averting a fiscal crisis - why america needs comprehensive fiscal reform now

Averting a Fiscal Crisis

Why America Needs Comprehensive Fiscal Reforms Now

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


(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


(Percent of GDP)

Realistic Projections2010 :62%2025 :94% 2040 :154%2080 :430%

5

What the Debt Will Realistically Look Like

Growth in Mandatory Spending

6

1972 1979 1986 1993 2000 2007 2014 2021 2028 2035 2042 2049 2056 2063 2070 20770%

5%

10%

15%

20%

25%

30%

Social Security Health CareOther Entitlements Revenue

Historical Average

Actual Projected

(Percent of GDP)

Consequences of Debt

7

“Crowding Out” of private sector investment, leading to slower economic growth

Higher Interest Payments displacing other government priorities and investments

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

The Risk of Fiscal Crisis

8

“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

Debt Drivers

9

What the Debt Will Realistically Look Like

Short-Term Long-Term

Economic Crisis (lost revenue and increased spending on safety net programs like Food Stamps)

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 revenues to fall)

Growing Interest Costs (from continued debt accumulation)

Insufficient Revenue (to meet the costs of funding government)

How Did We Get Here?

10

Drivers of the Debt Since 2001

Note: Estimates from The Pew Charitable Trusts based on CBO data.

Increases in Debt:

Technical & Economic Changes: 27%

Tax Cuts: 27%

Spending Increases: 41%

Other Means of Financing: 6%

Federal Spending and Revenues (Percent of GDP)

Growing Entitlement Spending

Note: Estimates based on CRFB Realistic Baseline.11

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?

12

Drivers of Entitlement Spending Growth (Percent of GDP)

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

Source: CBO Long-term Budget Outlook, 2011.

36%

64%

56%

44%

Why Is Federal Health Spending Increasing?

13

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 among 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

Health Care Spending by Country

14

Percent of GDP (2008)

36%

64%

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

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

Number of Workers for Every Social Security Retiree is Falling

15

36%

64%

1950 1960 2011 2035

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

Source: 2011 Social Security Trustees Report.

Living Longer, Retiring Earlier

16

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.

Looming Social Security Insolvency

17

Social Security Costs and Revenues (Percent of Taxable Payroll)

36%

64%1980

19841988

19921996

20002004

20082012

20162020

20242028

20322036

20402044

20482052

20562060

20642068

20722076

2080

6%

8%

10%

12%

14%

16%

18%

20%What Social Security Can Afford to Pay

What Social Security “Promises” to Pay

Revenues

Source: 2011 Social Security Trustees Report.

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

Note: Estimates based on CRFB Realistic Projections.18

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

19

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

Excessive Spending Through the Tax Code (Tax Expenditures)

20

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 $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

Tax Expenditures24%

Health Spending18%

Other Mandatory12%

Social Secutity16%

Non-Defense Discretionary

15%

Defense Discre-tionary

16%

Source: Joint Committee on Taxation.

Source: Office of Management and Budget.

How Much Do We Need to Save?

*Estimates based on CRFB Realistic Baseline.21

In order to stabilize debt at 60% of the economy by 2022:

(2012-2022 Savings)

Current Law Baseline Assuming No Trigger Savings

Current Policy Baseline Assuming Upper-Income Tax

Cuts Expire*

Current Policy Baseline Assuming

All Tax Cuts Continued*

Debt in 2021 w/ No Savings(% GDP)

67% 81% 86%

Required Savings to Stabilize Debt at 65% $1.7 Trillion $5.1 Trillion $6.4 Trillion

How Much Do We Need to Save? (cont’d)



(2012-2022 Savings)



Cuts Expire*




67% 81% 86%

Required Savings to Stabilize Debt at 65% $0.4 Trillion $3.8 Trillion $5.2 Trillion




(2012-2022 Savings. Negative numbers reflect increase in deficits).



Cuts Expire*




67% 81% 86%

Required Savings to Stabilize Debt at 70% -$0.8 Trillion $2.6 Trillion $4.0 Trillion


24

So even if lawmakers were to stabilize debt at 70% of the economy in 2021—a level higher than the internationally recognized threshold of 60%—they would have to enact at least $2.8 trillion in savings beyond the $920 billion enacted in the Budget Control Act, compared to realistic assumptions of

future debt .

That calls for a Go Big approach to debt reduction .

We Can’t Inflate or Grow Our Way Out

25

Inflation Growth

An unexpected increase in inflation could temporarily reduce the real value of debt and federal interest payments to investors

However, higher inflation would prompt investors to demand higher interest payments, increasing the costs of financing new debt

Higher inflation would also push up spending for all inflation-indexed programs, including Social Security, food stamps, military pensions, veterans’ benefits.

Strong economic growth is a necessary but not sufficient condition for debt reduction

Many spending programs grow as the economy does, and would outpace revenue growth Social Security payments would

increase as wages and, thus, benefits grew over time

Health care spending would grow even faster, given that costs continually grow notably faster than the overall economy

The levels of growth needed to significantly reduce medium-term debts would be way above historical norms

Debt Reduction and Economic Growth

26

CBO studied the economic impact of an illustrative $2.4 trillion debt reduction plan and found that real output would be between 0.6% and 1.4% higher, depending on the magnitude of the effects.

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 20211.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

CBO Baseline Growth Small Output EffectMedium Output Effect Large Output Effect

Real Output Growth (Percent)

*Estimates from CBO, “The Macroeconomic and Budgetary Effects of an Illustrative Policy for Reducing the Federal Budget Deficit.”

How to Reduce the Deficit

27

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

“Go Small”: Lots of Pain for Little Gain A smaller package would offer some

improvement to our fiscal situation, but it would not offer the benefits of a declining debt path

The public would see a package of tough choices and a debt burden that continues to grow. In essence, it would deliver political pain with not so much gain

Would leave in place considerable policy uncertainty, affecting businesses and markets

A smaller package and an incremental approach to debt reduction would not offer the political tradeoffs necessary to solve our fiscal challenges

28

What Could “Go Small” Look Like?

29

Possible Policy Changes Savings

Government-Wide $250 billion from chained CPI

Discretionary $100-200 billion from modestly slower growth in BCA caps

Health Care Negligible savings

Other Mandatory$150-250 billion from farm

subsidies, federal civilian and military retirement and benefits, Fannie and Freddie, and others

Social Security Negligible savings

Revenues Negligible savings

Net Interest $100 billionTotal $600-800 billion

Without addressing health care reforms or revenues, it will be very difficult to achieve significant savings

And even then, there is no guarantee that significant savings in other areas of the budget could be agreed on

Adding Serious Entitlement Reforms and Revenues Pushes You into “Go Big”

Democrats will only agree to serious entitlement reforms if there are revenues

Republicans will only agree to revenues in the context of comprehensive tax reform

Democrats will only agree to a comprehensive tax reform that replaces the Bush tax cuts if it raises at least the $800 billion they would get if President Obama vetoes extension of upper income tax cuts

Republicans will not agree to revenues anywhere near that amount without health savings that go beyond the amount proposed by the President

30

Advantages of “Go Big” Debt stabilized and falling as a share of

the economy later in the decade, and all the benefits associated with a declining debt burden:

Less “crowding out” of private sector investment

Stronger confidence in businesses and markets

Greater certainty and stability Stronger economy over the long-term Lower interest payments and increased

fiscal space Intergenerational equity Reduced or eliminated risk of fiscal

crisis

31

Advantages of “Go Big” (cont’d) Increased chances of enacting a

comprehensive debt solution of at least $3 - $4 trillion in savings:

Political trade offs necessary to address entitlement growth and revenues

Shared sacrifice in Go Big approach Realize the gains of debt reduction by

stabilizing and reducing the debt, and not just making difficult decisions that solve only part of the problem

Restore America’s faith in the political system

32

The Announcement Effect

Just announcing the adoption of a debt reduction plan can provide a boost in confidence, aiding the recovery

Prominent lawmakers, government officials, economists, and experts have reiterated the benefits of the announcement effect, including:

Ben Bernanke, Fed Chairman Erskine Bowles and Alan Simpson The International Monetary Fund Glenn Hubbard, former Chair of the President’s CEA Mark Zandi, Chief Economist, Moody’s Analytics Michael Bloomberg, Mayor of New York City Alan Blinder, former Fed Vice Chairman Larry Summers, former Director, NEC Various editorial boards and magazines, including the

Washington Post, Financial Times, and The Economist

33

Note: For more information on the “announcement effect,” see CRFB at http://crfb.org/blogs/announcing-announcement-effect-club

http://crfb.org/blogs/announcing-announcement-effect-club

http://crfb.org/blogs/announcing-announcement-effect-club

“Go Big”: Shared Sacrifice Expanding the size and scope of a package can promote a sense of shared

sacrifice on behalf of the American public and key interest groups, making it more likely that they would accept changes if everyone was contributing to the solution.

An incremental approach would allow advocates for parts of the budget to argue that they are bearing an unfair burden. A Go Big approach which achieves savings in all parts of the budget neutralizes that argument.

In a recent Washington Post op-ed, Fiscal Commission co-chairs Erskine Bowles and Alan Simpson highlighted this lesson from the Fiscal Commission deliberations:

“The more comprehensive we made it, the easier our job became. The tougher our proposal, the more people came aboard. Commission members were willing to take on their sacred cows and fight special interests — but only if they saw others doing the same and if what they were voting for solved the country’s problems.”

34

What Could “Go Really Big” Look Like?

35

Possible Policy Changes

$600 - $800 Billion Plan $3 Trillion Plan $4 Trillion Plan

Government-Wide $250 billion $250 billion $250 billion

Discretionary $100- 200 billion $300 billion $400 billion

Health Care Negligible savings $650 billion $900 billion

Other Mandatory $150 - $250 billion $350 billion $350 billion

Social Security Negligible savings $150 billion $300 billion

Revenues Negligible savings $850 billion $1.2 trillion

Net Interest $100 billion $450 billion $600 billionTotal $600 - $800 billion $3 trillion $4 trillion

Including serious entitlement reforms and revenues pushes the overall savings well above the $1.2 trillion mandate

Note: $4 trillion plan is a more ambitious version of the types of reforms in the $2.8 trillion plan.

The Bowles-Simpson Fiscal Commission Plan

36

Discretionary Spending Cuts to defense and non-defense programs,

totaling an additional $400 billion over ten years [on top of the savings already enacted].

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.

Illustrative Tax Rates

37

Bottom Rates Middle Rates Top Rates Corporate Rate

Current Rates for 2012 10% 15% 25% 28% 33% 35% 35%

Scheduled Rates for 2013 15% 28% 31% 36% 39.6% 35%

Eliminate All Tax Expenditures 8% 14% 23% 26%

Keep Child Tax Credit and EITC 9% 15% 24% 26%

Fiscal Commission’s Illustrative Tax Plan 12% 22% 28% 28%

2012 Rates, Expiration of the Tax Cuts, and Fiscal Commission’s Illustrative Plan

Fiscal Commission’s illustrative tax plan would reduce or eliminate most tax expenditures and use the savings to reduce tax rates and reduce the deficit.

The Bowles-Simpson Fiscal Commission Plan

38

(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%

What Savings Have Lawmakers Enacted So Far?

39

(Billions of Dollars)

Discretionary

Health Care

Social S

ecurit

y

Other Mandatory

Revenues

Interest

*$1.2 Trillion Sequeste

r$0

$400

$800

$1,200

$1,600

$2,000

Bowles-Simpson Recommendations Savings Enacted

Note: Estimates based on realistic budget projections.

It’s Time For a Fiscal Reform Plan

40

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

It’s Time for a Fiscal Reform Plan…Now

41

We Can’t Wait Until After the Election

Every month and year that passes, the debt grows larger and larger and the solutions become more difficult

Elections can take policy options off the table and back candidates into positions that make bipartisan solutions more difficult

Addressing the fiscal situation as soon as possible would make governing easier – not harder – after the election

Who Supports “Go Big”?

42

Calls for a $4+ Trillion, Bipartisan Solution to the Debt

45 Members of the Senate 150 Members of the House of Representatives 200 Business Groups, including the Chamber of Commerce, National

Association of Manufacturers, and Business Roundtable Other groups: Partnership for New York City, American Business

Conference, National Conference of State Legislatures 60+ former government officials, business leaders, and experts Editorial boards and other outside experts Countless concerned citizens

Principles of Fiscal Responsibility

43

For the 2012 Campaign

1. Make Deficit Reduction a Top Priority

2. Propose Specific Fiscal Targets

3. Recommend Specific Policies to Achieve the Targets

4. Do No Harm

5. Use Honest Numbers and Avoid Budget Gimmicks

6. Do Not Perpetuate Budget Myths

7. Do Not Attack Someone Else’s Plan Without Putting Forward an Alternative

8. Refrain from Pledges That Take Policies Off the Table

9. Propose Specific Solution for Social Security, Health Programs, and the Tax Code

10. Offer Solutions for Temporary and Expiring Policies

11. Encourage Congress to Come Up with a Budget Plan as Quickly as Possible

12. Remain Open to Bipartisan Compromise

The Time For Action Is Now

44

“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

averting a fiscal crisis - why america needs comprehensive fiscal reform now

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