The Federal Budget Picture
SHAI AKABAS, ASSOCIATE DIRECTOR OF ECONOMIC POLICY
A Little About BPC
BPC has tackled many critical issues over the past seven years
2011
2007
2008
2009
2010
BPC
Formed
Foreign Policy
Project
Homeland
Security Project
Leaders’ Project on
Health Care
BPCAN
Created
National
Transportation Policy
Project
Housing Commission
Prevention Initiative
Governors’
Council
Debt
Reduction
Task Force
2012 33 Funders
40 Staff
$24M
1 Funder
15 Staff
1 Project
$11M
100 Funders
62 Staff
$21M
50 Funders
44 Staff
$19M
Democracy
Project
2014
150 Funders
89 Staff
14 Projects
$22M
50 Funders
40 Staff
$21M
15 Funders
30 Staff
$24M
Financial Regulatory
Reform Initiative
Immigration
Task Force
CPR
CEO Health
and
Innovation
Council Energy
Project
2013
3
Economic Policy Program
Economic Policy Project
Financial Regulatory
Reform Initiative
Housing Initiative
Immigration Task Force
Retirement Security and
Personal Savings
Governance Program
Commission on Political Reform
Democracy Project
Governors’ Council
National Security Program
Foreign Policy Project
Homeland Security Project
Health Program
Health Project
Nutrition & Prevention Initiative
Health Innovation Initiative
Energy and Infrastructure
Program
Energy Project
BPC Programs in 2015
Last updated 3/27/2015
4
The Economy –
Not Back Yet
ECONOMY STILL PERFORMING BELOW POTENTIAL
NOTE: Axis does not start at zero. SOURCE: CBO Budget and Economic Outlook, 2015
6
10
12
14
16
18
20
2005 2008 2011 2014 2017 2020
Tril
lion
s o
f 20
09
Do
lla
rs
Actual Projection
Potential GDP
Real GDP
The Federal Budget –
Present, Past, and Future
FEDERAL SPENDING BY MAJOR CATEGORY, 2014
NOTE: Figures are net of offsetting receipts. SOURCE: CBO Budget and Economic Outlook, 2015
8
Defense
Discretionary,
$596
Non-Defense
Discretionary,
$583
Social Security,
$845
Major Health
Programs, $831
Other Mandatory
Programs, $420
Net Interest, $229
$0
$1,000
$2,000
$3,000
$4,000
Bil
lio
ns
of D
oll
ars
HISTORICAL TRENDS IN FEDERAL SPENDING
NOTE: Figures are net of offsetting receipts. SOURCE: CBO Budget and Economic Outlook, 2015
9
Discretionary
Spending
Social Security
Health Programs
Other Mandatory
Net Interest
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1965 1972 1979 1986 1993 2000 2007 2014
Per
cen
t of T
ota
l Fe
der
al S
pe
nd
ing
PROJECTED FEDERAL SPENDING AS % OF GDP
NOTE: Figures are net of offsetting receipts. SOURCE: CBO Long Term Budget Outlook, 2014
10
0
2
4
6
8
10
2014 2019 2024 2029 2034 2039
Per
cen
t of G
DP
Net Interest
Major Health Programs
Social Security
All Other Federal Spending
HEALTHCARE AND SOCIAL SECURITY GROW
QUICKLY BECAUSE OF AGING POPULATION
NOTE: Figures are net of offsetting receipts. SOURCE: CBO Long Term Budget Outlook, 2014
11
0
2
4
6
8
10
2014 2019 2024 2029 2034 2039
Per
cen
t of G
DP
Net Interest
Major Health Programs
Social Security
All Other Federal Spending
NET INTEREST GROWS AS INTEREST RATES RETURN
TO NORMAL
NOTE: Figures are net of offsetting receipts. SOURCE: CBO Long Term Budget Outlook, 2014
12
0
2
4
6
8
10
2014 2019 2024 2029 2034 2039
Per
cen
t of G
DP
Net Interest
Major Health Programs
Social Security
All Other Federal Spending
PROJECTION ERRORS CAN BE SIGNIFICANT
SOURCE: CBO Budget and Economic Outlooks, 2010 and 2015
13
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
2010 2011 2012 2013 2014
Bil
lio
ns
of D
oll
ars
Actual Net Interest Costs
2010 Projection of
Net Interest Costs
Total Savings: $352 billion
Revenue CURRENT LAW REVENUE WILL BE TOO LOW 14
19.9% 19.8%
20.6%
19.5%
18.1%
16%
17%
18%
19%
20%
21%
1998 1999 2000 2001 2015-2025
Average
NOTE: Axis does not start at zero. SOURCE: CBO Long Term Budget Outlook, 2015
Revenues averaged 20% of GDP
when the budget last balanced… …but are projected
to average just over
18% in the next ten
years.
0
40
80
120
160
1975 1985 1995 2005 2015 2025 2035 2045 2055
THE BOTTOM LINE: GROWING DEBT
SOURCE: CBO Long-Term Budget and Economic Outlook
15
Debt Held by the Public
100% of GDP
Actual Projected
Upcoming Issues:
Highway Trust Fund
HEADER GOES HERE 17
• Funds infrastructure and construction
• Provides funding for highway and transit programs in the form of reimbursements to states
• Multiple accounts
• Highway Account
• Mass Transit Account
• Main source of revenue is the gas tax
OVERVIEW OF HIGHWAY TRUST FUND
HEADER GOES HERE 18
• Highway user taxes (e.g., “gas tax”) have been extended through September 30, 2016
• Most budget authority in form of contract authority – authority to incur obligations in advance of appropriations
• Obligation limits, usually set in the annual appropriations acts, govern how much contract authority can be used in a given year
OVERVIEW OF HIGHWAY TRUST FUND
CBO PROJECTS LARGE SHORTFALL 19
0
10
20
30
40
50
60
70
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Bill
ion
s o
f D
olla
rs
Fiscal Year
Projections of Highway Trust Fund
CUMULATIVE SHORTFALL: $166 Billion
Outlays
Revenues and Interest
SOURCE: Congressional Budget Office
WHAT’S CAUSING THE LONG-TERM PROBLEM? 20
1. Gas tax has not increased since 1993
2. Americans driving less per person
3. Vehicles becoming more efficient
• Transfers from general funds have filled the gap
IMMEDIATE PROBLEMS 21
• Highway bill authorization expires 5/31/2015 • No cost to reauthorize
• Summer FY 2015, HTF insufficient to meet obligations • DoT will reduce reimbursements for state infrastructure projects
• House and Senate budgets light on solutions for HTF • “Deficit-neutral reserve fund for transportation”
• Want to stop transfers that close gap in funding
TRUST FUND NEARING EXHAUSTION 22
PROPOSED SOLUTIONS 23
• UPDATE Act (Rep. Blumenauer (D-OR))
• Doubles gas tax
• Gas Tax Replacement Act (Rep. Huffman (D-CA))
• Replace with lifecycle carbon emissions tax
• Grow America 2.0 (President Obama)
• Taxes on corporate profits held abroad
• Repatriation Tax Holiday (Sen. Boxer (D-CA), Sen. Paul (R-KY))
• 6.5% corporate tax on money brought home
• Prominent Republicans against raising gas tax
• Including Rep. Ryan (R-WI), Sen. Hatch (R-UT)
Upcoming Issues:
Debt Limit
DEBT LIMIT BASICS 25
The debt limit is: the maximum amount that Treasury is allowed to borrow;
set by statute (Congress must act to change it); and
covers most debt issued, whether held by the public (such as Treasury bills and savings bonds) or intragovernmental (such as debt held by the Social Security trust funds).
The debt limit was temporarily suspended from February 18, 2014 until March 16, 2015, when it will be reinstated at a higher level than before.
Total public debt subject to limit is about $18.1 trillion.
In comparison, the U.S. gross domestic product (GDP) was $17.4 trillion at the end of 2014.
Sources: Daily Treasury Statement and Bureau of Economic Analysis
REACHING THE DEBT LIMIT – WHAT IT MEANS 26
Layers of Defense Against Default The Treasury Department has multiple means that can be used to pay the
nation’s bills. If the debt limit is reached and policymakers do not act in time, however, all of these layers of defense will be breached and the nation will default on its obligations.
ISSUE NEW DEBT TO THE PUBLIC IN TRADITIONAL MANNER
EXTRAORDINARY MEASURES
DAILY REVENUE AND CASH ON HAND
DEFAULT ON FINANCIAL OBLIGATIONS
Debt Limit Reached
EM Exhausted
The X Date
WHAT IS THE X DATE? 27
X Date: The first day on which Treasury has exhausted its borrowing authority and no longer has sufficient funds to pay all of its bills in full and on time.
In other words, if the debt limit has not been raised by the X Date, the federal government will begin defaulting on some of its obligations.
After the X Date, bills must be paid solely out of incoming cash flows, which will be insufficient to cover all government spending.
BPC estimates that the X Date will most likely occur during the 4th quarter of 2015 (between October 1 and December 31).
WHY WILL EXTRAORDINARY MEASURES LAST SO
LONG IN 2015?
28
More extraordinary measures will be available In June of 2015, securities in the CSRDF (the pension fund for civil
servants) are scheduled to mature. During extraordinary measures, Treasury is not required to reinvest these securities or credit interest to the fund, which will reduce debt subject to the limit.
The deficit has been decreasing Revenue growth, in particular, has been strong in recent years as the
economic recovery has picked up steam. With lower deficits, extraordinary measures cash-on-hand and last longer.
Timing of debt limit reinstatement Most tax refunds are paid in February and early March. Reinstatement
of the debt limit in mid-March avoids depleting extraordinary measures on the heavy cash outflows during the height of tax-refund season.
THE DEFICIT HAS BEEN DECLINING
29
$(300,000)
$(250,000)
$(200,000)
$(150,000)
$(100,000)
$(50,000)
$-
$50,000
$100,000
$150,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
U.S. Treasury - Monthly Net Operating Cash Flow (in millions)
2011 2012 2013 2014
Source: Daily Treasury Statements
TIMING IS MORE FAVORABLE
30
$(300,000)
$(250,000)
$(200,000)
$(150,000)
$(100,000)
$(50,000)
$-
$50,000
$100,000
$150,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
U.S. Treasury - Monthly Net Operating Cash Flow (in millions)
2011 2012 2013 2014
Mid-March debt limit reinstatement avoids depleting extraordinary measures during tax refund season (Feb/early March)
TIMING IS MORE FAVORABLE
31
$(300,000)
$(250,000)
$(200,000)
$(150,000)
$(100,000)
$(50,000)
$-
$50,000
$100,000
$150,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
U.S. Treasury - Monthly Net Operating Cash Flow (in millions)
2011 2012 2013 2014
Mid-March debt limit reinstatement avoids depleting extraordinary measures during tax refund season (Feb/early March)
X Date most likely to occur 4Q 2015
Upcoming Issues:
Sequestration
SEQUESTRATION 33
Stemmed from the Budget Control Act of 2011
Across-the-board cuts in first year (2012)
Stringent caps thereafter
Applies to defense & non-defense discretionary and some mandatory programs
Does NOT apply to overseas contingency operations
DEFENSE SPENDING TO BE LOWEST SINCE 1965
NOTE: Figures are in outlays. Includes costs for Overseas Contingency Operations; does not start at zero. SOURCE: CBO Budget and Economic Outlooks, 2010 and 2015
34
2.0%
2.5%
3.0%
3.5%
4.0%
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
NON-DEFENSE DISCRETIONARY TO REACH
LOWEST LEVEL SINCE 1965
NOTE: Figures are outlays; graph does not start at zero. SOURCE: CBO Budget and Economic Outlooks, 2010 and 2015
35
2.0%
2.5%
3.0%
3.5%
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Where Are We Headed?
PRESIDENT OBAMA’S FY 2016 BUDGET • Taxes
• Reform or institute a number of personal income tax credits for education, child care, workers without children, two-earner couples
• Increase the capital gains rate
• Implement a tax on large financial institutions
• Broad reform of business taxation by cutting rate and broadening base and reforming international taxation
• Repeal mandatory and discretionary sequestration
• Provide tuition-free preschool for four-year olds (offset by increased tobacco taxes) & community college
• Use transition revenue from business tax reform to fund reauthorization of surface transportation ($478 billion over six years)
37
REPUBLICAN FY 2016 BUDGETS 38
Repeal Obamacare
Block grant and reduce funding to Medicaid/food stamps
Comprehensive tax reform that lowers rates
Premium support (House only)
Protect defense spending from sequester through overseas contingency account
Substantial cuts to domestic discretionary below sequester levels
DISCRETIONARY SPENDING UNDER VARIOUS
SCENARIOS
NOTE: Figures are budget authority and, aside from parentheses, include only funding within BCA caps. Also, a technical issue exists on the non-defense side with respect to changes in mandatory program spending – thus, some of the figures presented are interpretations of the actual estimates. SOURCE: CBO Budget and Economic Outlooks, 2010 and 2015; President Obama’s FY 2016 Budget; House Republican FY 2016 Budget
39
Sequester Level
BCA Cap Level
Continuing Resolution
Obama’s Request
House Budget
Defense 523 577 521 (64 OCO)
561 (51 OCO)
523 (94 OCO)
Non-Defense
493 530 492 527 493
Total 1017 1107 1013 1088 1017
3/16 –
Debt
Ceiling
Reinstated
40
6/30 –
Ex-Im Bank
Authorization
Expires
3/31 –
“Doc Fix”
Expires
5/31 –
Highway
Authorization
Expires
10/1 – Sequester
Returns;
CROmniubus and
CHIP Reauthorization
Expire
Sep. Oct. Nov. Dec.
2015 Budget Deadlines
4th Quarter
– Debt
Ceiling
Must be
Raised
12/31 –
Deadline for
Retroactive
Renewal of
Tax
Extenders
2016 –
SSDI
Trust
Fund Is
Exhausted
Est. June-
August –
Highway
Trust Fund
Runs Out
Mar. Apr. June July Aug. May