Long term budget projections, entitlements and demographics

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Long term budget projections, entitlements and demographics

  1. Free Slides fromEd Dolan’s Econ Bloghttp://dolanecon.blogspot.com/Budget Basics (3): The Long-Term, Demographics, and EntitlementsPost prepared June 18, 2010<br />Terms of Use: These slides are made available under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishers. <br />
  2. Post P100618 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/<br />Debt of the U.S. Federal Government, Past and Future<br /> Although much of the debate over fiscal policy focuses on stimulus vs. austerity in the short term, it is also important to look further ahead. These debt projections look half a century into the future.<br />
  3. Post P100618 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/<br />What Lies Behind the Projections?<br />What assumptions are used to make projections so far into the future?<br />Why is there such a wide range of projected rates of debt growth?<br />Why do both the CBO’s lowest and highest projections show a debt that explodes to unsustainable levels?<br />
  4. Post P100618 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/<br />The Baseline Scenario<br />The lower limit of future debt projections is given by a baseline scenario<br />By law, the CBO’s 10-year baseline scenario is based on the assumption that there will be no changes in tax or spending laws<br />For its long-term projections, the CBO extends this assumption far into the future. It is not intended to be realistic, but it provides a starting point.<br />Extended Baseline Scenario<br />
  5. Post P100618 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/<br />The Alternative Fiscal Scenario<br />The alternative fiscal scenario assumes that Congress will continue to make certain changes in laws that it has repeatedly made in the past:<br />It will not allow the 2001 and 2003 tax cuts to expire in full at the end of 2010, as they are scheduled to do<br />It will raise the minimum income level for the alternative minimum tax<br />It will pass a “doc fix” law that blocks pending cuts to Medicare payments*<br />Alternative Fiscal Scenario<br />*On June 17, 2010, the Senate rejected a doc fix bill. Some observers fear that this will cause some doctors to stop accepting Medicare patients. Further action to pass doc fix in 2010 is still possible.<br />
  6. Post P100618 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/<br />Interest Rate Assumptions<br />Interest rates are another source of uncertainty in long-term projections<br />The CBO makes the conservative assumption that the US will be able to borrow at rates close to the historical average even as debt increases to new highs<br />Some countries, like Greece, have experienced sharp rise in rates as their debt has increased, triggering a crisis (see chart)<br />Others, like Japan, have managed to keep rates low even with very high debt ratios<br />
  7. Post P100618 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/<br />The Role of Entitlement Spending<br />Growth of entitlement spending, especially Medicare, Medicaid, and Social Security, is the biggest source of future increases in the federal debt and deficit<br />Entitlements are elements of the federal budget that are determined by formulas in long-term legislation, in contrast to discretionary spending, like defense or education, which is set by annual Congressional appropriations.<br />
  8. Post P100618 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/<br />Sources of Growth in Entitlement Spending<br />The US population is aging, especially as baby-boomers reach retirement<br />Medicare costs are growing faster than income per capita (“excess cost growth”)<br />In the next 20 years, entitlement growth is driven mostly by aging, which cannot be much affected by policy changes<br />After that, excess growth of medical costs are the main factor. These could, in principle, be affected by policy<br />
  9. Post P100618 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/<br />Effects of 2010 Health Care Legislation<br />Data in previous slides do not include effects of 2010 health care bill<br />The CBO estimates the bill will slightly reduce the deficit, especially in the first few years<br /><ul><li>The effects are small because most major cost-control measures were too controversial to make it into the health care bill as passed by Congress
  10. On balance, the 2010 health care bill does not greatly affect long-term budget projections</li></li></ul><li>Post P100618 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/<br />Effects of Delaying Fiscal Adjustment<br /> To bring the budget to sustainability, it must be adjusted by reducing noninterest spending or increasing taxes or a combination of the two<br />Because interest expense grows as the debt grows, the needed adjustment becomes larger each year that adjustment is delayed<br />
  11. Post P100618 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/<br />The Bottom Line<br />“Under current law, the federal budget is on an unsustainable path”<br />“The choice facing policymakers is not whether to address rising deficits and debt but when and how to do so.”<br />“The longer that policy action on the budget is put off, the more costly and difficult it will be to resolve the long term budgetary imbalance.”<br />

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