averting a fiscal crisis 0 0

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Averting a Fiscal CrisisThe Committee for a Responsible Federal Budget


2/25

Deficit Projections

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Current Policy Current Law

Note: Estimates based on CRFB Realistic Baseline.

(Percent of GDP)

1992-2012 Average Deficit:2.9%

2012-2022 Average Current Policy Deficit: 4.7%

1


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10%

12%

14%

16%

18%

20%

22%

24%

26%

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Current Law Spending Current Law RevenuesCRFB Realistic Spending CRFB Realistic Revenues

Actual Projected

Gap Between Revenue and Spending


(Percent of GDP)

Avg. Historical Spending (1972-2011): 21.0%

2

Avg. Historical Revenues (1972-2011): 17.9%


4/25

Components of Revenue and Spending

Revenues and Financing

Outlays

Total Outlays = $3.627 Trillion

2012

3

Total Revenues = $2.456 Trillion

Total Financing = $3.627 Trillion

Individual Income

Tax27%

Corporate Tax

5%

Social Insurance

Taxes

23%

Other

6%

Borrowing

32%

Medicare

15%

Medicaid &

Other Health8%

Social Security

23%

Other Mandatory

18%

Defense

21%

Non-

Defense

7%

Interest

7%


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-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

Current Law

Debt Projections


(Percent of GDP)

Realistic Projections

2010: 63%

2025: 92%

2040: 147%

2080: 384%

4

What the Debt Will

Realistically Look Like


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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

5


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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 to manage its budget and thegovernment 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

6


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Debt Drivers

7

Short-Term Long-Term

Economic Crisis(lost revenue and increased spending fromautomatic stabilizers)

Economic Response(stimulus spending/tax breaks andfinancial sector rescue policies)

Tax Cuts(in 2001, 2003, and 2010)

War Spending(in Iraq and Afghanistan)

Rapid Health Care Cost Growth(causing Medicare and Medicaid costs

to rise)

Population Aging

(causing Social Security and Medicarecosts to rise, and revenue to fall)

Growing Interest Costs(from continued debt accumulation)

Insufficient Revenue

(to meet the costs of funding government)


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Federal Spending and Revenues (Percent of GDP)

Growing Entitlement Spending


8

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%Actual Projected

Revenues

Interest

Health Care

Other Spending

Social Security

Average Historical

Revenues


10/25

Why Is Entitlement Spending Growing?

8%

10%

12%

14%

16%

18%

20%

22%

24%

26%

Aging

Excess Health Care

Cost Growth

Drivers of Entitlement Spending Growth (Percent of GDP)

9

36%

64%

56%

44%

Source: CBO Long-term Budget Outlook, 2011.


11/25

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 toMedicare 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 marketcompetition difficult

Incentives Are Backwards by hiding true costs of

care through insurance and by hiding costs of

insurance enrollment through employer

sponsorship, incentivizing overspending

10


12/25

Health Care Spending by Country

Percent of GDP (2008)

Source: 2008 Data from the Organization for Economic Cooperation and Development.

11

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Public Private


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Number of Workers for Every Social Security Retiree Is Falling

Source: 2011 Social Security Trustees Report.

12

1950 1960 2011 2035

16:1 5:1 3:1 2:1


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Living Longer, Retiring Earlier

40

45

50

55

60

65

70

75

80

85

90

Life Expectancy

Average Age of Retirement

Normal Retirement Age

Early Retirement Age

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

13


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Looming Social Security Insolvency

6%

8%

10%

12%

14%

16%

18%

20%

Social Security Costs and Revenues (Percent of Taxable Payroll)

Source: 2011 Social Security Trustees Report.

14

Payable Benefits

Revenues

Scheduled Benefits


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Interest as a Share of the Budget

(Percent of GDP)

Note: Estimates based on CRFB Realistic Projections.

15

Total Spending = 24% of GDP Total Spending = 27% of GDP Total Spending = 34% of GDP

2010 2030 2050

Interest

6%

Primary

Spending

94%

Interest

19%Primary

Spending

81%

Interest27%

Primary

Spending

73%


17/25

Insufficient Revenue

Unpaid for Tax Cuts in 2001, 2003, and

2010 lowered revenue collection without

making corresponding spending cuts ortax 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

16


18/25

Excessive Spending Through the Tax Code (Tax Expenditures)Tax Expenditures as a Percent of Primary

Spending if Included in the BudgetLarge Tax Expenditures

and Their 2011 Costs (billions)

Employer Health Insurance Exclusion $174

Mortgage Interest Deduction $89

401(k)s and IRAs $77

Earned Income Tax Credit $62Special Rates for Capital Gains and

Dividends $61

State & Local Tax Deduction $57Charitable Deduction $49Child Tax Credit $45

Source: Joint Committee on Taxation.

Source: Office of Management and Budget.

Tax

Expenditures24%

Health Spending

18%

Other Mandatory

12%

Social Secutity

16%

Non-Defense

Discretionary

15%

Defense

Discretionary

16%


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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

18


20/25

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.

19


21/25

The Bowles-Simpson Fiscal Commission Plan

20

(Deficits as Percent of GDP)

0%

1%

2%

3%

4%

5%6%

7%

8%

9%

10%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Plausible Baseline Commission Plan


22/25

Its Time for a Fiscal Reform Plan

21

Reasons to Enact a PlanSooner 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

Creates announcement

effect to improve growth

Reduces size of necessary

adjustment

Source: Congressional Budget Office

9.7%

6.8%

5.2%

4.8%

0% 2% 4% 6% 8% 10% 12%

2025

2020

2015

2013


23/25

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

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24/25

How Big Is the Fiscal Cliff?

23

Policy 2013

Fiscal Impact

2013-2022

Fiscal Impact

2001/2003/2010 Income and Estate Tax

Cuts$110 billion $2.8 trillion

AMT Patches (w/ Tax Cut Interactions) $125 billion $1.7 trillion

Sequester $65 billion $980 billion

Doc Fixes $10 billion $270 billion

Jobs Measures $115 billion $150 billion

Various Tax Extenders $30 billion $455 billion

Taxes from the Affordable Care Act $25 billion $420 billion

Total Fiscal Impact ~$500 billion $8.1 trillionTotal Economic Impact (% GDP) ~2% N/A

Note: Congressional Budget Office estimates and CRFB

calculations. 2013-2022 estimates include interest.


25/25

The Time For Action Is Now

If not addressed, burgeoning deficits

will eventually lead to afiscal 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 avertorremedy

the crisis will both narrowand

become more stringent.

-Erskine Bowles and Sen. Alan Simpson, Former

co-chairs of the National Commission on Fiscal

Responsibility and Reform

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