Averting a Fiscal CrisisThe Committee for a Responsible Federal Budget

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%

2

19901992

19941996

19982000

20022004

20062008

20102012

20142016

20182020

2022-4%

-2%

0%

2%

4%

6%

8%

10%

12%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

10%

12%14%16%18%20%22%24%26%

Current Law Spending Current Law RevenuesCRFB Realistic Spending CRFB Realistic Revenues

Actual Projected

Gap Between Revenue and Spending

Note: Estimates based on CRFB Realistic Baseline.

(Percent of GDP)

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

3

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

Components of Revenue and SpendingRevenues and Financing Outlays

Total Outlays = $3.563 Trillion

2012

4

Total Revenues = $2.435 TrillionTotal Financing = $3.563 Trillion

Individual Income Tax27%

Corporate Tax5%

Social Insurance Taxes24%

Other6%

Borrowing32%

Medicare13%

Medicaid & Other Health

8%

Social Security22%

Other Mandatory16%

Defense19%

Non-Defense15%

Interest6%

Surpluses Turning Into Growing Deficits…Spending and Revenues (Billions of Dollars)

5Source: Congressional Budget Office, Alternative Fiscal Scenario

What Debt Is Likely to Reach

RevenuesPrimary

Spending

Interest

Deficit

RevenuesPrimary Spending

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 2022Interest Costs Will Reach $1 Trillion By 2024

19401945

19501955

19601965

19701975

19801985

19901995

20002005

20102015

20202025

20302035

20402045

20502055

20602065

20702075

2080-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

Current Law

Debt Projections

Note: Estimates based on CRFB Realistic Baseline.

(Percent of GDP)

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

6

What the Debt Will Realistically Look Like

Consequences of Debt “Crowding Out” of public sector

investment leading to slower economic growth

Higher Interest Payments displacing other government priorities

Intergenerational Inequity as future generations pay for current government spending

Unsustainable Promises of high spending and low taxes

Uncertain Environment for businesses to invest and households to plan

Eventual Fiscal Crisis if changes are not made

7

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 the government 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 don’t act in advance] the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis.”

-Ben Bernanke, Chairman of the Federal Reserve

8

Debt Drivers

9

Short-Term Long-Term

Economic Crisis (lost revenue and increased spending from automatic stabilizers)

Economic Response (stimulus spending/tax breaks and financial 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 costs to rise)

Population Aging (causing Social Security and Medicare costs to rise, and revenue to fall)

Growing Interest Costs (from continued debt accumulation)

Insufficient Revenue (to meet the costs of funding government)

Federal Spending and Revenues (Percent of GDP)

Growing Entitlement Spending

Note: Estimates based on CRFB Realistic Baseline.10

19801983

19861989

19921995

19982001

20042007

20102013

20162019

20222025

20282031

20342037

20402043

20462049

20522055

20582061

20642067

20702073

20762079

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%Actual Projected

Revenues

Interest

Health Care

Other Spending

Social Security

Average HistoricalRevenues

Why Is Entitlement Spending Growing?

20102013

20162019

20222025

20282031

20342037

20402043

20462049

20522055

20582061

20642067

20702073

20762079

8%

10%

12%

14%

16%

18%

20%

22%

24%

26%

Aging

Excess Health CareCost Growth

Drivers of Entitlement Spending Growth (Percent of GDP)

11

36%

64%

56%

44%

Source: CBO Long-term Budget Outlook, 2011.

Why Is Federal Health Spending Increasing? The Population Is Aging due to increased life

expectancy and retirement of the baby boom generation, adding more beneficiaries to Medicare and Medicaid

Per Beneficiary Costs Are Growing faster than the economy in both the public and private sector. Causes of this excess cost growth include: Americans Are Unhealthy when compared to

populations in similar economies Americans Are Wealthy and Willing to Pay More Fragmentation and Complexity between insurers,

providers, and consumers make normal market competition difficult

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

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Health Care Spending by CountryPercent of GDP (2008)

Source: 2008 Data from the Organization for Economic Cooperation and Development.13

Mexico

Turkey

Korea

Luxe

mbourgChile

Poland

Czech Republic

HungaryIsr

ael

Slova

k Republic

Slove

nia

Finland

Norway

United Kingdom

Ireland

Spain

Italy

Sweden

New Zealand

Canada

Austria

Switz

erland

France

United St

ates

OECD Average

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Public Private

Number of Workers for Every Social Security Retiree Is Falling

Source: 2011 Social Security Trustees Report.14

1950 1960 2011 2035

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

Living Longer, Retiring Earlier

19291932

19351938

19411944

19471950

19531956

19591962

19651968

19711974

19771980

19831986

19891992

19951998

20012004

2007

40

45

50

55

60

65

70

75

80

85

90

Life Expectancy

Average Age of Retirement

Normal Retirement Age

Early Retirement Age

Source: Social Security Administration and U.S. Census Bureau.15

Looming Social Security Insolvency

19801983

19861989

19921995

19982001

20042007

20102013

20162019

20222025

20282031

20342037

20402043

20462049

20522055

20582061

20642067

20702073

20762079

6%

8%

10%

12%

14%

16%

18%

20%

Social Security Costs and Revenues (Percent of Taxable Payroll)

Source: 2012 Social Security Trustees Report.16

Payable Benefits

Revenues

Scheduled Benefits

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

Note: Estimates based on CRFB Realistic Projections.17

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

2010 2030 2050

Interest6%

Primary Spending

94%

Interest 18%

Primary Spending

82%

Interest26%

Primary Spending

74%

Insufficient Revenue Unpaid for Tax Cuts in 2001, 2003, and

2010 lowered revenue collection without making corresponding spending cuts or tax increases to offset the budgetary effect

Spending in the Tax Code Costs $1 Trillion annually in lost revenues through so called "tax expenditures," which make the tax code more complicated, less efficient, and force higher rates

18

Excessive Spending Through the Tax Code (Tax Expenditures)

19

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

Large Tax Expenditures and Their 2011 Costs (billions)

Employer Health Insurance Exclusion $110

Special Rates on Dividends and Capital Gains

$91

Mortgage Interest Deduction $78

401(k)s and IRAs $60

Earned Income Tax Credit $60

Child Tax Credit $56

Charitable Deduction $30

Tax Expenditures24%

Health Spending17%

Other Mandatory12%

Social Secutity16%

Non-Defense Discretionary

14%

Defense Dis-cretionary

15%

Source: Joint Committee on Taxation.

Source: Office of Management and Budget.

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

Cuts

Budget Process Reform

20

The Bowles-Simpson Fiscal Commission PlanDiscretionary Spending Equal cuts to defense and non-defense in

2013 totaling $1.2 trillion.

Social Security Progressive benefit changes, retirement

age increase, tax increase for high earners totaling $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.

21

The Bowles-Simpson Fiscal Commission Plan

22

(Deficits as Percent of GDP)20

10

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2025

2030

2035

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

0%

5%

10%

Plausible Baseline Commission Plan

It’s Time for a Fiscal Reform Plan

23

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 beneficiaries time to plan

Creates “announcement effect” to improve growth

Reduces size of necessary adjustment

Source: Congressional Budget Office

2025

2020

2015

2013

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

9.7%

6.8%

5.2%

4.8%

What’s 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 once The “sequester” will immediately cut defense by 10%, non-defense

discretionary by 8%, and other spending across-the-board The payroll tax holiday and extended unemployment benefits will

expire The AMT will hit 30 million taxpayers instead of 4 million All the tax extenders will expire Physicians will see a 30% cut in their Medicare payments Tax increases from the Affordable Care Act will begin The country will once again hit the debt celling

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How Big Is the Fiscal Cliff?

25

Policy 2013 Fiscal

Impact

2013-2022 Fiscal Impact

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

AMT Patches (w/ Tax Cut Interactions) $125 billion $1.7 trillionSequester $65 billion $980 billionDoc Fixes $10 billion $270 billionJobs Measures $115 billion $150 billionVarious “Tax Extenders” $30 billion $455 billionTaxes from the Affordable Care Act $25 billion $420 billion

Total Fiscal Impact ~$500 billion $8.1 trillion

Total Economic Impact (% GDP) ~2% N/A

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

The Time For Action Is Now

“If not addressed, burgeoning deficits will 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, the risk of a crisis will increase, and the options available to avert or remedy the crisis will both narrow and become more stringent.”

-Erskine Bowles and Sen. Alan Simpson, Former co-chairs of the National Commission on Fiscal Responsibility and Reform

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