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Budget Outlook

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    • 1. I. Background on the Federal Budget and the Return of Budget Deficits
    • 2. Composition of the Federal Budget in 2005 Center on Budget and Policy Priorities; last revised February 3, 2006.
    • 3. The Federal Budget in 2005
      • Expenditures $2.472 trillion
      • Revenues $2.154 trillion
      • Deficit $ 318 billion
      Source: Congressional Budget Office
    • 4. FROM LARGE SURPLUSES TO LARGE DEFICITS IN JUST 5 YEARS Cumulative Surpluses/Deficits, 2002-2011 Source: CBPP calculations based on Congressional Budget Office data. Assumes extension of tax cuts and Alternative Minimum Tax relief.
    • 5. LEGISLATION ADDING TO DEFICITS: MOSTLY TAX CUTS AND DEFENSE Cost, 2002-2011, of legislation enacted since January 2001 Tax Cuts Defense, Homeland Security and International Entitlements Domestic Discretionary (except Homeland Security) 50% 33% 10% 6% Source: CBPP calculations based on Congressional Budget Office data. Assumes extension of tax cuts and Alternative Minimum Tax relief.
    • 6. Average Outlays as Share of the Economy 1975-2005: 21% Outlay Path without Katrina EVEN WITH KATRINA, FEDERAL SPENDING IS BELOW AVERAGE FOR RECENT DECADES Outlays with Katrina Source: CBPP Calculations based on Congressional Budget Office Data
    • 7. COST OF KATRINA EXPENDITURES AND TAX CUTS, 2006-2011 $150 Billion $1.66 Trillion Source: CBPP Calculations based on Congressional Budget Office data.
    • 8. Average Revenues As Share of the Economy 1975-2005: 18.3% 2005 Revenues As Share of the Economy: 17.5% REVENUES AS SHARE OF THE ECONOMY ARE BELOW THEIR HISTORICAL AVERAGE Source: CBPP Calculations based on Congressional Budget Office Data
    • 9. WHAT WOULD IT TAKE TO BALANCE THE BUDGET WHILE PRESERVING THE TAX CUTS? To balance the budget by 2016 while making the tax cuts permanent, policy makers would have to: 32%  Or cut every other program except Social Security, Medicare, defense, and homeland security by…...... 56%  Or cut Medicare by……………………………….…....….....….... 66%  Or cut defense spending by ............................................ 45%  Cut Social Security benefits by..................................
    • 10. II. Drivers of the Long-Term Fiscal Problem
      • Rising health care costs in the private and public sectors alike.
      • Costly tax cuts, the costs of which will grow larger over time if the tax cuts are made permanent.
      • The aging of the population, which raises the costs of Social Security, Medicare, and Medicaid.
    • 11. Source: CBPP long-term deficit estimates assuming continuation of current policy including extension of the tax cuts and continuation of AMT relief. UNDER CURRENT POLICY, DEFICITS WOULD GROW DEEPER IN FUTURE DECADES (Surplus (+)/Deficit(-) as a Percent of GDP)
    • 12. MEDICARE, MEDICAID, AND SOCIAL SECURITY EXPECTED TO RISE RAPIDLY Source: CBO, Long term Budget Outlook, Dec 2005
    • 13. Medicaid Costs Less Than Private Health Insurance Source: Hadley and Holahan, Inquiry, 2004 Estimated 2001 per capita costs of serving Medicaid enrollees with Medicaid vs. private insurance, after adjusting for health differences.
    • 14. MAKING THE TAX CUTS AND AMT RELIEF PERMANENT WOULD COST TRILLIONS Source: CBPP calculations from Congressional Budget Office data Cost of tax cuts with interest, adjusted for inflation
    • 15. THE TAX CUTS AND SOCIAL SECURITY: Costs through the next 75 years Tax Cuts If Made Permanent 75-year Shortfall in Social Security Source: Social Security Trustees Report estimate of Social Security shortfall, CBPP calculation of tax cut costs based on Joint Committee on Taxation estimates
    • 16.
      • III. Congress’s Major Budget Decisions Over the Past Year
    • 17. The Fiscal Year 2006 Congressional Budget Plan
      • The plan contained domestic program reductions, tax cuts, and defense spending increases.
      • The proposed tax cuts and defense increases were larger than the domestic program reductions.
      • As a result, the cuts in domestic programs would be used to offset a portion of the cost of the tax cuts and defense spending increases, not to reduce the deficit.
      • The plan would increase deficits by $168 billion over five years.
    • 18. Budget Changes Recently Enacted Or Nearing Enactment  But Congress also is expected to complete action in early 2006 on close to $100 billion in tax cuts over five years, so the deficit will further increase.  Cuts in “domestic discretionary” programs – the part of the budget that includes K-12 education, housing, environmental protection, and other areas – of $7 billion, after accounting for inflation, in 2006 alone.  Reductions of $39 billion in “entitlement” programs over five years, such as: Medicaid, which provides health care to low-income and elderly people, children, and people with disabilities; children’s programs, including child support enforcement and foster care; and student loans.
    • 19. Budget Reconciliation Bill Recently Enacted
      • Analysis by the Congressional Budget Office indicates the law will:
        • Cause many low-income people eligible for Medicaid to forgo needed health care because of increased co-payments and premiums.
        • Result in $8 billion in child support going uncollected over 10 years due to cuts in child support enforcement.
        • Shift billions of dollars in costs for welfare reform and child care assistance to the states.
    • 20. AVERAGE VALUE OF TAX CUTS, 2006 Source: Tax Policy Center
    • 21. WHO GAINS FROM THE TWO NEW TAX CUTS THAT TOOK EFFECT JANUARY 1? Source: Tax Policy Center Average tax cuts in 2010, when these tax cuts are fully in effect
    • 22.
      • IV. This Year’s Budget Debate
    • 23. KEY ELEMENTS OF THE PRESIDENT’S NEW BUDGET PROPOSAL
        • Large cuts in domestic discretionary programs, with cuts growing deeper over time
        • Cuts in Medicaid that shift significant costs to states
        • Makes 2001 and 2003 tax cuts permanent
        • Expanded health tax cuts that are worth most to people with high incomes
        • New budget rules that make it easier to pass tax cuts and force significant spending cuts in the future
        • Net Effect : Increase deficits by $281 billion over 5 years, according to CBO documents
    • 24. President’s Proposed Cuts in Domestic Discretionary Funding Grow Deeper Over Time
    • 25. President’s Budget Calls for Large Cuts to Broad Range of Domestic Programs
    • 26. Since 2001, Funding for Domestic Discretionary Programs Has Fallen as a Share of the Economy Domestic Discretionary Funding as a Share of GDP Source: CBPP calculations based on CBO data
    • 27. State General Revenue Other sources, 74% Federal funding, 26% STATES DEPEND ON FEDERAL FUNDING Source: CBPP calculations based on Census data
    • 28. Tax Cuts Cost More Than Most Agency Budgets Source: CBPP calculations from CBO and OMB data 2006 Agency Budgets, Tax Cuts if Fully in Effect in 2006
    • 29. Tax Cuts for Highest-Income 1 Percent of Households Compared with Spending on Administration’s Stated Priorities Source: CBPP calculations from Office of Management and Budget, Joint Committee on Taxation, and Urban-Brookings Tax Policy Center data. Funding levels are those requested in the President’s budget. Tax Cuts for Top 1% Tax Cuts and Spending, 2007 Homeland Security Veterans Affairs Department Education Department
    • 30. Tax Cuts for People With Incomes Over $1 Million Cost More Than All of the Cuts in Domestic Discretionary Programs Would Save Source: CBPP calculations from Office of Management and Budget, Joint Committee on Taxation, and Urban-Brookings Tax Policy Center data. Tax Cuts for Millionaires: $68 Billion Domestic Discretionary Program Cuts: $57 Billion Tax Cuts and Spending Cuts, 2011
    • 31. Source: Joint Committee on Taxation and CBPP Interest cost Revenue loss Estate Tax Repeal Costs Nearly $1 Trillion Over 10 Years Cost, with interest FY 2012-2021
    • 32.
      • V. Where Do We Go From Here?
    • 33. The Current Recovery Has Been Weaker Than Average; Only Corporate Profits Have Grown Rapidly Average Real Growth, Current Recovery Average Real Growth, Other Post-World War II Recoveries Source: CBPP calculations based on Commerce Department, Labor Department, and Federal Reserve data.
    • 34. Job Growth Has Been Especially Weak in This Recovery Average Private-Sector Job Growth Source: Bureau of Economic Analysis and CBPP calculations
    • 35. Economic Growth Revenue Growth Economic and Revenue Growth Following 1980s and Recent Tax Cuts and 1990s Tax Increases 1980s 1990s 2000-2011, Administration Estimates Growth Rates, Adjusted for Inflation and Population Growth
    • 36. Studies Find Recent Tax Cuts as Likely to Reduce Economic Growth as to Increase It “ tax legislation will probably have a net negative effect on saving, investment, and capital accumulation over the next 10 years.” -- Congressional Budget Office “ making the 2001 and 2003 tax cuts permanent would raise the cost of capital for new investments, reduce long-term investment, and reduce economic growth.” --Brookings Institution economists Studies by Federal Reserve economists, the Joint Committee on Taxation , and other noted experts have produced similar findings regarding the effects of unpaid for tax cuts. Sources: Congressional Budget Office, The Budget and Economic Outlook: An Update, Aug. 2003, p. 45; Gale & Orszag, "Budget Deficits, National Saving, and Interest Rates," prepared for the Brookings Panel on Economic Activity, September 2004, p. 34; Elmendorf & Reischneider (Federal Reserve economists), “Short-Run Effects of Fiscal Policy with Forward-Looking Financial Markets,” National Tax Journal, Sept. 2002, pp. 357-86; Joint Committee on Taxation, “Macroeconomic Analysis of HR 2,” Congressional Record, May 8, 2003, pp. H3829-32.
    • 37. Likely Consequences of Un balanced Approach to Deficit Reduction
      • Large cuts over time in programs for the poor.
      • Increases in number of uninsured Americans.
      • Federal government may be unable to fulfill some core functions.
      • More costs shifted to states.
    • 38. The Goal: Balanced Approach To Deficit Reduction
      • Balanced approach would include revenue increases as well as spending cuts, especially since the recent tax cuts are a main reason we have deficits.
      • Cuts would not fall disproportionately on low-income programs and would focus on “weak claims,” not “weak clients.”
      • Balanced approach was taken in 1990 and 1993 by Presidents Bush and Clinton.
    • 39. Some First Steps Under a Balanced Approach to Deficit Reduction
      • Restore “Pay As You Go” rules requiring both tax cuts and increases in entitlement programs to be paid for.
      • Shelve tax cuts not yet fully in effect; do not extend expiring tax cuts unless they are paid for.
      • Adopt recommendations from congressional Medicare commission to curb excessive Medicare payments to health-care providers.
      • Adopt President’s farm subsidy reforms.
      • Pare back earmarks in appropriations bills.
      • Adopt Joint Tax Committee proposals to curb unproductive tax breaks and shelters and reduce tax avoidance.
      • Use better inflation measure for everything from Social Security cost-of-living adjustments to indexing of the tax code.