GAO: Fiscal picture improving, but debt track still 'unsustainable'

A new government report found that this summer's debt-limit deal and the prospect of an improving economy has the fiscal picture looking better, but fundamental problems remain as the government is still on an "unsustainable" track.

The Government Accountability Office (GAO) reported Monday that there is reason for optimism about the nation's fiscal picture over the next decade, but that Congress still needs to grapple with the fundamental drivers of the deficit.

According to the watchdog, the Budget Control Act (BCA) hammered out in August, if kept intact, would lower discretionary spending in 2022 to its lowest levels in half a century. Furthermore, if the economy stays on the recovery track, the government's coffers will fill with more revenue and it will end up spending less. But the broader problems plaguing the government's balance sheet still loom large.

"While the BCA improved the outlook, it did not eliminate the longer-term challenge," the GAO wrote. "It did not focus on the fundamental drivers of the government's future fiscal imbalances — a structural gap between revenues and spending driven by rising healthcare costs and demographics."

While the nation's fiscal picture would improve if the debt limit agreement, and its $1.2 trillion sequester, are allowed to go through, its impact on the economy is more worrisome. Federal Reserve Chairman Ben Bernanke has repeatedly warned lawmakers that the dramatic policy swings set to take effect on Jan. 1, when the sequester hits and the Bush tax cuts are set to expire, could be so dramatic as to endanger the fledgling recovery. He has instead called for them to be replaced with more gradual changes to avoid that shock. The GAO did not consider the economic impact of policy in its analysis.

On the healthcare front, the GAO said the healthcare reform law, if implemented as intended, would have a "major effect" on that fiscal gap, but would not erase it as the population continues to age and healthcare costs climb. The amount of debt issued by the government will continue to climb under current policy, placing the government on an "unsustainable" track, according to the GAO.

Under an alternative scenario where lawmakers delay a number of pending policy changes, the debt picture is even worse. In that scenario, the Bush tax cuts and other temporary tax breaks are extended for another decade, and the automatic "trigger" cuts brought on by the failure of the supercommittee are not enacted. Revenue and discretionary spending are kept at historical averages.

In that situation, the government will pass its all-time high for debt — 109 percent in 1946 — around 2025. Under current law, the government would not clear that threshold until roughly 20 years later.

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