Executive Summary to the 2017 Financial Report of U.S. Government

Where We Are Headed

An important purpose of this 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 fiscal 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 the Financial Report assume current policy will continue indefinitely.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, net interest, and total spending   expressed as a percent of GDP. The projections do not reflect the Tax Cuts and Jobs Act (P.L. 115-97) enacted on December 22, 2017; for more information on the Act, see Note 25, Subsequent Events.

• The primary deficit is the difference between non-interest spending and receipts. The primary deficit expressed as a ratio relative to GDP (the primary deficit-to-GDP ratio) is useful for gauging long-term fiscal sustainability.
• The primary deficit-to-GDP ratio spiked during 2009 through 2012 due to the financial crisis and the ensuing severe recession, as well as increased spending and temporary tax reductions enacted to stimulate the economy and support recovery. As an economic recovery took hold, the primary deficit-to-GDP ratio fell, averaging 1.9 percent from 2013-2017. The ratio is projected to shrink further through 2021 as discretionary spending limits remain in effect and economic recovery boosts tax receipts.
• After 2021, increased spending for Social Security and health programs² due to the continued retirement of  the baby boom generation and increases in health care costs is projected to result in increasing primary deficits through 2038 when the primary deficit-to-GDP ratio reaches 2.1 percent. After 2038, the ratio slowly declines as the aging of the population slows, and reaches 0.6 percent in 2091.

• The persistent long-term gap between projected receipts and total spending shown in Chart 5 occurs despite the projected effects of the Affordable Care Act (ACA)³ on long-term deficits.
  • Enactment of the ACA in 2010 and the Medicare Access and CHIP Reauthorization Act (MACRA) in 2015 established cost controls for Medicare hospital and physician payments whose long-term effectiveness is still to be demonstrated.
  • There is uncertainty about the extent to which these projections can be achieved and whether the ACA’s provisions that reduce Medicare cost growth will be overridden by new legislation.

Table 1 summarizes the status and projected trends of the Government’s Social Security and Medicare Trust Funds.

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

• The debt-to-GDP ratio was 76 percent at the end of FY 2017, and under current policy is projected to be 74 percent in 2027, 136 percent in 2047, and 297 percent in 2092.
• The debt-to-GDP ratio rises continuously despite flat primary deficits mainly because higher levels of debt lead to higher net interest expenditures, which lead to higher deficits and debt. The continuous rise of the debt-to-GDP ratio after 2026 indicates that current fiscal policy is unsustainable.
• These debt-to-GDP projections are generally higher than the corresponding projections in both the FY 2016 and FY 2015 Financial Reports.

The Fiscal Gap and the Cost of Delaying Policy Reform

• The 75-year fiscal gap is a measure of how much primary deficits must be reduced over the next 75 years in order to make fiscal policy sustainable. That estimated fiscal gap for 2017 is 2.0 percent of GDP (compared to 1.6 percent for 2016).
• This estimate implies that making fiscal policy sustainable over the next 75 years would require some combination of spending reductions and receipt increases that equals 2.0 percent of GDP on average over the next 75 years. The fiscal gap represents 10.0 percent of 75-year present value receipts and 9.4 percent of 75- year present value non-interest spending.
• The timing of policy changes to make fiscal policy sustainable has important implications for the well-being of future generations as is shown in Table 2.

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• Table 2 shows that, if action is delayed by 10 years, the estimated magnitude of primary surplus increases necessary to close the 75-year fiscal gap increases by about 20 percent from 2.0 percent of GDP on average over 75 years to 2.4 percent on average over 65 years); if action is delayed by 20 years, the magnitude of reforms necessary increases by about 50 percent.
• Future generations are harmed by a policy delay 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

• Projections in the Financial Report indicate that the Government’s debt-to-GDP ratio is projected to remain relatively stable over the next decade, and then continuously rise over the remaining projection period and beyond if current policy is kept in place. This trend implies that current policy is not sustainable.
• As long as changes in policy are not so abrupt as to slow economic growth, the sooner policy changes are adopted, the smaller the changes to revenue and/or spending will need to be to return the Government to a sustainable fiscal path.

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)

²See the 2017 Trustees Report for Medicare (pp 4-5) and Social Security (pp 4-23). (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 2017 Medicare Trustees Report for more information). (Back to Content)