustainable and if unaddressed would put increased pressure on the rest of the federal budget, limit lawmakers’ ability to respond to unforeseen events, and increase the likelihood of a future fiscal crisis.

Other recommendations that GAO makes or reiterates include:

• Find an Alternative to the Debt Ceiling – The current debt limit does not control debt, but rather restricts the Treasury’s authority to borrow to finance the decisions already enacted by Congress and the president. GAO has suggested we look for alternative approaches that better link decisions about borrowing with decisions about spending and revenue.
• Reduce improper payments - The improper payments estimate in FY 2016 was over $144 billion and since FY 2003 the cumulative estimates total over $1.2 trillion.
• Close the Tax Gap – The annual gross tax gap between taxes owed and those paid on time is estimated to be $458 billion.
• Continue Efforts to Reduce Duplication, Overlap, and Fragmentation – Actions taken so far by Congress and the executive branch have resulted in roughly $56 billion in financial benefits from FY 2010 through 2015, with an additional $69 billion projected through 2025.
• Improve Management Information – Stronger efforts in financial reporting and effective implementation of the Digital Accountability and Transparency Act of 2014 (DATA Act) will improve decision-making.

Implications

The announcement of a brand new annual fiscal assessment and the release of the current fiscal outlook comes at a crucial time of presidential transition. While the timing of such an effort is what it is, the emphasis on the unsustainability of the current fiscal path – although not a new theme for many – will likely provide fodder for all sides in the unfolding policy and funding debates that come with new administrations and new policy agendas. Every administration and Congress inherits both good and bad scenarios by those that came before them. The challenge to the incoming Trump Administration and new Congress is where to go from here.