FY 2012 BUDGET

Medicare + Med-icaid21%

Social Security21%

Other Mandatory

15%Interest

7%Defense Discretionary

19%

Non-Defense Discretionary

17%

1

Federal Spending Projected for 2023

“Other Health Programs” includes: Health insurance subsidies, exchanges, and related spending; Department of Defense Medicare-Eligible Retiree Health Care Fund (including TRICARE for Life); Children’s Health Insurance Program, and other programs.

Medicare(15%)

Defense(12%)

Medicaid(10%)

Social Security(23%)

Other Mandatory Spending(10%)Domestic Discretionary(12%)

NetInterest(14%)

Other Health Programs(3%)

Source: The Congressional Budget Office. The Budget and Economic Outlook: Fiscal Years 2013 to 2023. February 2013.

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10.8 10.0

17.719.8

7.3

4.7

-0.8

-3.8 -3.8

1.3

19.7

6.0

3.3

9.4

13.5

4.12.1

-2.4

-6.0 -6.2

-1.1

17.3

-8

-4

0

4

8

12

16

20

1965-70 1970-75 1975-80 1980-85 1985-90 1990-95 1995-00 2000-05 2005-10 2010-15 2015-20

Source: “The Budget and Economic Outlook Fiscal Years 2013 to 2023: Congressional Budget Office, February 2013” plus historical data.

Nominal Growth Real Growth in 2005 $% Growth

Growth in Net InterestAverage Annual Growth, 5-year periods (1965 – 2020)

FY 1980 – FY 2020(Outlays in Billions of Dollars)

Major Components of the Budget

$590.9$946.4

$1,253.1$1,515.8

$1,789.2

$2,472.2

$3,518.2 $3,523.5

$4,105.0

$5,250.0

Source: CBO, Budget & Economic Outlook:Projections: Fiscal Years 2013 to 2023. February 2013.

AGING OF POPULATION AND RISING HEALTH CARE COST IMPACT ON FEDERAL SPENDING• Explaining Projected Growth in Federal Spending on Major Health Care Programs

and Social Security by 2037 (Percent)

• Aging Excess Cost Growth

Extended Baseline Scenario

Health Care and Social Security

75 25

Health Care 60 40

Extended Alternative Fiscal Scenario

Health Care and Social Security

68 32

Health Care 52 48

Source: The 2012 Long-Term Budget Outlook, Congressional Budget Office, June 2012.

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Fantasy 1: We can save enough in the rest of the budget to pay for the projected growth in entitlements.

2012 2020 2030 2040 20500%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%Major Entitlement Programs*Discretionary Spending

Entitlements and Discretionary Spending, as a Percent of GDP, If the Projected Growth in Entitlement Spending Is Paid for Entirely by Cutting Discretionary Spending, 2012-2050

*Social Security, Medicare, Medicaid, CHIP, and exchange subsidiesSource: CBO Alternative Fiscal Scenario (CBO, 2012) and CSIS calculations

4

Fantasy 2: We can raise taxes enough to pay for the projected growth in entitlements.

Series10%

20%

40%

60%

80%

100%

120%

140%

160%

180%

65%

102%

169%

Required Percentage Increase in the Income Tax Burden for Different Groups of Taxpayers If the Pro-jected Growth in Entitlements from 2010 to 2030 is Paid for Entirely by Raising Income Taxes

Source: CBO Alternative Fiscal Scenario (2012) and CSIS calculations

Increase If Taxes Are Raised for Everyone

Increase for the Top 5 Percent of Taxpayers If Taxes Are Only Raised for the Top 5 Percent

Increase for the Top 1 Percent of Taxpayers If Taxes Are Only Raised for the Top 1 Percent

5

ABSENT REFORMS, DEBT IS SET TO SKYROCKET IN THE COMING DECADES

19721975

19781981

19841987

19901993

19961999

20022005

20082011

20142017

20202023

20262029

20322035

20382041

20442047

20500%

50%

100%

150%

200%

250%

% o

f GDP

Note: Unlike current law, the Bipartisan Policy Center’s Plausible Baseline assumes that the 2001, 2003, and 2010 tax cuts are extended, the AMT is indexed to inflation, Medicare’s physician payment rates are maintained at their current rate (the “doc fix”), the looming sequester from the Budget Control Act of 2011 is lifted, and troops stationed overseas decline to 45,000 by 2015

Debt breaches 100% of GDP in 2027

Sources: Congressional Budget Office (January 2012) and Bipartisan Policy Center extrapolations

8

REACHING THE DEBT LIMIT – WHAT IT MEANS 9

Layers of Defense Against DefaultThe Treasury Department has multiple means that can be used to pay the nation’s bills. If the debt limit is reached and Congress does not act in time, however, all of these layers of defense will be breached and the nation will default on its obligations.

ISSUE NEW DEBT TO THE PUBLIC IN TRADITIONAL MANNER

EXTRAORDINARY MEASURES

DAILY REVENUE AND CASH ON HAND

DEFAULT ON FINANCIAL OBLIGATIONS

Debt Limit Reached

EM Exhausted

The X Date

The Appropriations & Budget Process

House Authorizing Committees:AgricultureEducation and LaborEnergy and CommerceFinancial ServicesForeign AffairsGovernment ReformHomeland SecurityHouse AdministrationJudiciaryNatural ResourcesScience & TechnologySelect IntelligenceSmall BusinessTransportation & InfrastructureVeterans’ AffairsWays & MeansSelect Energy Ind. & Global Warming

Senate Authorizing Committees:Agriculture, Nutrition & ForestryArmed ServicesBanking, Housing & Urban AffairsCommerce, Science & TransportationEnergy & Natural ResourcesEnvironment & Public WorksFinanceForeign RelationsHealth, Education, Labor & PensionsHomeland Security & Government AffairsIndian AffairsJudiciaryRules & AdministrationSelect IntelligenceSmall BusinessSpecial AgingVeterans’ Affairs

16 House & 16 SenateAuthorizing Committees•Hold hearings

16 House & 16 SenateAuthorizing Committees•Each holds a markup & reports out authorization legislation

House and Senate Floors•Consider amendments•Votes to pass each authorization bill and sent to conference

Authorization Bill Conference Report•House and Senate vote to adopt conference report and send to President for signature

White House•Signed by President or allowed to become law without signature

Laws•Setting mandatory spending revenue levels•Setting levels authorized to be appropriated

The White HousePresident’s Budget

House & Senate Appropriations Committees (12)Agriculture and Rural DevelopmentFood and Drug Administration,Commerce, Justice and ScienceDefenseEnergy & Water DevelopmentFinancial ServicesHomeland Security Interior and Environment Labor, HHS and EducationLegislative BranchMilitary Construction and Veterans AffairsState and Foreign Operations Transportation, Treasury andHousing & Urban Development

House & Senate Budget Committees•Hold Hearings

House & Senate Appropriations Committees•Views & estimates•Full committees make 302 (b) suballocations to their respective 12 subcommittees

Executive Branch Congressional Budget Office Authorizing Committees Budget Committees Appropriations Committees

CBO•Reestimates President’s Budget•Baseline

House & Senate BudgetCommittees•Each Committee holds a markup and reports out the concurrent resolution on the budget

Budget Resolution Conference Report•House & Senate vote to pass conference report•Conference report includes: 302 (a) spending allocations; reconciliation instructions

House & Senate Floors•Consider amendments•Votes to pass the Budget Resolution

House & Senate Budget Committees•Package Reconciliation language from Authorizing Committees•Report Out reconciliation bill

House & Senate Floors•Consider Amendments•Pass Reconciliation bill and send to conference

Reconciliation Bill Conference Report•House & Senate vote to adopt conference report and send to President for signature

White House•Signed by President or allowed to become law without signature

White House•Vetoed by President Bill Returned to House of origin

House & Senate•Requires 2/3 vote to override vote in each chamber

White House•Vetoed by President Bill Returned to House of origin

House & Senate•Requires 2/3 vote to override veto in each chamber

12 House & Senate AppropriationsSubcommittees•Hold Hearings

12 House & Senate Appropriations Subcommittees•Each holds a markup & reports out appropriations legislation

House & Senate Floors•Consider amendments•Vote to adopt 12 appropriations bills and send to conference

Appropriations bill Conference Reports•Adopt 12 conference reports and send to President for signature

White House•Signed by President or allowed to become law without signature

White House•Vetoed by President Bill Returned to House or origin

House & Senate•Requires 2/3 vote to override in each chamber

Continuing Resolution (CR) Needed if:•Failure to pass 12 appropriations bills•Failure to overturn a veto

House & Senate Floors•Consider amendments•Vote to pass the CR and send to conference

CR Conference Committee•House & Senate vote to adopt conference report and sent to President for signature

White House•Signed by President or allowed to become law without signature

White House•Vetoed by President Bill Returned to House of origin

House & Senate•Requires 2/3 vote to override in each chamber

$85.3 Billion Sequester 2013

Defense Non-Defense

Discretionary $ 42.6 bn (7.8% reduction)

$ 26.5 bn(5.0% reduction)

Mandatory $ 0.1 bn(7.9% reduction)

$16.2 bn(5.1% /2.0% Medicare reduction)

Total $42.7 bn $42.7 bn

IMPACT OF THE SEQUESTER: 2013 AND 2013 - 21

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2014 2015 2016 2017 2018 2019 2020 2021 2022 20231.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Historical Av-erage since 1970

Lowest Level since 1970

BCA Caps / Domenici-Rivlin

Chairman Mur-ray's FY14 Budget

Sequester

Chairman Ryan's FY14 Budget

NON-DEFENSE SPENDING UNDER VARIOUS BUDGET PATHS

Fiscal Years

Sources: Congressional Budget Office, Chairman Ryan’s FY 2014 Budget, Chairman Murray’s FY 2014 Budget, BPC Projections

% o

f GDP

12

Economic Environment:Economic ForecastsCalendar Years 2012 - 2014

2012Forecast

2013Forecast

2014Real GDP Growth

– Federal Reserve– CBO– Blue Chip–Administration

+ 1.7-1.8%+ 1.9%+1.9%+2.3%

+ 2.3-3.0%

+1.4%+ 2.2%+2.3%

+3.0-3.5%+3.4%+ 2.8%+3.2%

Inflation (CPI)– CBO– Blue Chip– Federal Reserve*–Administration

+1.9%+1.9%

+1.6 – 1.7%+2.1%

+ 1.5%+ 1.9%

+1.3 – 2.0%+2.1%

+2.0%+ 2.2%

+1.5 – 2.0%+2.2%

Unemployment Rate–CBO– Blue Chip– Federal Reserve–Administration

7.8%7.8%

7.8 – 7.9%8.1%

8.0%7.5%

7.4 – 7.7%7.7%

7.6%7.0%

6.8 – 7.3%7.2%

10 Year Note–CBO–Blue Chip–Administration

1.7%1.7%1.8%

2.3%2.2%2.0%

2.9%2.7%2.6%

Sources: Congressional Budget Office, February 2013; Blue Chip Economics Forecasts, January 2013; Federal Reserve December 12, 2012.* Federal Reserve projection of PCE inflation.

House and Senate-Passed FY 2014 Budgets (Deficit Reduction: 2014-2023, billions of $s)

(Reductions from Current Law Baseline*)

House Senate

Sequester $0 ($995)

War & Sandy Hurricane Draw-Downs

$931 $1,230

Taxes $0 $833

Other Mandatory $962 $76

Discretionary $249 $382

Repeal Health Care Law $1,837 $0

Medicare/Medicaid $885 $137

Job Measures $0 ($100)

Subtotal $4,864 $1,536Interest $869 $193

Total $5,733 $1,756

* CBO Current Law Baseline assumes expiring provisions will expire including SGR “Doc” fix; sequester will not be

canceled; war spending and disaster assistance will be maintained at current 2013 level inflation adjusted.

2014 2015 2016 2017 2018 2019 2020 2021 2022 202317.00%

18.00%

19.00%

20.00%

21.00%

22.00%

23.00%

24.00%

Baseline Ryan Murray Administration

<-21% 40 year Historic

Average

Federal Spending: % GDP

Current Policy Baseline, Chairman Ryan , Chairwoman Murray, the Administration: FY 2014 Budget Resolutions

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2014 2015 2016 2017 2018 2019 2020 2021 2022 202316.50%

17.00%

17.50%

18.00%

18.50%

19.00%

19.50%

20.00%

20.50%

Baseline Ryan Murray Administration

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Federal Revenues: % GDP

Current Policy Baseline, Chairman Ryan , Chairwoman Murray, the Administration: FY 2014 Budget Resolutions

<-18% 40 year Historic

Average

2014 2015 2016 2017 2018 2019 2020 2021 2022 202320.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

Baseline Ryan Murray Administration

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Federal Debt Held by the Public: % GDP

Current Policy Baseline, Chairman Ryan , Chairwoman Murray, the Administration: FY 2014 Budget Resolutions

<-40% 40 year Historic

Average