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Transcript of Averting a Fiscal Crisis 0 0
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Averting a Fiscal CrisisThe Committee for a Responsible Federal Budget
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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%
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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
Note: Estimates based on CRFB Realistic Baseline.
(Percent of GDP)
Avg. Historical Spending (1972-2011): 21.0%
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Avg. Historical Revenues (1972-2011): 17.9%
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Components of Revenue and Spending
Revenues and Financing
Outlays
Total Outlays = $3.627 Trillion
2012
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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
Note: Estimates based on CRFB Realistic Baseline.
(Percent of GDP)
Realistic Projections
2010: 63%
2025: 92%
2040: 147%
2080: 384%
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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
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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
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Debt Drivers
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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
Note: Estimates based on CRFB Realistic Baseline.
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0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%Actual Projected
Revenues
Interest
Health Care
Other Spending
Social Security
Average Historical
Revenues
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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)
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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 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
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Health Care Spending by Country
Percent of GDP (2008)
Source: 2008 Data from the Organization for Economic Cooperation and Development.
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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.
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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.
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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.
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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.
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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%
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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
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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
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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.
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The Bowles-Simpson Fiscal Commission Plan
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(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
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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 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
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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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How Big Is the Fiscal Cliff?
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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.
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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