Budget Policy

The structural imbalance of the federal budget will do increasing damage to the economy in the future and is unsustainable in the long term. Action to hold the deficit at its expected postrecession level would mitigate some of these harmful effects, but in the long run they would require increasingly painful decisions that still would not yield an adequately rising standard of living for future generations. The erosion of America's future economic strength is being worsened by the increasing allocation of federal dollars to current consumption rather than to investment in infrastructure, human capital, and research and development. The budget process needs to adopt a longer-term planning horizon linking fiscal policy with broader goals for the economy. In addition, a new decision-making framework is needed to highlight the choice between consumption and investment spending throughout the budget process. If America is to achieve a budget policy that serves the interests of future generations, hard choices are required as to what responsibilities the federal government will carry and how they will be financed. No part of the budget can be exempt from such an examination, but the dimensions of the problem are such that the dominant program areas must receive concentrated attention. The budgetary implications of defense spending, spiraling health care costs, and the not-so-distant retirement of the baby boomers will all have to be confronted. The Comptroller General and Chief Economist summarized this report in separate testimony before Congress; see: Budget Policy: Long-Term Implications of the Deficit, by Charles A. Bowsher, Comptroller General of the United States, before the Subcommittee on Deficits, Debt Management and International Debt, Senate Committee on Finance, GAO/T-OCG-92-4, June 5, 1992 (15 pages); and Budget Policy: The Budget Deficit and Long-Term Economic Growth, by Sidney G. Winter, Chief Economist, before the Joint Economic Committee, GAO/T-OCE-92-1, June 11, 1992 (16 pages).

GAO found that: (1) the structurally unbalanced federal budget will damage the economy in the future and is not sustainable in the long term; (2) federal budget deficits have grown since World War II and remain embedded in the budget as a result of rapidly rising mandated spending and relatively flat revenue growth; (3) the short-run damage from deficits may not be as visible as the short-term costs involved in dealing with them, but deficits do consume savings that otherwise could be productively invested in such areas as increased labor input, capital accumulation, improved products and processes, improved resource allocation, adequate physical and social infrastructure, and improved organization and management; (4) projected increases in health care and social security expenditures, in combination with other current revenue and expenditure policies, present a dismaying picture of continued deficit growth; and (5) a major reduction in the long-run structural budget deficit, by reducing current consumption, would yield long-term benefits such as higher national saving, higher investment, more rapid economic growth, and a lower foreign debt. GAO believes that the budget process should be improved by: (1) reforming the structure and presentation of budget data to facilitate the making of budget choices that promote long-term economic growth; (2) encouraging decisionmakers to look at all budget areas, but particularly large or growing areas of the budget; (3) adopting a longer-term planning approach that links fiscal policy with broader goals for economic performance; and (4) placing more emphasis on the investment implications of fiscal policies.