GAO: Debt could break record in 10 years

The nation's long-term fiscal outlook remains unsustainable, according to a new Government Accountability Office analysis showing escalating levels of debt and a surging budget deficit.

The GAO report comes as CBO is expected to announce on Friday the fiscal 2009 deficit will hit a record $1.4 trillion, or 9.9 percent of GDP. It will total $9.1 trillion over the next decade, in line with estimates that were made earlier this month.

According to the GAO analysis, released late Thursday, public debt is projected to surpass by 2019 the record of 109 percent of GDP, set in 1946 -- one year after the end of World War II.

The report cited healthcare costs and demographic trends as the two main drivers.

"Absent reform, Social Security, Medicare and Medicaid will account for a growing share of the economy in coming years. The longer action to deal with the nation's long-term fiscal outlook is delayed, the larger the changes will need to be, increasing the likelihood that they will be disruptive and destabilizing," said the report.

The analysis was based on historical trends and policy preferences. Accordingly, it assumes that discretionary spending grows with GDP rather than inflation during the first 10 years; that Medicare physician payment rates are not reduced as they are in the CBO baseline; that all tax provisions are extended to 2019; and that the alternative minimum tax exemption amount is indexed to inflation through 2019, when revenues are brought back to their historical level.

The analysis also projected an increase in the budget deficit, which could rise to about 20 percent of GDP by about 2038 absent reform.

Healthcare cost growth and demographic trends that were once thought of as long-term challenges are already hurting the federal budget in the near term, the report noted.

"The oldest members of the baby-boom generation are now eligible for Social Security retirement benefits and will be eligible for Medicare benefits in less than 2 years," GAO said. "Meanwhile, Medicare's Hospital Insurance Trust Fund began running cash deficits in 2008; that is, program expenses exceed dedicated revenue. Social Security cash surpluses, which have been used to help finance other government activities, are projected to turn to cash deficits by 2016."