Averting a Fiscal Crisis - Updated 02-12

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Updated version of our popular PowerPoint presentation that clearly and succinctly lays out the fiscal challenge facing the United States. To see what can be done about it, visit http://crfb.org/go-big

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Averting a Fiscal Crisis - Updated 02-12

  1. 1. Averting a Fiscal CrisisThe Committee for a Responsible Federal Budget
  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% 150% CRFB Realistic Debt 100% 50% Current Law 0% Note: Estimates based on CRFB Realistic Baseline.4
  6. 6. 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 made5
  7. 7. 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 Reserve6
  8. 8. Debt Drivers Short-Term Long-Term Economic Crisis  Rapid Health Care Cost Growth (lost revenue and increased spending from (causing Medicare and Medicaid costs automatic stabilizers) to rise) Economic Response  Population Aging (stimulus spending/tax breaks and (causing Social Security and Medicare financial sector rescue policies) costs to rise, and revenue to fall) Tax Cuts  Growing Interest Costs (in 2001, 2003, and 2010) (from continued debt accumulation) War Spending  Insufficient Revenue (in Iraq and Afghanistan) (to meet the costs of funding government)7
  9. 9. 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.8
  10. 10. 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 14% 36% 12% 44% 64% Aging 10% 8% Source: CBO Long-term Budget Outlook, 2011.9
  11. 11. 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 between 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 overspending10
  12. 12. Health Care Spending by Country Percent of GDP (2008) 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Public Private Source: 2008 Data from the Organization for Economic Cooperation and Development.11
  13. 13. Number of Workers for Every Social Security Retiree Is Falling 1950 1960 2011 2035 16:1 5:1 3:1 2:1 Source: 2011 Social Security Trustees Report.12
  14. 14. Living Longer, Retiring Earlier 90 85 80 Average Age of Retirement 75 Normal Retirement Age 70 65 60 55 Early Retirement Age 50 Life Expectancy 45 40 Source: Social Security Administration and U.S. Census Bureau.13
  15. 15. Looming Social Security Insolvency Social Security Costs and Revenues (Percent of Taxable Payroll) 20% Scheduled Benefits Payable Benefits 18% 16% 14% 12% 10% Revenues 8% 6% Source: 2011 Social Security Trustees Report.14
  16. 16. 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.15
  17. 17. 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 $1 Trillion annually in lost revenues through so called "tax expenditures," which make the tax code more complicated, less efficient, and force higher rates16
  18. 18. Excessive Spending Through the Tax Code (Tax Expenditures)Tax Expenditures as a Percent of Primary Large Tax Expenditures 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. 19. 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 Reform18
  20. 20. 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 tax19
  21. 21. 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% Plausible Baseline Commission Plan20
  22. 22. 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 201  Improves generational fairness 2 4.9%  Gives taxpayers 201 5.9% 5 businesses, and entitlement beneficiaries time to plan 202 8.1% 0  Creates “announcement effect” to improve growth 202 5 12.5%  Reduces size of necessary 0% 2% 4% 6% 8% 10% 12% 14% adjustment Source: Congressional Budget Office21
  23. 23. 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 Reform22

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