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The expanded version of our PowerPoint presentation that clearly lays out the fiscal challenge facing the United States. For more, visit http://crfb.org/go-big.
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Averting a Fiscal Crisis
Why America Needs Comprehensive Fiscal Reforms Now
Deficit Projections
19911993
19951997
19992001
20032005
20072009
20112013
20152017
20192021
-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%
2
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
10%
12%
14%
16%
18%
20%
22%
24%
26%
Current Law Spending Current Law RevenuesCRFB Realistic Spending CRFB Realistic Revenues
Actual Projected
Gap Between Revenue and Spending
Note: Estimates based on CRFB Realistic Baseline.
(Percent of GDP)
Avg. Historical Spending (1972-2011): 21.0%
3
Avg. Historical Revenues (1972-2011): 17.9%
Components of Revenue and SpendingRevenues and Financing Outlays
Total Outlays = $3.601 Trillion
2011
4
Total Revenues = $2.523 TrillionTotal Financing = $3.601 Trillion
Individual Income Tax27%
Corporate Tax5%
Social Insurance Taxes25%
Other6%
Borrowing30%
Medicare13%
Medicaid & Other Health
8%
Social Security21%
Other Mandatory16%
Defense19%
Non-Defense17%
Interest6%
19401945
19501955
19601965
19701975
19801985
19901995
20002005
20102015
20202025
20302035
20402045
20502055
20602065
20702075
2080
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
500%
Current Law
Debt Projections
Note: Estimates based on CRFB Realistic Baseline.
(Percent of GDP)
Realistic Projections2010 :62%2025 :94% 2040 :154%2080 :430%
5
What the Debt Will Realistically Look Like
Growth in Mandatory Spending
6
1972 1979 1986 1993 2000 2007 2014 2021 2028 2035 2042 2049 2056 2063 2070 20770%
5%
10%
15%
20%
25%
30%
Social Security Health CareOther Entitlements Revenue
Historical Average
Actual Projected
(Percent of GDP)
Consequences of Debt
7
“Crowding Out” of private sector investment, leading to slower economic growth
Higher Interest Payments displacing other government priorities and investments
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
The Risk of Fiscal Crisis
8
“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 don’t 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
9
What the Debt Will Realistically Look Like
Short-Term Long-Term
Economic Crisis (lost revenue and increased spending on safety net programs like Food Stamps)
Economic Response (stimulus spending/tax breaks and financial 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 Medicare costs to rise, and revenues to fall)
Growing Interest Costs (from continued debt accumulation)
Insufficient Revenue (to meet the costs of funding government)
How Did We Get Here?
10
Drivers of the Debt Since 2001
Note: Estimates from The Pew Charitable Trusts based on CBO data.
Increases in Debt:
Technical & Economic Changes: 27%
Tax Cuts: 27%
Spending Increases: 41%
Other Means of Financing: 6%
Federal Spending and Revenues (Percent of GDP)
Growing Entitlement Spending
Note: Estimates based on CRFB Realistic Baseline.11
19801983
19861989
19921995
19982001
20042007
20102013
20162019
20222025
20282031
20342037
20402043
20462049
20522055
20582061
20642067
20702073
20762079
0%
10%
20%
30%
40%
50%
60%Actual Projected
Revenues
Interest
Health Care
Other Spending
Social Security
Average HistoricalRevenues
Why Is Entitlement Spending Growing?
12
Drivers of Entitlement Spending Growth (Percent of GDP)
20102013
20162019
20222025
20282031
20342037
20402043
20462049
20522055
20582061
20642067
20702073
20762079
8%
10%
12%
14%
16%
18%
20%
22%
24%
26%
Aging
Excess Health CareCost Growth
Source: CBO Long-term Budget Outlook, 2011.
36%
64%
56%
44%
Why Is Federal Health Spending Increasing?
13
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 among 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
Health Care Spending by Country
14
Percent of GDP (2008)
36%
64%
Mexic
o
Turkey
Korea
Luxe
mbourgChile
Poland
Czech
Republic
HungaryIsr
ael
Slova
k Republic
Slove
nia
Finland
Norway
United Kingdom
Ireland
Spain
Italy
Sweden
New Zealand
Canada
Austria
Switz
erland
France
United St
ates
OECD Avera
ge0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Public Private
Source: 2008 Data from the Organization for Economic Cooperation and Development.
Number of Workers for Every Social Security Retiree is Falling
15
36%
64%
1950 1960 2011 2035
16:1 5:1 3:1 2:1
Source: 2011 Social Security Trustees Report.
Living Longer, Retiring Earlier
16
19291932
19351938
19411944
19471950
19531956
19591962
19651968
19711974
19771980
19831986
19891992
19951998
20012004
2007
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.
Looming Social Security Insolvency
17
Social Security Costs and Revenues (Percent of Taxable Payroll)
36%
64%1980
19841988
19921996
20002004
20082012
20162020
20242028
20322036
20402044
20482052
20562060
20642068
20722076
2080
6%
8%
10%
12%
14%
16%
18%
20%What Social Security Can Afford to Pay
What Social Security “Promises” to Pay
Revenues
Source: 2011 Social Security Trustees Report.
Interest as a Share of the Budget(Percent of GDP)
Note: Estimates based on CRFB Realistic Projections.18
Total Spending = 24% of GDP Total Spending = 27% of GDP Total Spending = 35% of GDP
2010 2030 2050
Interest6%
Primary Spending
94%
Interest19%
Primary Spending
81%
Interest28%
Primary Spending
72%
Insufficient Revenue
19
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 Over $1 Trillion annually in lost revenues through so called "tax expenditures," which make the tax code more complicated, less efficient, and force higher rates
Excessive Spending Through the Tax Code (Tax Expenditures)
20
In order to stabilize Debt at 60% of the economy by 2021:Tax Expenditures as a Percent of Primary Spending if Included in the Budget
Large 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 $62
Special Rates for Capital Gains and Dividends
$61
State & Local Tax Deduction $57
Charitable Deduction $49
Child Tax Credit $45
Tax Expenditures24%
Health Spending18%
Other Mandatory12%
Social Secutity16%
Non-Defense Discretionary
15%
Defense Discre-tionary
16%
Source: Joint Committee on Taxation.
Source: Office of Management and Budget.
How Much Do We Need to Save?
*Estimates based on CRFB Realistic Baseline.21
In order to stabilize debt at 60% of the economy by 2022:
(2012-2022 Savings)
Current Law Baseline Assuming No Trigger Savings
Current Policy Baseline Assuming Upper-Income Tax
Cuts Expire*
Current Policy Baseline Assuming
All Tax Cuts Continued*
Debt in 2021 w/ No Savings(% GDP)
67% 81% 86%
Required Savings to Stabilize Debt at 65% $1.7 Trillion $5.1 Trillion $6.4 Trillion
How Much Do We Need to Save? (cont’d)
*Estimates based on CRFB Realistic Baseline.22
In order to stabilize debt at 65% of the economy by 2022:
(2012-2022 Savings)
Current Law Baseline Assuming No Trigger Savings
Current Policy Baseline Assuming Upper-Income Tax
Cuts Expire*
Current Policy Baseline Assuming
All Tax Cuts Continued*
Debt in 2021 w/ No Savings(% GDP)
67% 81% 86%
Required Savings to Stabilize Debt at 65% $0.4 Trillion $3.8 Trillion $5.2 Trillion
How Much Do We Need to Save? (cont’d)
*Estimates based on CRFB Realistic Baseline.23
In order to stabilize debt at 70% of the economy by 2022:
(2012-2022 Savings. Negative numbers reflect increase in deficits).
Current Law Baseline Assuming No Trigger Savings
Current Policy Baseline Assuming Upper-Income Tax
Cuts Expire*
Current Policy Baseline Assuming
All Tax Cuts Continued*
Debt in 2021 w/ No Savings(% GDP)
67% 81% 86%
Required Savings to Stabilize Debt at 70% -$0.8 Trillion $2.6 Trillion $4.0 Trillion
How Much Do We Need to Save? (cont’d)
24
So even if lawmakers were to stabilize debt at 70% of the economy in 2021—a level higher than the internationally recognized threshold of 60%—they would have to enact at least $2.8 trillion in savings beyond the $920 billion enacted in the Budget Control Act, compared to realistic assumptions of
future debt .
That calls for a Go Big approach to debt reduction .
We Can’t Inflate or Grow Our Way Out
25
Inflation Growth
An unexpected increase in inflation could temporarily reduce the real value of debt and federal interest payments to investors
However, higher inflation would prompt investors to demand higher interest payments, increasing the costs of financing new debt
Higher inflation would also push up spending for all inflation-indexed programs, including Social Security, food stamps, military pensions, veterans’ benefits.
Strong economic growth is a necessary but not sufficient condition for debt reduction
Many spending programs grow as the economy does, and would outpace revenue growth Social Security payments would
increase as wages and, thus, benefits grew over time
Health care spending would grow even faster, given that costs continually grow notably faster than the overall economy
The levels of growth needed to significantly reduce medium-term debts would be way above historical norms
Debt Reduction and Economic Growth
26
CBO studied the economic impact of an illustrative $2.4 trillion debt reduction plan and found that real output would be between 0.6% and 1.4% higher, depending on the magnitude of the effects.
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 20211.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
CBO Baseline Growth Small Output EffectMedium Output Effect Large Output Effect
Real Output Growth (Percent)
*Estimates from CBO, “The Macroeconomic and Budgetary Effects of an Illustrative Policy for Reducing the Federal Budget Deficit.”
How to Reduce the Deficit
27
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
“Go Small”: Lots of Pain for Little Gain A smaller package would offer some
improvement to our fiscal situation, but it would not offer the benefits of a declining debt path
The public would see a package of tough choices and a debt burden that continues to grow. In essence, it would deliver political pain with not so much gain
Would leave in place considerable policy uncertainty, affecting businesses and markets
A smaller package and an incremental approach to debt reduction would not offer the political tradeoffs necessary to solve our fiscal challenges
28
What Could “Go Small” Look Like?
29
Possible Policy Changes Savings
Government-Wide $250 billion from chained CPI
Discretionary $100-200 billion from modestly slower growth in BCA caps
Health Care Negligible savings
Other Mandatory$150-250 billion from farm
subsidies, federal civilian and military retirement and benefits, Fannie and Freddie, and others
Social Security Negligible savings
Revenues Negligible savings
Net Interest $100 billionTotal $600-800 billion
Without addressing health care reforms or revenues, it will be very difficult to achieve significant savings
And even then, there is no guarantee that significant savings in other areas of the budget could be agreed on
Adding Serious Entitlement Reforms and Revenues Pushes You into “Go Big”
Democrats will only agree to serious entitlement reforms if there are revenues
Republicans will only agree to revenues in the context of comprehensive tax reform
Democrats will only agree to a comprehensive tax reform that replaces the Bush tax cuts if it raises at least the $800 billion they would get if President Obama vetoes extension of upper income tax cuts
Republicans will not agree to revenues anywhere near that amount without health savings that go beyond the amount proposed by the President
30
Advantages of “Go Big” Debt stabilized and falling as a share of
the economy later in the decade, and all the benefits associated with a declining debt burden:
Less “crowding out” of private sector investment
Stronger confidence in businesses and markets
Greater certainty and stability Stronger economy over the long-term Lower interest payments and increased
fiscal space Intergenerational equity Reduced or eliminated risk of fiscal
crisis
31
Advantages of “Go Big” (cont’d) Increased chances of enacting a
comprehensive debt solution of at least $3 - $4 trillion in savings:
Political trade offs necessary to address entitlement growth and revenues
Shared sacrifice in Go Big approach Realize the gains of debt reduction by
stabilizing and reducing the debt, and not just making difficult decisions that solve only part of the problem
Restore America’s faith in the political system
32
The Announcement Effect
Just announcing the adoption of a debt reduction plan can provide a boost in confidence, aiding the recovery
Prominent lawmakers, government officials, economists, and experts have reiterated the benefits of the announcement effect, including:
Ben Bernanke, Fed Chairman Erskine Bowles and Alan Simpson The International Monetary Fund Glenn Hubbard, former Chair of the President’s CEA Mark Zandi, Chief Economist, Moody’s Analytics Michael Bloomberg, Mayor of New York City Alan Blinder, former Fed Vice Chairman Larry Summers, former Director, NEC Various editorial boards and magazines, including the
Washington Post, Financial Times, and The Economist
33
Note: For more information on the “announcement effect,” see CRFB at http://crfb.org/blogs/announcing-announcement-effect-club
“Go Big”: Shared Sacrifice Expanding the size and scope of a package can promote a sense of shared
sacrifice on behalf of the American public and key interest groups, making it more likely that they would accept changes if everyone was contributing to the solution.
An incremental approach would allow advocates for parts of the budget to argue that they are bearing an unfair burden. A Go Big approach which achieves savings in all parts of the budget neutralizes that argument.
In a recent Washington Post op-ed, Fiscal Commission co-chairs Erskine Bowles and Alan Simpson highlighted this lesson from the Fiscal Commission deliberations:
“The more comprehensive we made it, the easier our job became. The tougher our proposal, the more people came aboard. Commission members were willing to take on their sacred cows and fight special interests — but only if they saw others doing the same and if what they were voting for solved the country’s problems.”
34
What Could “Go Really Big” Look Like?
35
Possible Policy Changes
$600 - $800 Billion Plan $3 Trillion Plan $4 Trillion Plan
Government-Wide $250 billion $250 billion $250 billion
Discretionary $100- 200 billion $300 billion $400 billion
Health Care Negligible savings $650 billion $900 billion
Other Mandatory $150 - $250 billion $350 billion $350 billion
Social Security Negligible savings $150 billion $300 billion
Revenues Negligible savings $850 billion $1.2 trillion
Net Interest $100 billion $450 billion $600 billionTotal $600 - $800 billion $3 trillion $4 trillion
Including serious entitlement reforms and revenues pushes the overall savings well above the $1.2 trillion mandate
Note: $4 trillion plan is a more ambitious version of the types of reforms in the $2.8 trillion plan.
The Bowles-Simpson Fiscal Commission Plan
36
Discretionary Spending Cuts to defense and non-defense programs,
totaling an additional $400 billion over ten years [on top of the savings already enacted].
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.
Illustrative Tax Rates
37
Bottom Rates Middle Rates Top Rates Corporate Rate
Current Rates for 2012 10% 15% 25% 28% 33% 35% 35%
Scheduled Rates for 2013 15% 28% 31% 36% 39.6% 35%
Eliminate All Tax Expenditures 8% 14% 23% 26%
Keep Child Tax Credit and EITC 9% 15% 24% 26%
Fiscal Commission’s Illustrative Tax Plan 12% 22% 28% 28%
2012 Rates, Expiration of the Tax Cuts, and Fiscal Commission’s Illustrative Plan
Fiscal Commission’s illustrative tax plan would reduce or eliminate most tax expenditures and use the savings to reduce tax rates and reduce the deficit.
The Bowles-Simpson Fiscal Commission Plan
38
(Deficits as Percent of GDP)20
10
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
2025
2030
2035
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
What Savings Have Lawmakers Enacted So Far?
39
(Billions of Dollars)
Discretionary
Health Care
Social S
ecurit
y
Other Mandatory
Revenues
Interest
*$1.2 Trillion Sequeste
r$0
$400
$800
$1,200
$1,600
$2,000
Bowles-Simpson Recommendations Savings Enacted
Note: Estimates based on realistic budget projections.
It’s Time For a Fiscal Reform Plan
40
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
2025
2020
2015
2012
0% 2% 4% 6% 8% 10% 12% 14%
12.5%
8.1%
5.9%
4.9%
Source: Congressional Budget Office
It’s Time for a Fiscal Reform Plan…Now
41
We Can’t Wait Until After the Election
Every month and year that passes, the debt grows larger and larger and the solutions become more difficult
Elections can take policy options off the table and back candidates into positions that make bipartisan solutions more difficult
Addressing the fiscal situation as soon as possible would make governing easier – not harder – after the election
Who Supports “Go Big”?
42
Calls for a $4+ Trillion, Bipartisan Solution to the Debt
45 Members of the Senate 150 Members of the House of Representatives 200 Business Groups, including the Chamber of Commerce, National
Association of Manufacturers, and Business Roundtable Other groups: Partnership for New York City, American Business
Conference, National Conference of State Legislatures 60+ former government officials, business leaders, and experts Editorial boards and other outside experts Countless concerned citizens
Principles of Fiscal Responsibility
43
For the 2012 Campaign
1. Make Deficit Reduction a Top Priority
2. Propose Specific Fiscal Targets
3. Recommend Specific Policies to Achieve the Targets
4. Do No Harm
5. Use Honest Numbers and Avoid Budget Gimmicks
6. Do Not Perpetuate Budget Myths
7. Do Not Attack Someone Else’s Plan Without Putting Forward an Alternative
8. Refrain from Pledges That Take Policies Off the Table
9. Propose Specific Solution for Social Security, Health Programs, and the Tax Code
10. Offer Solutions for Temporary and Expiring Policies
11. Encourage Congress to Come Up with a Budget Plan as Quickly as Possible
12. Remain Open to Bipartisan Compromise
The Time For Action Is Now
44
“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