1 restoring fiscal sanity: meeting the long-run challenge april 14, 2005 alice m. rivlin and isabel...
TRANSCRIPT
1
Restoring Fiscal Sanity:Meeting the Long-Run Challenge
April 14, 2005
Alice M. Rivlin and Isabel Sawhill, editors
Henry J. Aaron, William G. Gale, Ron Haskins, Jack Meyer, Peter R. Orszag, Rudolph Penner, John B. Shoven, and C. Eugene Steuerle, authors
http://www.brookings.edu/budget
2
Big Choices Must Be Made
The population is aging and medical care costs are rising fast
Combination will drive federal spending to unprecedented levels
By 2030, huge gap opens between projected spending and historic revenue levels
Should taxes be raised to European levels? Should other federal activities be slashed? Should promises to the elderly be adjusted?
3
Federal Spending, 2004
Social Security, Medicare, and Medicaid 42%
Other Domestic Spending 31%
Defense 20%
Interest on the National Debt 7%
Source: See figure 2-1, page 36 of Restoring Fiscal Sanity 2005
4
Federal Revenue and Outlays(as percentage of GDP, 1962 to 2015)
10.00
12.00
14.00
16.00
18.00
20.00
22.00
24.00
26.00
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Year
Pe
rce
nt
of
GD
P
Actual Predicted
Outlays
Revenue
Source: See figure 1-2, page 22 of Restoring Fiscal Sanity 2005
5
CBO Projection of Social Security, Medicare, and Medicaid
Social Security
Medicare
Medicaid
0.0
5.0
10.0
15.0
20.0
25.0
30.0
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
2041
2043
2045
2047
2049
Fiscal Year
Per
cen
t o
f G
DP
2.5 Percent Excess Cost Growth
18 percent
Source: See figure 1, page 2 of Restoring Fiscal Sanity 2005
6
Historical and Projected Components of Federal Spending, 1962 – 2050
Defense
Other Federal Spending
Interest
Social Security, Medicare, Medicaid
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
2022
2025
2028
2031
2034
2037
2040
2043
2046
2049
Year
Pe
rce
nt
of
GD
P
Actual Predicted 2.5 Percent Excess Cost Growth (Simulation 1)
Long-term Revenue 18.4%
Source: Congressional Budget Office
7
The Choices
Keep revenues at or below current level with wholesale reductions in spending (the smaller government scenario)
Maintain current commitments and fund some new priorities (the larger government scenario)
Do some combination of the two, but still need to decide where to cut spending, and whether to fund any new initiatives
8
Smaller Government Scenario
Social Security benefits indexed to prices, not wages
Medical costs held to growth rate of economy Eliminate most commercial and agricultural
subsidies, most education, housing, job training, environmental, and crime programs
Selected cuts in other domestic programs deemed wasteful or ineffective
Defense spending held below $400 billion
9
Consequences of Smaller Government Scenario
Federal taxes reduced slightly Elderly responsible for much bigger share of costs of
retirement– Social security benefits fall by 18% in 2030, more steeply
thereafter– Portion of health outlays paid by elderly would rise from
about 40% to about 70% by 2030, more thereafter
Non-defense spending cut by about $400 billion a year by end of decade (about 10%)
No room to meet unforeseen contingencies (e.g., terrorism) or fund new initiatives
10
Larger Government Scenario
Social Security, Medicare, Medicaid unchanged
Added spending for new initiatives equal to 1.5% of GDP (e.g., health care, education, global poverty)
Defense allowed to grow in line with Pentagon’s future years defense plan through 2022
11
Consequences of Larger Government Scenario
Total spending rises from 20% of GDP in 2005 to about 28% in 2030
Big tax increase But tax burdens still lower than in 17 other
advanced countries
12
After-Tax Real Income forAverage Household
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
SmallerGovernment
LargerGovernment
2005 2030
Taxes
After-tax Income
Mean Income (2005 $)
Source: Author’s calculations
13
The Politics of Deficit Reduction: Lessons from the Past
Past efforts to reduce deficit or make major changes in taxes and entitlements have sometimes succeeded
– 1983 Social Security reforms– 1986 tax reform– 1990s budget agreements (1990, 1993, 1997)
Six lessons from history and literature– The public must demand action– Presidential leadership is important– Bipartisanship works best– Everything should be on the table– Unorthodox methods of legislating can help– Rules matter
14
The Politics of Deficit Reduction: What Washington Insiders Say
Our interviews suggest considerable pessimism that past success can be replicated in current environment
– Only 1 out of 20 thought spending could be cut by as much as 5 percent
– 15 out of 20 thought it would be cut by less than 1%– Only 3 out of 20 thought even a minority of Republicans
would agree to a tax increase in the next few years Most important for success, according to insiders
– External factors that create public concern– Presidential leadership– Bipartisan compromise, spreading the pain
15
Conclusions
Current deficits threaten economic well-being Even if they decline in short-run, they will balloon in
longer-run Social Security is a problem; Medicare is a much bigger
problem Fiscal imbalances present an opportunity to rethink what
government does and how we pay for it Eventually, taxes must be raised and spending cut The sooner this is done, the less costly and painful it will
be Presidential leadership and bipartisan compromise will
be required