Thursday, February 14, 2008

U.S. long-term fiscal policies unsustainable

Long-term fiscal outlook of the federal government remains essentially unsustainable, despite some improvements in the annual deficit estimate for this fiscal year, says the Government Accountability Office (GAO) in its latest report.

In view of this scenario, GAO has predicted that the fiscal policies of the federal government may be impacted by the ever-longer deficits which could possibly lead to debt burdens to run out of control.

These findings were based on GAO's latest simulations of two alternative fiscal paths using baseline extended option and an alternative based on recent trends and policy preferences.

"Under these alternative assumptions, discretion by spending grows with the economy during the first ten years, most of which go to Medicare physician payments," GAO reported.

Under the current law, Medicare payments to physicians have not been reduced and revenues are brought to their current level. In order to sustain this growth path, physician payments are scheduled to be reduced by as much as ten percent this year and another five percent in each subsequent year through 2016.

GAO found out that what is unsustainable will not be sustained based on the current assumptions. To do this is to change the government's fiscal course. According to its findings, the longer action to deal with the nation's long-term fiscal outlook may pose greater risk so that the eventual changes will be disrupted."Acting sooner rather than later will give us more time to phase in gradual changes, while providing more time for those likely to be most affected to make compensatory changes," it cited.

At the moment, there is a wide gap in the long-term fiscal outlook results between expected revenues and expected spending. GAO observed that most of the federal government's expenditures are eaten up by Medicare, Medicaid and the Social Security, especially those related to health care programs.

The retirement of the baby boomers is one key element of these expenditures. This year alone, the first baby boomers are expected to draw social security retirement benefits. Then in 2011, the first boomers will become eligible for Medicare, which GAO believes, would be an added burden to the government's spending.

GAO has expressed apprehensions based on its studies the coming two decades, the country's population will age dramatically so that only fewer workers will be capable of supporting an ever larger costs for retirees.But the government's worry does not fall so much on the social security spending, but on the Medicare and Medicaid programs, which are growing rapidly.

A proof to this is that the government's Medicare Part D along exceed the unfunded obligations for social security benefits. In fact, health care spending per capita grew by as much as 25 percent faster than the average annual GDP per capita. For this reason, rising health care costs pose a fiscal challenge not only for the federal government but to the business community and the economy as a whole.

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