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