Post on 16-Jan-2016
Diane Lim RogersThe Brookings
InstitutionMay 2006
How Did We Get Back to Big Deficits?
(and What Can We Do About It?)
drogers@brookings.edu
Federal Revenue and Outlays
(as a Percentage of GDP, 1965-2016)
Source: FY 2007 Budget of the United States Government, Historical Tables, 1.2; Brookings-Urban Tax Policy Center, Budget Outlook Tables, January 2006, Appendix 3
Revenues
Outlays
Average Revenues, (1965-2005)
Average Outlays, (1965-2005)
15
16
17
18
19
20
21
22
23
24
25
19651967196919711973197519771979198119831985198719891991199319951997199920012003200520072009201120132015
Per
cent
age
of G
DP
PredictedActual
Source: Brookings-Urban Tax Policy Center, Budget Outlook Tables, January 2006, Appendix Tables 2, 4
The Recent Tax Cuts Have Been Costly
Budgetary Impact of 2001-2004 Tax Cut Legislation
-800.0
-700.0
-600.0
-500.0
-400.0
-300.0
-200.0
-100.0
0.0
2001 2003 2005 2007 2009 2011 2013 2015
(bill
ions
of c
urre
nt d
olla
rs)
Revenue Losses From Current Law Revenue Losses From ExtensionAdditional Debt Service
Yet Tax Cuts Have Not Held Down Growth of Spending
Real Annualized Growth Rates in Total Federal Spending
5.7%
3.0%
2.6%
4.1%
1.9%
1.5%
4.9%
2.6%
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
Lyndon Johnson
Richard Nixon
Gerald Ford
James Carter
Ronald Reagan
George H.W. Bush
William Clinton
George W. Bush
Source: Authors’ calculations from Budget of the United States Government, FY 2007, Table 8.2
Much of Spending Growth Has Occurred in Defense
Real Annualized Growth Rates in Defense Spending
4.9%
-2.5%
3.0%
-3.8%
-1.7%
8.1%
-6.6%
4.4%
-8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
Lyndon Johnson
Richard Nixon
Gerald Ford
James Carter
Ronald Reagan
George H.W. Bush
William Clinton
George W. Bush
Source: Authors’ calculations from Budget of the United States Government, FY 2007, Table 8.2
Although Other Spending Not Exactly “Austere”
Growth in Non-Defense, Non-Homeland Security Spending
3.8%
2.2%
3.7%
2.0%
4.4%4.4%
6.6%
9.2%
0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%
10.0%
LyndonJohnson
RichardNixon
GeraldFord
JamesCarter
RonaldReagan
GeorgeH.W.Bush
WilliamClinton
GeorgeW. Bush
Source: Authors’ calculations from Budget of the United States Government, FY 2007, Tables 1.3, 4.1, 8.2
7%
1%
9%
20%
49%
0%
10%
20%
30%
40%
50%
60%
LowestQuintile
SecondQuintile
MiddleQuintile
FourthQuintile
HighestQuintile
Income Inequality Has IncreasedIncreases in Pretax Income by Quintile (1979-2003)
Sources: Congressional Budget Office, “Historical Effective Tax Rates, 1979-2003,” Brookings-Urban Tax Policy Center, “Table T05-0062,” February 2005
0.3%
2.0%
2.3% 2.4%
3.7%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
LowestQuintile
SecondQuintile
MiddleQuintile
FourthQuintile
TopQuintile
and the Recent Tax Cuts Have Exacerbated the Trend
Increases in After-tax Income (2005) From 2001-2004 Tax Cuts
Sources: Congressional Budget Office, “Historical Effective Tax Rates, 1979-2003,” Brookings-Urban Tax Policy Center, “Table T05-0062,” February 2005
• Lower long-term growth through lower national saving
• Unfair burden on future generations• Greater dependence on the rest of
the world OR
• Higher interest costs
Why Deficits Matter
Americans Are Not Saving for the Future
Personal Saving as a Percentage of Disposable Income, 1947 - 2005
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
1947-I 1949-I 1951-I 1953-I 1955-I 1957-I 1959-I 1961-I 1963-I 1965-I 1967-I 1969-I 1971-I 1973-I 1975-I 1977-I 1979-I 1981-I 1983-I 1985-I 1987-I 1989-I 1991-I 1993-I 1995-I 1997-I 1999-I 2001-I 2003-I 2005-I
Starting in the second quarter of 2005, the personal saving rate fell below zero for the first time since the Great Depression.
Source: Bureau of Economic Analysis, National Income and Product Accounts, Table 2.1, Personal Income and Its Disposition
Public Saving As a Public GoodNet Public, Net Private, and Net National Saving as
Share of GDP
-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%
10.0% 199
0-I
199
1-I
199
2-I
199
3-I
199
4-I
199
5-I
199
6-I
199
7-I
199
8-I
199
9-I
200
0-I
200
1-I
200
2-I
200
3-I
200
4-I
200
5-I Sa
ving
as a
Per
cent
age
of G
DP
(Total) Net National Saving (%GDP)Net Private Saving (%GDP)Net Government (Public) Saving (%GDP)
But Interest Rates Have Stayed Low Through Foreign Financing of
Our DebtForeign Holdings as a Share of Marketable U.S.
Public Debt
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
55.00%
3/ 31/ 2000 3/ 31/ 2001 3/ 31/ 2002 3/ 31/ 2003 3/ 31/ 2004 3/ 31/ 2005
Date
Percentage of Public Debt That Is Foreign-Held
May 2005: Foreign holdings exceed 50% threshold for first time.
• First and foremost, public recognition that deficits are unwise and unfair:– Deficits financed by foreign borrowing
are direct threat to our “competitiveness”
– Unfair burden on our children and grandchildren who will have to pay it back
• Public willingness to forgo tax cuts or accept spending cutbacks
What Can Be Done?
• Politicians responding to constituents’ demands for fiscally-responsible policies
• Bipartisanship required to make the tough choices
• Higher standards for tax cuts and spending programs from an economic “bang per buck” perspective
• Rules to help politicians stay fiscally responsible—and on both sides of the budget (taxes and spending)
What Can Be Done, continued
Status Quo Won’t DoSavings from Deficit Reduction Act of 2005
Compared with Plausible Baseline of Projected Deficits
-100
0
100
200
300
400
500
600
700
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
(bill
ions
of d
olla
rs)
Deficit Reduction Act of 2005 (scored by CBO, 1/ 27/ 2006, Senate version, S.1932)Projected Deficit (Brookings-Urban Tax Policy Center, 2006)
Longer-Term Revenue Effects of IRA Conversion Provision
in 2006 Tax Reconciliation Agreement(This Is Called Paying for the Tax Cuts?)
(6,000)
(4,000)
(2,000)
-
2,000
4,000
6,000
2006
2009
2012
2015
2018
2021
2024
2027
2030
2033
2036
2039
2042
2045
2048
Fiscal Year
Rev
enue
Cha
nge
($m
illio
ns)
Source: Brookings-Urban Tax Policy Center
Improving the Budget Process
• Caps on discretionary spending for ten years
• PAYGO rules on both tax cuts and spending
• No sunsets of tax or entitlement changes to avoid out-year costs
• Stricter definition of emergency spending
• Some accounting for long-term costs
Conclusions• Current deficits threaten economic well-being
—they are unwise and unfair.• Huge commitments to long-term entitlements
and tax cuts make the most recent attempts at deficit reduction look puny.
• 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 bipartisanship compromise will be required, and the public must demand it.