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Averting a FiscalCrisis

The Committee for a Responsible Federal

Budget


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Deficit Projections

Note: Estimates based on CRFB Realistic Baseline.

(Percent of GDP)

1991-2011 Average Deficit:2.8%

2012-2021 Average Current PolicyDeficit: 4.3%

2


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Gap Between Revenue and Spending


(Percent of GDP)

Avg. Historical Spending (1970-2010): 20.8%

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Avg. Historical Revenues (1970-2010): 18.0%


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Components of Revenue and Spending

Revenues and Financing Outlays

Total Outlays = $3.597Trillion

2011

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Total Revenues =$2.314 Trillion

Total Financing =$3.598 Trillion


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Debt Projections


(Percent of GDP)

Realistic Projections2010: 62%2025: 90%2040: 145%2080: 399%

5

CRFB Realistic Debt


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Consequences of Debt

Crowding Out of publicsector investment leading to

slower economic growth

Higher Interest Paymentsdisplacing other governmentpriorities

Intergenerational Inequityas future generations pay forcurrent government spending

Unsustainable Promises ofhigh spending and low taxes

Uncertain Environment forbusinesses to invest and

households to plan6


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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 tomanage its budget and the government would lose its ability toborrow 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 federalbudget must occur [if we dont act in advance] the needed

fiscal adjustments will be a rapid and painful response to alooming or actual fiscal crisis.

-Ben Bernanke, Chairman of the Federal Reserve

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Debt Drivers

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Short-Term Long-Term

Economic Crisis(lost revenue andincreased spending fromautomatic stabilizers)

Economic Response(stimulus spending/taxbreaks and financialsector rescue policies)

Tax Cuts

(in 2001, 2003, and 2010) War Spending

(in Iraq and Afghanistan)

Rapid Health Care CostGrowth(causing Medicare andMedicaid coststo rise)

Population Aging(causing Social Securityand Medicare costs torise, and revenue to fall)

Growing Interest Costs(from continued debtaccumulation)

Insufficient Revenue(to meet the costs offunding government)


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Federal Spending and Revenues (Percent of GDP)

Growing Entitlement Spending


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Why Is Entitlement Spending Growing?

0.08

2.08

4.08

6.08

8.08

10.08

12.08

Drivers of Entitlement Spending Growth (Percent of GDP)

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36%

64%

56

%

44%

Source: CBO Long-term Budget Outlook, 2011.


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Why Is Federal Health Spending Increasing?

The Population Is Aging due toincreased life expectancy and

retirement of the baby boomgeneration, adding more beneficiariesto Medicare and Medicaid

Per Beneficiary Costs Are Growingfaster than the economy in both the

public and private sector. Causes ofthis excess cost growth include:

Americans Are Unhealthy whencompared to populations in similareconomies

Americans Are Wealthy and Willingto Pay More

Fragmentation and Complexitybetween insurers, providers, andconsumers make normal marketcompetition difficult

Incentives Are Backwards by hidingtrue costs of care throu h insurance and11


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Health Care Spending by Country

Percent of GDP (2008)

Source: 2008 Data from the Organization for Economic Cooperation andDevelopment.12

0

2

4

6

8

10

12


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Number of Workers for Every Social Security Retiree IsFalling

Source: 2011 Social Security Trustees Report.

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1950 1960 2011 2035

16:1

5:1

3:1

2:1


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Living Longer, Retiring Earlier

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

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Looming Social Security Insolvency

Social Security Costs and Revenues (Percent of TaxablePayroll)

Source: 2011 Social Security Trustees Report.

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PayableBenefits

Revenues

ScheduledBenefits


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

Note: Estimates based on CRFB Realistic Projections.

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Total Spending = 24%of GDP



2010 2030 2050


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Insufficient Revenue

Unpaid for Tax Cuts in 2001,2003, and 2010 lowered revenue

collection without makingcorresponding spending cuts ortax increases to offset thebudgetary effect

Spending in the Tax CodeCosts $1 Trillion annually in lostrevenues through so called "taxexpenditures," which make thetax code more complicated, less

efficient, and force higher rates

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E i S di Th h th T C d


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Excessive Spending Through the Tax Code(Tax Expenditures)

Tax Expenditures as aPercent of Primary

Spending if Included in theBudget

Large Tax Expendituresand Their 2011 Costs

(billions)Employer Health InsuranceExclusion

$174

Mortgage Interest Deduction $89

401(k)s and IRAs $77

Earned Income Tax Credit $62

Special Rates for Capital Gains andDividends

$61

State & Local Tax Deduction $57

Charitable Deduction $49

Child Tax Credit $45

Source: Joint Committee on Taxation.

Source: Office of Management and Budget.


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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

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The Bowles-Simpson Fiscal Commission Plan

Discretionary Spending

Equal cuts to defense and non-defense in 2013 totaling $1.7 trillionthrough 2020

Social Security

Progressive benefit changes,retirement

age increase, tax increase for highearners

Health Care Spending

Cuts to providers, lawyers, drugcompanies, & beneficiaries totaling

$400 billion

Other Mandatory Programs

Reforms to farm, civilian/militaryretirement, & other programs saving$200 billion

Tax Reform and Revenue20


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The Bowles-Simpson Fiscal Commission Plan

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(Debt as Percent of GDP)

0

2

4

6

8

10

12

0

2

4

6

8

10

12

10

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Its Time for a Fiscal Reform Plan

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Reasons to Enact a PlanSooner Rather than Later

Size of Adjustment to Close 25-year FiscalGap,

Depending on Start Year (Percent of GDP)

Allows for gradual phasein

Improves generational

fairness Gives taxpayers

businesses, andentitlement beneficiaries

time to plan Creates announcement

effect to improvegrowth

Reduces size ofnecessary adjustment

-0.02 0 0.02 0.04 0.06 0.08 0.1 0.12


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The Time For Action Is Now

If not addressed, burgeoningdeficits will eventually lead toa fiscal crisis, at which pointthe bond markets will forcedecisions upon us. If we donotact soon to reassure themarkets, the risk of a crisiswill increase, and the options

available to avertorremedythe crisis will both narrow andbecome more stringent.

-Erskine Bowles and Sen. AlanSimpson, Former co-chairs of the

National Commission on Fiscal

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