The Nation’s Fiscal Health: A Roadmap Is Needed to Address Projected Unsustainable Debt Levels

What the GAO found

The federal government faces an unsustainable long-term fiscal future. At the end of fiscal year 2022, debt held by the public was about 97 percent of gross domestic product (GDP). Projections by the Office of Management and Budget and the Treasury Department, the Congressional Budget Office, and the GAO show that current fiscal policy is unsustainable over the long term. Public debt is projected to grow at a faster rate than the size of the economy. Public debt is projected to reach an all-time high of 106 percent of GDP within 10 years and continue to grow at an increasing rate. The GAO projects that this ratio could more than double the size of the economy by 2051, without any changes in revenue and spending policies.

Government debt is expected to grow faster than GDP

The federal budget deficit in fiscal year 2022 was among the largest in history

When the government spends more than it collects, the Treasury borrows money to finance the resulting deficit. The federal budget deficit in fiscal 2022 was $1.4 trillion, down 50 percent from fiscal 2021 but still the fourth largest in U.S. history. This decline is due to higher tax revenues and lower federal spending related to the pandemic. In fiscal year 2022, the federal debt held by the public rose by about $2 trillion, reaching $24.2 trillion.

Increasing deficits lead to unsustainable debt levels

The growing debt is a consequence of borrowing to finance ever-larger annual budget deficits. GAO designed this

  • expenditures for Social Security, federal health care programs, and all other federal programs increase more than revenues, resulting in a primary deficit; and
  • net interest costs, which essentially represent the federal government’s cost of servicing its debt, rose steadily over the next 30 years, further increasing the overall budget deficit.

Primary deficit and general budget deficit, actual and projected

Net interest costs will continue to increase due to both higher levels of total debt and projected increases in interest rates over the long term. Higher than projected interest rates will further increase interest expense and debt. In addition to increased borrowing costs, rising debt can lead to slower economic growth.

Other potential fiscal risks stem from delays in raising or suspending the debt limit — the legal limit on the total amount of money the federal government is authorized to borrow to meet its existing statutory obligations. These delays could create disruptions in financial markets and investors may demand higher interest rates to hedge against increased risks, which in turn could increase borrowing costs. Failure to raise the debt limit in time to prevent a default would have far more severe economic and reputational consequences.

Action is needed to change the unsustainable fiscal path

The GAO previously suggested that Congress develop a plan to address the government’s fiscal outlook and promote fiscal sustainability. GAO’s work identifies several components of an effective fiscal plan:

  • Include well-developed fiscal rules and goals to help manage debt, for example by controlling factors such as spending and revenue to achieve the debt-to-GDP target.
  • Assess the drivers of the primary deficitsuch as mandatory and discretionary expenses, and revenues — including tax expenses such as deductions and tax credits.
  • Consider alternative approaches to the debt limit to avoid disrupting the government bond market and increasing borrowing costs, and to improve the management of the federal debt. For example, the debt limit could be set as part of a budget resolution, or the Treasury Department could be given the power to propose a change to the debt limit that would take effect absent congressional disapproval.

Why did the GAO do this study?

GAO produces this annual Fiscal Health Report to examine the current fiscal health of the federal government and its future fiscal path, absent policy changes in program revenue and spending.

This report describes: (1) the fiscal condition of the federal government and changes from fiscal years 2019 through 2022; (2) the results of our 75-year simulation of the federal government’s fiscal outlook; (3) effects of rising interest costs and rates; (4) additional risks to the federal government’s fiscal outlook; and (5) components of a sustainable long-term fiscal plan and actions that Congress and federal agencies can take now to reap financial benefits.

For more information, contact Jeff Arkin, (202) 512-6806 or [email protected], Robert F. Dacey at (202) 512-3406 or [email protected], or Dawn B. Simpson, (202) 512 – 3406 or [email protected].

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