Averting a Fiscal Crisis - Why America Needs Comprehensive Fiscal Reform Now

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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 Reform Now

  1. 1. Averting a Fiscal Crisis Why America Needs Comprehensive Fiscal Reforms Now
  2. 2. Deficit Projections (Percent of GDP)12% 1992-2012 Average Deficit: 2.9%10% 2012-2022 Average Current Policy Deficit: 4.7% 8% 6% 4% 2% 0% -2% -4% Current Policy Current Law Note: Estimates based on CRFB Realistic Baseline.1
  3. 3. Gap Between Revenue and Spending (Percent of GDP)26% Actual Projected24% Avg. Historical Spending (1972-2011): 21.0%22%20%18%16% Avg. Historical Revenues (1972-2011): 17.9%14%12%10% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Current Law Spending Current Law Revenues CRFB Realistic Spending CRFB Realistic Revenues Note: Estimates based on CRFB Realistic Baseline.2
  4. 4. Components of Revenue and Spending Revenues and Financing Outlays Interest 6% Medicare 13% Borrowing Medicaid & Non-Defense 30% Individual Income Other Health 17% Tax 8% 27% 2011 Social Security Defense 21% Other 6% Corporate Tax 19% 5% Social Insurance Taxes Other Mandatory 25% 16% Total Revenues = $2.523 Trillion Total Outlays = $3.601 Trillion Total Financing = $3.601 Trillion3
  5. 5. Debt Projections (Percent of GDP) 500% Realistic Projections 450% 2010: 62% 400% 2025: 94% 350% 2040: 154% 300% 2080: 430% 250% 200% What the Debt Will 150% Realistically Look Like 100% 50% Current Law 0% Note: Estimates based on CRFB Realistic Baseline.4
  6. 6. Growth in Mandatory Spending (Percent of GDP)30% Actual Projected25% Historical Average20%15%10%5%0% 1972 1982 1992 2002 2012 2022 2032 2042 2052 2062 2072 2082 Social Security Health Care Other Entitlements Revenue5
  7. 7. Consequences of Debt  “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 made6
  8. 8. The Risk of Fiscal Crisis “Rising Debt increases the likelihood of a fiscal crisis during which investors would lose confidence in the governments 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 Reserve7
  9. 9. Debt Drivers Short-Term Long-Term Economic Crisis  Rapid Health Care Cost Growth (lost revenue and increased spending on (causing Medicare and Medicaid costs safety net programs like Food Stamps) to rise) Economic Response  Population Aging (stimulus spending/tax breaks and (causing Social Security and Medicare financial sector rescue policies) costs to rise, and revenues to fall) Tax Cuts  Growing Interest the Debt Will What Costs (in 2001, 2003, and 2010) Realistically Look Like (from continued debt accumulation) War Spending  Insufficient Revenue (in Iraq and Afghanistan) (to meet the costs of funding government)8
  10. 10. How Did We Get Here? Drivers of the Debt Since 2001 Increases in Debt:  Technical & Economic Changes: 27%  Tax Cuts: 27%  Spending Increases: 41%  Other Means of Financing: 6% Note: Estimates from The Pew Charitable Trusts based on CBO data.9
  11. 11. Growing Entitlement Spending Federal Spending and Revenues (Percent of GDP) 60% Actual Projected 50% Average Historical Revenues 40% Interest Revenues 30% 20% Health Care Social Security 10% Other Spending 0% Note: Estimates based on CRFB Realistic Baseline.10
  12. 12. Why Is Entitlement Spending Growing? Drivers of Entitlement Spending Growth (Percent of GDP) 26% 24% 22% 20% 56% 18% Excess Health Care 16% Cost Growth 36% 14% 12% Aging 44% 64% 10% 8% Source: CBO Long-term Budget Outlook, 2011.11
  13. 13. 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 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 overspending12
  14. 14. Health Care Spending by Country Percent of GDP (2008) 18% 16% 14% 12% 10% 8% 6% 4% 36% 2% 0% 64% Public Private Source: 2008 Data from the Organization for Economic Cooperation and Development.13
  15. 15. Number of Workers for Every Social Security Retiree is Falling 1950 1960 2011 2035 36% 64% 16:1 5:1 3:1 2:1 Source: 2011 Social Security Trustees Report.14
  16. 16. Living Longer, Retiring Earlier908580 Average Age of Retirement75 Normal Retirement Age70656055 Early Retirement Age50 Life Expectancy4540 Source: Social Security Administration and U.S. Census Bureau.15
  17. 17. Looming Social Security Insolvency Social Security Costs and Revenues (Percent of Taxable Payroll) 20% What Social Security “Promises” to Pay What Social Security Can Afford to Pay 18% 16% 14% 12% 10% Revenues 36% 8% 6% 64% Source: 2011 Social Security Trustees Report.16
  18. 18. Interest as a Share of the Budget (Percent of GDP) 2010 2030 2050 Primary Interest Primary Interest Interest Primary Spending 19% Spending 28% 6% Spending 94% 72% 81% Total Spending = 24% of GDP Total Spending = 27% of GDP Total Spending = 35% of GDP Note: Estimates based on CRFB Realistic Projections.17
  19. 19. Insufficient Revenue  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 rates18
  20. 20. Excessive Spending Through the Tax Code (Tax Expenditures) TaxIn order to stabilize Debtof Primary the economy by 2021: Expenditures Expenditures as a Percent at 60% of Large Tax Spending if Included in the Budget and Their 2011 Costs (billions) Employer Health Insurance Exclusion $174 Mortgage Interest Deduction $89 Defense Discretionary 401(k)s and IRAs $77 Tax 16% Expenditures 24% Earned Income Tax Credit $62 Non-Defense Special Rates for Capital Gains and $61 Discretionary 15% Dividends Health Spending 18% State & Local Tax Deduction $57 Social Secutity Charitable Deduction $49 16% Other Mandatory Child Tax Credit $45 12% Source: Joint Committee on Taxation. Source: Office of Management and Budget.19
  21. 21. How Much Do We Need to Save? In order to stabilize debt at 60% of the economy by 2022: (2012-2022 Savings) Current Policy Current Policy Current Law Baseline Assuming Baseline Assuming Baseline Assuming Upper-Income Tax All Tax Cuts No Trigger Savings Cuts Expire* Continued* Debt in 2021 w/ No Savings 67% 81% 86% (% GDP) Required Savings to $1.7 Trillion $5.1 Trillion $6.4 Trillion Stabilize Debt at 65% *Estimates based on CRFB Realistic Baseline.20
  22. 22. How Much Do We Need to Save? (cont’d) In order to stabilize debt at 65% of the economy by 2022: (2012-2022 Savings) Current Policy Current Policy Current Law Baseline Assuming Baseline Assuming Baseline Assuming Upper-Income Tax All Tax Cuts No Trigger Savings Cuts Expire* Continued* Debt in 2021 w/ No Savings 67% 81% 86% (% GDP) Required Savings to $0.4 Trillion $3.8 Trillion $5.2 Trillion Stabilize Debt at 65% *Estimates based on CRFB Realistic Baseline.21
  23. 23. How Much Do We Need to Save? (cont’d) In order to stabilize debt at 70% of the economy by 2022: (2012-2022 Savings. Negative numbers reflect increase in deficits.) Current Policy Current Policy Current Law Baseline Assuming Baseline Assuming Baseline Assuming Upper-Income Tax All Tax Cuts No Trigger Savings Cuts Expire* Continued* Debt in 2021 w/ No Savings 67% 81% 86% (% GDP) Required Savings to -$0.8 Trillion $2.6 Trillion $4.0 Trillion Stabilize Debt at 70% *Estimates based on CRFB Realistic Baseline.22
  24. 24. How Much Do We Need to Save? (cont’d) 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.23
  25. 25. We Can’t Inflate or Grow Our Way Out Inflation Growth  An unexpected increase in inflation  Strong economic growth is a necessary could temporarily reduce the real value but not sufficient condition for debt of debt and federal interest payments reduction to investors  Many spending programs grow as the  However, higher inflation would prompt economy does, and would outpace investors to demand higher interest revenue growth payments, increasing the costs of  Social Security payments would financing new debt increase as wages and, thus,  Higher inflation would also push up benefits grew over time spending for all inflation-indexed  Health care spending would grow programs, including Social Security, food even faster, given that costs stamps, military pensions, veterans’ continually grow notably faster benefits. than the overall economy  The levels of growth needed to significantly reduce medium-term debts would be way above historical norms24
  26. 26. Debt Reduction and Economic Growth Real Output Growth (Percent) 4.0% 3.5% CBO studied the economic 3.0% impact of an illustrative $2.4 trillion debt reduction plan 2.5% and found that real output would be between 0.6% and 2.0% 1.4% higher, depending on 1.5% the magnitude of the effects. 1.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 CBO Baseline Growth Small Output Effect Medium Output Effect Large Output Effect *Estimates from CBO, “The Macroeconomic and Budgetary Effects of an Illustrative Policy for Reducing the Federal Budget Deficit.”25
  27. 27. 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 Reform26
  28. 28. “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 challenges27
  29. 29. What Could “Go Small” Look Like? Possible Policy Changes Savings  Without addressing Government-Wide $250 billion from chained CPI health care reforms or Discretionary $100-200 billion from modestly revenues, it will be very slower growth in BCA caps difficult to achieve Health Care Negligible savings significant savings $150-250 billion from farm subsidies, federal civilian and Other Mandatory military retirement and benefits,  And even then, there is Fannie and Freddie, and others no guarantee that Social Security Negligible savings significant savings in Revenues Negligible savings other areas of the budget Net Interest $100 billion could be agreed on Total $600-800 billion28
  30. 30. 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 President29
  31. 31. 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 crisis30
  32. 32. 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 system31
  33. 33. 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 Note: For more information on the “announcement effect,” see CRFB at http://crfb.org/blogs/announcing-announcement-effect-club32
  34. 34. “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.”33
  35. 35. What Could “Go Really Big” Look Like? Including serious entitlement reforms and revenues pushes the overall savings well above the $1.2 trillion mandate Possible Policy $600 - $800 Billion $3 Trillion Plan $4 Trillion Plan Changes 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 billion Total $600 - $800 billion $3 trillion $4 trillion Note: $4 trillion plan is a more ambitious version of the types of reforms in the $2.8 trillion plan.34
  36. 36. The Bowles-Simpson Fiscal Commission Plan 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 tax35 rates, broaden the base, and raise $1.2 trillion.
  37. 37. Illustrative Tax Rates 2012 Rates, Expiration of the Tax Cuts, and Fiscal Commission’s Illustrative Plan Corporate Bottom Rates Middle Rates Top Rates Rate Current Rates for 10% 15% 25% 28% 33% 35% 35% 2012 Scheduled Rates for 15% 28% 31% 36% 39.6% 35% 2013 Eliminate All Tax 8% 14% 23% 26% Expenditures Keep Child Tax 9% 15% 24% 26% Credit and EITC Fiscal Commission’s 12% 22% 28% 28% Illustrative Tax 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.36
  38. 38. The Bowles-Simpson Fiscal Commission Plan (Deficits as Percent of GDP) 10% 18% 9% 16% 8% 14% 7% 12% 6% 10% 5% 8% 4% 6% 3% 2% 4% 1% 2% 0% 0%37
  39. 39. What Savings Have Lawmakers Enacted So Far? (Billions of Dollars) $2,000 $1,600 $1,200 $800 $400 $0 Bowles-Simpson Recommendations Savings Enacted Note: Estimates based on realistic budget projections.38
  40. 40. It’s Time For a Fiscal Reform Plan Reasons to Enact a Plan Size of Adjustment to Close 25-year Fiscal Gap, Sooner Rather than Later Depending on Start Year (Percent of GDP)  Allows for gradual phase in  Improves generational fairness 201 2 4.9%  Gives taxpayers 201 5.9% businesses, and entitlement 5 beneficiaries time to plan 202 8.1%  Creates “announcement 0 effect” to improve growth 202 12.5% 5  Reduces size of necessary adjustment 0% 2% 4% 6% 8% 10% 12% 14% Source: Congressional Budget Office39
  41. 41. It’s Time for a Fiscal Reform Plan…Now 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 election40
  42. 42. Who Supports “Go Big”? 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 citizens41
  43. 43. Principles of Fiscal Responsibility 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 Compromise42
  44. 44. The Time For Action Is Now “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 Reform43

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