Averting A Fiscal Crisis 0

Averting a Fiscal Crisis
The Committee for a Responsible Federal Budget
Deficit Projections
(Percent of GDP)
12% 10% 8%
1992-2012 Average Deficit: 2.9% 2012-2022 Average Current Policy Deficit: 4.3%
6% 4%
2% 0% -2% -4%
Note: Estimates based on CRFB Realistic Baseline.

1
Gap Between Revenue and Spending

(Percent of GDP)
26% 24% 22% 20% 18% 16% 14% 12% 10% 2000 2002 2004 2006 2008 2010 Current Law Spending CRFB Realistic Spending 2012 2014 2016 2018 2020 Current Law Revenues CRFB Realistic Revenues 2022
Avg. Historical Revenues (1972-2011): 17.9% Avg. Historical Spending (1972-2011): 21.0% Actual Projected

2
Components of Revenue and Spending

Revenues and Financing Outlays
Interest 6% Borrowing 32% Non-Defense 15%
Medicare 14% Medicaid & Other Health 8%
Individual Income Tax 27%
2012
Defense 19%
Other 6% Social Insurance Taxes 24%
Corporate Tax 5%
Social Security 22%
Other Mandatory 16%
Total Revenues = $2.435 Trillion Total Financing = $3.563 Trillion
Total Outlays = $3.563 Trillion
Surpluses Turning Into Growing Deficits

Spending and Revenues (Billions of Dollars)
$860B
Interest Deficit
$1.4T
Surplus
$220B
Interest Deficit
$1.1T $5.1T
$236B $233B $1.6T
What Debt Is Likely to Reach Primary

Spending
Revenues
$4.6T
Interest
Primary Spending Revenues
$3.3T $2.0T
Primary Spending
$2.4T
Revenues
2000
Source: Congressional Budget Office, Alternative Fiscal Scenario
4
2012
2022
Interest Costs Will Reach $1 Trillion By 2024
Debt Projections
(Percent of GDP)
400% 350%
300%
250% 200% 150% 100% 50% 0% -50%
Realistic Projections 2010: 63% 2025: 88% 2040: 140% 2080: 365%
What the Debt Will Realistically Look Like

Current Law

5
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 dont 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
Short-Term Long-Term
Economic Crisis
(lost revenue and increased spending from automatic stabilizers)
Rapid Health Care Cost Growth

(causing Medicare and Medicaid costs to rise)
Economic Response
(stimulus spending/tax breaks and financial sector rescue policies)
Population Aging
(causing Social Security and Medicare costs to rise, and revenue to fall)
Tax Cuts
(in 2001, 2003, and 2010)
Growing Interest Costs

(from continued debt accumulation)
War Spending
(in Iraq and Afghanistan)
Insufficient Revenue
(to meet the costs of funding government)
Growing Entitlement Spending

Federal Spending and Revenues (Percent of GDP)
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
Actual Average Historical Revenues Revenues
Projected
Interest
Health Care Social Security Other Spending

9
Why Is Entitlement Spending Growing?

Drivers of Entitlement Spending Growth (Percent of GDP)
26%
24%
22% 20% 18% 16% 14% 12% Excess Health Care Cost Growth
56%
36%
64%
Aging
44%
10%
8%
Source: CBO Long-term Budget Outlook, 2011.

10
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 Country

Percent of GDP (2008)
18% 16% 14% 12% 10% 8% 6% 4%
2%
0%
Public
Private
Source: 2008 Data from the Organization for Economic Cooperation and Development.
12
Number of Workers for Every Social Security Retiree Is Falling

1950 1960 2011 2035
16:1
5:1
3:1
2:1
Source: 2011 Social Security Trustees Report.

13
Living Longer, Retiring Earlier

90 85 80 75
Normal Retirement Age Average Age of Retirement
70 65 60 55 50 45 40
Life Expectancy Early Retirement Age
Source: Social Security Administration and U.S. Census Bureau.

14
Looming Social Security Insolvency

Social Security Costs and Revenues (Percent of Taxable Payroll)
20% Payable Benefits 18% 16% 14% 12% 10% 8% 6% Revenues Scheduled Benefits
Source: 2011 Social Security Trustees Report.

15
Interest as a Share of the Budget

(Percent of GDP)
2010 2030 2050
Primary Spending 94%
Interest 6%
Interest 18%
Interest 26%
Total Spending = 24% of GDP
Note: Estimates based on CRFB Realistic Projections.

16
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)

TaxIn order to stabilize Debtof Primary the economy by 2021: Expenditures Expenditures as a Percent at 60% of Large Tax Spending if Included in the Budget and Their 2011 Costs (billions)
Employer Health Insurance Exclusion Mortgage Interest Deduction
Defense Discretionary 16%
$174 $89
Tax Expenditures 24%
401(k)s and IRAs

Earned Income Tax Credit
$77
$62
Non-Defense Discretionary 15% Health Spending 17% Social Secutity 16%
Special Rates for Capital Gains and Dividends State & Local Tax Deduction
Charitable Deduction
Other Mandatory 12%
$61
$57
$49 $45
Child Tax Credit
Source: Joint Committee on Taxation. Source: Office of Management and Budget.

18
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 Plan

Discretionary 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

(Deficits as Percent of GDP)
10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
Plausible Baseline
Commission Plan
21
Its Time for a Fiscal Reform Plan

Reasons to Enact a Plan Sooner 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
2013
4.8%
2015
5.2%
Creates announcement
effect to improve growth
2020
6.8%
Reduces size of necessary

adjustment
2025
9.7%
0%
2%
4%
6%
8%
10%
12%
Source: Congressional Budget Office

22
Whats 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
23
How Big Is the Fiscal Cliff?

Policy 2001/2003/2010 Income and Estate Tax Cuts AMT Patches (w/ Tax Cut Interactions) 2013 Fiscal Impact $110 billion 2013-2022 Fiscal Impact $2.8 trillion
$125 billion
$65 billion $10 billion $115 billion $30 billion $25 billion ~$500 billion ~2%
$1.7 trillion
$980 billion $270 billion $150 billion $455 billion $420 billion $8.1 trillion N/A
Sequester Doc Fixes

Jobs Measures Various Tax Extenders Taxes from the Affordable Care Act Total Fiscal Impact Total Economic Impact (% GDP)
Note: Congressional Budget Office estimates and CRFB calculations. 2013-2022 estimates include interest.
24
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
25

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Averting a Fiscal Crisis

The Committee for a Responsible Federal Budget

Note: Estimates based on CRFB Realistic Baseline.

Gap Between Revenue and Spending

Note: Estimates based on CRFB Realistic Baseline.

Components of Revenue and Spending

Interest 6% Borrowing 32% Non-Defense 15%

Medicare 14% Medicaid & Other Health 8%

Individual Income Tax 27%

Other 6% Social Insurance Taxes 24%

Social Security 22%

Other Mandatory 16%

Total Revenues = $2.435 Trillion Total Financing = $3.563 Trillion

Total Outlays = $3.563 Trillion

Surpluses Turning Into Growing Deficits

$236B $233B $1.6T

What Debt Is Likely to Reach Primary

Interest Costs Will Reach $1 Trillion By 2024

What the Debt Will Realistically Look Like

Note: Estimates based on CRFB Realistic Baseline.

Higher Interest Payments displacing

Intergenerational Inequity as future

Unsustainable Promises of high

Uncertain Environment for businesses

Eventual Fiscal Crisis if changes are not

The Risk of Fiscal Crisis

Our national debt is our biggest national security threat.

Rapid Health Care Cost Growth

Growing Interest Costs

Growing Entitlement Spending

Actual Average Historical Revenues Revenues

Health Care Social Security Other Spending

Note: Estimates based on CRFB Realistic Baseline.

Why Is Entitlement Spending Growing?

Source: CBO Long-term Budget Outlook, 2011.

Why Is Federal Health Spending Increasing?

Per Beneficiary Costs Are Growing faster than

Americans Are Wealthy and Willing to Pay More

Incentives Are Backwards by hiding true costs of

Health Care Spending by Country

Number of Workers for Every Social Security Retiree Is Falling

Source: 2011 Social Security Trustees Report.

Living Longer, Retiring Earlier

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

Looming Social Security Insolvency

Source: 2011 Social Security Trustees Report.

Interest as a Share of the Budget

Primary Spending 94%

Primary Spending 82%

Primary Spending 74%

Total Spending = 24% of GDP

Total Spending = 27% of GDP

Total Spending = 34% of GDP

Note: Estimates based on CRFB Realistic Projections.

Spending in the Tax Code Costs $1 Trillion

Excessive Spending Through the Tax Code (Tax Expenditures)

Tax Expenditures 24%

401(k)s and IRAs

Non-Defense Discretionary 15% Health Spending 17% Social Secutity 16%