Congressional Budget Office

Understanding the 2016 Budget Outlook

Presentation to the American Academy of Actuaries Washington, D.C.

November 4, 2016

Keith Hall Director

This presentation draws on An Update to the Budget and Economic Outlook: 2016 to 2026 (August 2016), www.cbo.gov/publication/51908; The Long-Term Budget Outlook (July 2016), www.cbo.gov/publication/51580; Federal Subsidies for Health Insurance Coverage for People Under Age 65: 2016 to 2026 (March 2016), www.cbo.gov/publication/51385; and related CBO publications.

1 CO N GR ES S IO N A L B UDGE T O F F IC E

CBO’s Budget Projections Through 2026 as of August 2016

2 CO N GR ES S IO N A L B UDGE T O F F IC E

CBO provides objective, nonpartisan information to the Congress.

CBO produces estimates of the effects of changes in federal policies and makes baseline projections of federal spending, revenues, and deficits under current law.

3 CO N GR ES S IO N A L B UDGE T O F F IC E

Total Deficits or Surpluses

Percentage of GDP

Actual Projected

Deficits

Surpluses

Average Deficit,1966 to 2015

(-2.8%)

1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021 2026-10

-8

-6

-4

-2

0

2

4

4 CO N GR ES S IO N A L B UDGE T O F F IC E

Total Revenues and Outlays

Percentage of GDP

1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021 20260

4

8

12

16

20

24

28

Outlays

Revenues

Average Outlays,1966 to 2015

(20.2%)

Average Revenues,1966 to 2015

(17.4%)

Actual Projected

5 CO N GR ES S IO N A L B UDGE T O F F IC E

Major Changes in Projected Revenues From 2016 to 2026

Percentage-Point ChangeRevenues as aPercentage of GDP Major Reasons for Change

Individual Income Taxes

• Real bracket creep

• Increased distributions from retirement accounts, relative to GDP

• Rising income inequality

Payroll Taxes

Corporate Income Taxes

Federal ReserveRemittances

2016

8.5 9.8

6.1 5.8

1.6 1.6

0.6 0.3

2026

Rising income inequality

Net effect of four different changes

Return to historical averages

1.3

-0.2

-0.1

-0.4

-1.5 0 1.5

6 CO N GR ES S IO N A L B UDGE T O F F IC E

Tax Expenditures and Other Budget Categories in 2016

IndividualIncome

Tax Revenues

PayrollTax Revenues

All OtherRevenues

All TaxExpenditures

DefenseSpending

Medicare SpendingNet of

Offsetting Receipts

Social SecuritySpending

0

2

4

6

8

10

Corporate Income TaxExpendituresPayroll TaxExpenditures

Individual Income TaxExpenditures

Percentage of GDP

7 CO N GR ES S IO N A L B UDGE T O F F IC E

Projected Outlays in Major Budget Categories

Percentage of GDP

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 20260

1

2

3

4

5

6

7Discretionary Major Health Care Programs

Social Security

Net Interest

Other Mandatory

6.7

6.0

5.3

2.62.5

8 CO N GR ES S IO N A L B UDGE T O F F IC E

Net Federal Subsidies for Health Insurance for People Under Age 65 (Projected as of March 2016)

Billions of Dollars

2016 2017–2026

Employment-Based Coverage 268 3,629

Medicaid and CHIPa 279 3,790

Nongroup Coverage and Basic Health Plan 48 919

Medicareb 80 979

Taxes and Penalties Related to Coverage -15 -441 ______________ ______________________

Net Federal Subsidies 660 8,877

a. For Medicaid, this includes only outlays for medical services for noninstitutionalized enrollees under 65 who have full benefits.

b. Outlays for benefits net of offsetting receipts (such as premiums) for noninstitutionalized Medicare beneficiaries under 65.

9 CO N GR ES S IO N A L B UDGE T O F F IC E

CBO usually updates its baseline projections three times a year. The spring baseline is the major update for the Affordable Care Act (ACA) marketplaces.

Types of changes include these:

• Changes in law;

• Changes in CBO’s economic forecast; and

• Technical changes from new information, data, regulations, and modeling assumptions.

10 CO N GR ES S IO N A L B UDGE T O F F IC E

Projections of Subsidized Enrollment in the Health Insurance Marketplaces

Millions of People

2014 2016 2018 2020 2022 2024 20260

4

8

12

16

20March 2010

March 2016

11 CO N GR ES S IO N A L B UDGE T O F F IC E

CBO’s and JCT’s Estimates of the Net Budgetary Effects of the Insurance Coverage Provisions of the Affordable Care Act

Billions of Dollars

2014 2016 2018 2020 2022 2024 2026

March 2010 March 2016

12 CO N GR ES S IO N A L B UDGE T O F F IC E

Factors contributing to the lower projections include these:

• Slower-than-expected growth in enrollment through the health insurance marketplaces;

• The slowdown in the overall growth of health care costs; and

• The U.S. Supreme Court’s decision that made the expansion of eligibility for Medicaid optional for states.

13 CO N GR ES S IO N A L B UDGE T O F F IC E

CBO’s Budget Projections Through 2046 as of July 2016

14 CO N GR ES S IO N A L B UDGE T O F F IC E

Federal Debt, Outlays, and Revenues

Percentage of GDP

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045

0

50

100

150

Federal Debt Heldby the Public

Actual Extended Baseline Projection

Outlays

Revenues

15 CO N GR ES S IO N A L B UDGE T O F F IC E

Total Revenues

Percentage of GDP

2016

2000 2005 2010 2015 2020 2025 2030 2035 2040 20450

5

10

15

20

25 Actual Extended Baseline Projection

Average Revenues,1966 to 2015

(17.4%)

20262046

18.2 18.219.4

16 CO N GR ES S IO N A L B UDGE T O F F IC E

Sources of Growth in Federal Revenues Between 2016 and 2046

Percentage of GDP

-1.0 -0.5 0 0.5 1.0 1.5

Growth in Total Revenues Between 2016 and 2046

Other Factors

Changes in the Distribution of Income

Aging and the Taxation of Retirement Income

Structural Features of the Individual Income Tax(Including real bracket creep)

New and Expiring Tax Provisions

1.1

0.8

0.3

0.1

-1.0

1.2

17 CO N GR ES S IO N A L B UDGE T O F F IC E

Components of Federal Spending

Percentage of GDP

Social Security

Other NoninterestSpending

Major Health CarePrograms

Net Interest

Actual Extended Baseline Projection

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045

15

10

5

0

18 CO N GR ES S IO N A L B UDGE T O F F IC E

CBO expects that, between 2016 and 2046, gross federal spending on major health care programs as a share of GDP will increase by 4 percentage points, from 6.1 percent to 10.1 percent.

19 CO N GR ES S IO N A L B UDGE T O F F IC E

Of that total, 2.2 percentage points come from excess cost growth, meaning that spending per beneficiary, adjusted for demographic changes, will grow more quickly than potential GDP per capita.

The other 1.8 percentage points come from the aging of the population, mostly because aging makes more people eligible for Medicare and increases costs per enrollee.

20 CO N GR ES S IO N A L B UDGE T O F F IC E

Changes in Population, by Age Group

Millions of People Millions of People

2000 2010 2020 2030 20400

50

100

150

200

250

300

350

Age 65 or Older

Ages 20 to 64

Actual Projected

2000 2010 2020 2030 20400

10

20

30

40

50

60

70

80

90

65 to 74

75 to 84

85 to 94

95 or OlderActual Projected

21 CO N GR ES S IO N A L B UDGE T O F F IC E

Tax Revenues and Outlays for Social Security

Percentage of GDP

2000 2005 2010 2015 2020 2025 2030 2035 2040 20450

1

2

3

4

5

6

7 Actual Projected

Outlays

Tax Revenues

22 CO N GR ES S IO N A L B UDGE T O F F IC E

Projected Spending, Revenues, and Deficits, Compared With Past Averages

Percentage of GDP

Average,1966–2015

2016

2046

23 CO N GR ES S IO N A L B UDGE T O F F IC E

Federal Debt Held by the Public

Percentage of GDP

0

25

50

75

100

125

150

Civil War World War I

GreatDepression

World War II

Actual ExtendedBaselineProjection

1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010 2030

24 CO N GR ES S IO N A L B UDGE T O F F IC E

Projected Federal Debt Based on Different Rates of Labor Participation, Productivity Growth, Interest on Federal Borrowing, and Excess Cost Growth for Federal Spending on Medicare and Medicaid

Actual Projected

Percentage of GDP

2000 2005 2010 2015 2020 2025 2030 2035 2040 20450

50

100

150

200

Extended Baseline

Given Rates That LowerProjected Deficits

Given Rates That RaiseProjected Deficits

141

196

93

25 CO N GR ES S IO N A L B UDGE T O F F IC E

The Size of Policy Changes Needed to Make Federal Debt Meet Two Possible Goals in 2046

39% of GDP(Its 50-year average)

75% of GDP(Its current level)

In 2017, that would amount to . . .

$560 billion, which is equal to $1,700 per person $330 billion, which is equal to $1,000 per person

2.9% of GDP,which is equal to a

1.7% of GDP,which is equal to a

16% increase in revenues

14% cut in spending

9% increase in revenues

8% cut in spending

or a or an

If lawmakers aimed for debt in 2046 to equal . . .

Each year, they would need to increase revenues or reduce noninterest spending by . . .

26 CO N GR ES S IO N A L B UDGE T O F F IC E

Notes

Slide 6. The budgetary effects of tax expenditures were projected by CBO using estimates from the staff of the Joint Committee on Taxation, which were prepared before the enactment of the Consolidated Appropriations Act, 2016, and do not include the effects of that law.

Slide 17. Spending on major health care programs consists of spending on Medicare (net of offsetting receipts), Medicaid, and the Children’s Health Insurance Program, as well as outlays to subsidize health insurance purchased through the marketplaces established under the Affordable Care Act and related spending.