averting a fiscal crisis 0

7/31/2019 Averting a Fiscal Crisis 0

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Averting a Fiscal CrisisThe Committee for a Responsible Federal Budget


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Deficit Projections

Note: Estimates based on CRFB Realistic Baseline.

(Percent of GDP)

1992-2012 Average Deficit: 2.9% 2012-2022 Average Current Policy Deficit: 4.3%

1

-4%

-2%

0%

2%

4%

6%

8%

10%

12%


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10%

12%

14%

16%

18%

20%

22%

24%

26%

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022Current Law Spending Current Law RevenuesCRFB Realistic Spending CRFB Realistic Revenues

Actual Projected

Gap Between Revenue and Spending


(Percent of GDP)

Avg. Historical Spending (1972-2011): 21.0%

2

Avg. Historical Revenues (1972-2011): 17.9%


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Components of Revenue and SpendingRevenues and Financing

Outlays

Total Outlays = $3.563 Trillion

2012

3

Total Revenues = $2.435 TrillionTotal Financing = $3.563 Trillion

Individual Income

Tax27%

Corporate Tax5%

Social InsuranceTaxes24%

Other6%

Borrowing32%

Medicare14%

Medicaid &Other Health

8%

Social Security22%

Other Mandatory16%

Defense19%

Non-Defense15%

Interest6%


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Surpluses Turning Into Growing Deficits

Spending and Revenues (Billions of Dollars)

4

Source: Congressional Budget Office, Alternative Fiscal Scenario

What Debt Is Likelyto Reach

Revenues

PrimarySpending

Interest

Deficit

RevenuesPrimarySpending

InterestDeficit

RevenuesPrimary Spending

Surplus

Interest

$2.0T $2.4T

$4.6T

$1.4T$860B

$5.1T

$1.1T

$220B

$3.3T

$236B$233B

$1.6T

2000 2012 2022

Interest Costs Will Reach $1 Trillion By 2024


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-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

Current Law

Debt Projections


(Percent of GDP)

Realistic Projections2010: 63%2025: 88%2040: 140%2080: 365%

5

What the Debt WillRealistically Look Like


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Consequences of DebtCrowding Out of public sectorinvestment leading to slower economicgrowth

Higher Interest Payments displacingother government priorities

Intergenerational Inequity as futuregenerations pay for currentgovernment spending

Unsustainable Promises of highspending and low taxes

Uncertain Environment for businessesto invest and households to plan

Eventual Fiscal Crisis if changes are notmade

6


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The Risk of Fiscal Crisis

Rising Debt increases the likelihood of a fiscal crisis during which investors would

lose confidence in the government's ability to manage its budget and thegovernment would lose its ability to borrow at affordable rates. -Doug Elmendorf, Director of the Congressional Budget Office

Our national debt is our biggest national security threat. -Admiral Mike Mullen, Chairman of the Joint Chiefs of Staff

One way or another, fiscal adjustments to stabilize the federal budget must occur [if we dont act in advance] the needed fiscal adjustments will be a rapid andpainful response to a looming or actual fiscal crisis.

-Ben Bernanke, Chairman of the Federal Reserve

7


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Debt Drivers

8

Short-Term Long-Term

Economic Crisis(lost revenue and increased spending fromautomatic stabilizers)

Economic Response(stimulus spending/tax breaks andfinancial sector rescue policies)

Tax Cuts(in 2001, 2003, and 2010)

War Spending(in Iraq and Afghanistan)

Rapid Health Care Cost Growth(causing Medicare and Medicaid coststo rise) Population Aging(causing Social Security and Medicarecosts to rise, and revenue to fall)

Growing Interest Costs(from continued debt accumulation)

Insufficient Revenue(to meet the costs of funding government)


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Federal Spending and Revenues (Percent of GDP)

Growing Entitlement Spending

Note: Estimates based on CRFB Realistic Baseline.9

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%Actual Projected

Revenues

Interest

Health Care

Other Spending

Social Security

Average HistoricalRevenues


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Why Is Entitlement Spending Growing?

8%

10%

12%

14%

16%

18%

20%

22%

24%

26%

Aging

Excess Health CareCost Growth

Drivers of Entitlement Spending Growth (Percent of GDP)

10

36%

64%

56%

44%

Source: CBO Long-term Budget Outlook, 2011.


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Why Is Federal Health Spending Increasing?The Population Is Aging due to increased lifeexpectancy and retirement of the baby boomgeneration, adding more beneficiaries toMedicare and Medicaid

Per Beneficiary Costs Are Growing faster thanthe economy in both the public and privatesector. Causes of this excess cost growth include:

Americans Are Unhealthy when compared topopulations in similar economies

Americans Are Wealthy and Willing to Pay More

Fragmentation and Complexity between insurers,

providers, and consumers make normal marketcompetition difficult

Incentives Are Backwards by hiding true costs of care through insurance and by hiding costs of insurance enrollment through employersponsorship, incentivizing overspending

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Health Care Spending by Country

Percent of GDP (2008)

Source: 2008 Data from the Organization for Economic Cooperation and Development.12

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Public Private


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Number of Workers for Every Social Security Retiree Is Falling

Source: 2011 Social Security Trustees Report.13

1950 1960 2011 2035

16:1 5:1 3:1 2:1


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Living Longer, Retiring Earlier

40

45

50

55

60

65

70

75

80

8590

Life Expectancy

Average Age of Retirement

Normal Retirement Age

Early Retirement Age

Source: Social Security Administration and U.S. Census Bureau.14


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Interest as a Share of the Budget(Percent of GDP)

Note: Estimates based on CRFB Realistic Projections.16

Total Spending = 24% of GDP Total Spending = 27% of GDP Total Spending = 34% of GDP

2010 2030 2050

Interest6%

PrimarySpending

94%

Interest18%Primary

Spending82%

Interest26%PrimarySpending

74%


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Insufficient RevenueUnpaid for Tax Cuts in 2001, 2003, and2010 lowered revenue collection withoutmaking corresponding spending cuts ortax increases to offset the budgetaryeffect

Spending in the Tax Code Costs $1 Trillion

annually in lost revenues through so called"tax expenditures," which make the taxcode more complicated, less efficient, andforce higher rates

17


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Excessive Spending Through the Tax Code (Tax Expenditures)

18

In order to stabilize Debt at 60% of the economy by 2021:Tax Expenditures as a Percent of PrimarySpending if Included in the Budget

Large Tax Expendituresand Their 2011 Costs (billions)

Employer Health Insurance Exclusion $174

Mortgage Interest Deduction $89

401(k)s and IRAs $77

Earned Income Tax Credit $62

Special Rates for Capital Gains andDividends

$61

State & Local Tax Deduction $57

Charitable Deduction $49

Child Tax Credit $45

Tax

Expenditures24%

Health Spending17%

Other Mandatory12%

Social Secutity16%

Non-DefenseDiscretionary

15%

DefenseDiscretionary

16%

Source: Joint Committee on Taxation.

Source: Office of Management and Budget.


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How to Reduce the Deficit

Domestic Discretionary Cuts

Defense Spending Cuts

Health Care Cost Containment

Social Security Reform

Other Spending Cuts

Tax Reform and Tax Expenditure

CutsBudget Process Reform

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The Bowles-Simpson Fiscal Commission PlanDiscretionary Spending

Equal cuts to defense and non-defense in2013 totaling $1.2 trillion.

Social Security

Progressive benefit changes, retirementage increase, tax increase for high earnerstotaling $300 billion.

Health Care Spending

Cuts to providers, lawyers, drug companies,& beneficiaries totaling $400 billion.

Other Mandatory Programs

Reforms to farm, civilian/military retirement,& other programs saving $290 billion.

Tax Reform and Revenue

Comprehensive reform to lower tax rates,broaden the base, and raise $1.2 trillion.

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The Bowles-Simpson Fiscal Commission Plan

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(Deficits as Percent of GDP)

0%

1%

2%

3%

4%

5%6%

7%

8%

9%

10%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Plausible Baseline Commission Plan


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Its Time for a Fiscal Reform Plan

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Reasons to Enact a PlanSooner Rather than Later

Size of Adjustment to Close 25-year Fiscal Gap,Depending on Start Year (Percent of GDP)

Allows for gradual phase in

Improves generational fairness

Gives taxpayers businesses,and entitlement beneficiariestime to plan

Creates announcementeffect to improve growth

Reduces size of necessaryadjustment

Source: Congressional Budget Office

9.7%

6.8%

5.2%

4.8%

0% 2% 4% 6% 8% 10% 12%

2025

2020

2015

2013


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Whats in the Fiscal Cliff?

At the end of 2012, the following is scheduled to occur:

All of the 2001/2003/2010 tax cuts will expire at onceThe sequester will immediately cut defense by 10%, non-defensediscretionary by 8%, and other spending across-the-boardThe payroll tax holiday and extended unemployment benefits willexpireThe AMT will hit 30 million taxpayers instead of 4 millionAll the tax extenders will expire

Physicians will see a 30% cut in their Medicare paymentsTax increases from the Affordable Care Act will beginThe country will once again hit the debt celling

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How Big Is the Fiscal Cliff?

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Policy 2013Fiscal Impact

2013-2022Fiscal Impact

2001/2003/2010 Income and Estate TaxCuts $110 billion $2.8 trillion

AMT Patches (w/ Tax Cut Interactions) $125 billion $1.7 trillion

Sequester $65 billion $980 billion

Doc Fixes $10 billion $270 billionJobs Measures $115 billion $150 billion

Various Tax Extenders $30 billion $455 billion

Taxes from the Affordable Care Act $25 billion $420 billion

Total Fiscal Impact ~$500 billion $8.1 trillionTotal Economic Impact (% GDP) ~2% N/A

Note: Congressional Budget Office estimates and CRFBcalculations. 2013-2022 estimates include interest.


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The Time For Action Is Now

If not addressed, burgeoning deficitswill eventually lead to a fiscal crisis , at which point the bond markets will

force decisions upon us. If we do not act soon to reassure the markets, therisk of a crisis will increase , and theoptions available to avert or remedy the crisis will both narrow and become more stringent .

-Erskine Bowles and Sen. Alan Simpson, Formerco-chairs of the National Commission on FiscalResponsibility and Reform

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