averting a fiscal crisis - updated 02-12
DESCRIPTION
Updated version of our popular PowerPoint presentation that clearly and succinctly lays out the fiscal challenge facing the United States. To see what can be done about it, visit http://crfb.org/go-bigTRANSCRIPT
Averting a Fiscal CrisisThe Committee for a Responsible Federal Budget
Deficit Projections
19911993
19951997
19992001
20032005
20072009
20112013
20152017
20192021
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Current Policy Current Law
Note: Estimates based on CRFB Realistic Baseline.
(Percent of GDP)
1992-2012 Average Deficit: 2.9%
2012-2022 Average Current Policy Deficit: 4.7%
2
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
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 = $3.601 Trillion
2011
4
Total Revenues = $2.523 TrillionTotal Financing = $3.601 Trillion
Individual Income Tax27%
Corporate Tax5%
Social Insurance Taxes25%
Other6%
Borrowing30%
Medicare13%
Medicaid & Other Health
8%
Social Security21%
Other Mandatory16%
Defense19%
Non-Defense17%
Interest6%
19401945
19501955
19601965
19701975
19801985
19901995
20002005
20102015
20202025
20302035
20402045
20502055
20602065
20702075
2080
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
500%
Current Law
Debt Projections
Note: Estimates based on CRFB Realistic Baseline.
(Percent of GDP)
Realistic Projections2010 :62%2025 :94% 2040 :154%2080 :430%
5
CRFB Realistic Debt
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
6
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
7
Debt Drivers
8
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.9
19801983
19861989
19921995
19982001
20042007
20102013
20162019
20222025
20282031
20342037
20402043
20462049
20522055
20582061
20642067
20702073
20762079
0%
10%
20%
30%
40%
50%
60%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)
10
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
11
Health Care Spending by CountryPercent of GDP (2008)
Source: 2008 Data from the Organization for Economic Cooperation and Development.12
Mexic
o
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 Avera
ge0%
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.13
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.14
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: 2011 Social Security Trustees Report.15
Payable Benefits
Revenues
Scheduled Benefits
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 = 35% of GDP
2010 2030 2050
Interest6%
Primary Spending
94%
Interest19%
Primary Spending
81%
Interest28%
Primary Spending
72%
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
17
Excessive Spending Through the Tax Code (Tax Expenditures)
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 $174
Mortgage Interest Deduction $89
401(k)s and IRAs $77
Earned Income Tax Credit $62
Special Rates for Capital Gains and Dividends
$61
State & Local Tax Deduction $57
Charitable Deduction $49
Child Tax Credit $45
Source: Joint Committee on Taxation.
Source: Office of Management and Budget.
Tax Expenditures24%
Health Spending18%
Other Mandatory12%
Social Secutity16%
Non-Defense Discretionary
15%
Defense Discre-tionary
16%
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
19
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.
20
The Bowles-Simpson Fiscal Commission Plan
21
(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
22
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
2025
2020
2015
2012
0% 2% 4% 6% 8% 10% 12% 14%
12.5%
8.1%
5.9%
4.9%
Source: Congressional Budget Office
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
23