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Auerbach slides

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Auerbach describes the dial endgame for the USA without discussing solutions but does adequately drive the IMF policy view home. keep buying bonds or suffer the yields (and the pain) of Spain. We …

Auerbach describes the dial endgame for the USA without discussing solutions but does adequately drive the IMF policy view home. keep buying bonds or suffer the yields (and the pain) of Spain. We have a more constructive view. research@pamria.com

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  • 1. Long-Term Fiscal Issues Alan J. Auerbach University of California, Berkeley June, 2012
  • 2. Outline• For the United States: – How did we get here? – Where are we headed over the next ten years? – Where are we headed in the long term?• Other countries’ long-run prospects
  • 3. US Federal Budget Deficit (Percent of Potential GDP) 12 10 8 6 4Percent 2 0 -2 -4 January 2001 projections -6 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Fiscal Year
  • 4. US Federal Budget Deficit (Percent of Potential GDP) 12 10 Economic 8 6 Legislative Interest 4Percent 2 Legislative Outlays 0 -2 Legislative Revenue -4 January 2001 projections -6 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Fiscal Year
  • 5. What Happened?Three Phases: 1. Economic downturn (2001) and slow recovery
  • 6. US Federal Budget Deficit (Percent of Potential GDP) 12 10 Economic 8 6 Legislative Interest 4Percent 2 Legislative Outlays 0 -2 Legislative Revenue -4 January 2001 projections -6 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Fiscal Year
  • 7. What Happened?Three Phases: 1. Economic downturn (2001) and slow recovery 2. Policy throughout the 2000s • Tax cuts • Defense buildup • Medicare Part D
  • 8. US Federal Budget Deficit (Percent of Potential GDP) 12 10 Economic 8 6 Legislative Interest 4Percent 2 Legislative Outlays 0 -2 Legislative Revenue -4 January 2001 projections -6 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Fiscal Year
  • 9. What Happened?Three Phases: 1. Economic downturn (2001) and slow recovery 2. Policy throughout the 2000s • Tax cuts • Defense buildup • Medicare Part D 3. The Great Recession • Increased deficits in 2009-11 due to weak economy plus ARRA, TARP, etc.
  • 10. US Federal Budget Deficit (Percent of Potential GDP) 12 10 Economic 8 6 Legislative Interest 4Percent 2 Legislative Outlays 0 -2 Legislative Revenue -4 January 2001 projections -6 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Fiscal Year
  • 11. Where Are We Headed? The Next Ten Years
  • 12. Alternative Deficit Projections, 2012-2022 9 8 7 6 5Percent of GDP 4 3 2 CBO Baseline 1 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Fiscal Year
  • 13. Alternative Deficit Projections, 2012-2022 9 8 7 6 Extended Policy 5Percent of GDP 4 Obama Budget 3 2 CBO Baseline 1 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Fiscal Year
  • 14. Alternative Debt Projections, 2012-2022 100 90 Extended Policy 80 Obama BudgetPercent of GDP 70 CBO Baseline 60 50 40 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Fiscal Year
  • 15. Where Are We Headed? The Long Term
  • 16. Revenues and Non-Interest Expenditures 35 30 Pessimistic Scenario, ExpendituresPercent of GDP 25 Optimistic Scenario, Expenditures 20 Optimistic Scenario, Revenues Pessimistic Scenario, Revenues 15 10 2012 2022 2032 2042 2052 2062 2072 2082 Year
  • 17. Projections of the National Debt 1000 800Percent of GDP 600 Pessimistic Scenario 400 200 Optimistic Scenario 0 2012 2022 2032 2042 2052 2062 2072 2082 Year
  • 18. The Fiscal Gap• The immediate and permanent tax increase or spending cut (or combination) that would keep the debt/GDP ratio at the same level in the long term as it is now
  • 19. Baseline Fiscal Gap Assumptions• Start with one of three scenarios through 2022• After 2022, most categories of spending and revenues stay constant as a share of GDP• Social Security estimates derived from Trustees report• Medicaid derived from CBO estimates• Medicare derived from one of three sources (Medicare Trustees, CMS Actuary, CBO)
  • 20. Fiscal Gaps (Percent of GDP) CBO Baseline Obama Budget Extended PolicyHealth Spending Through Through ThroughAssumptions 2089 Permanent 2089 Permanent 2089 PermanentMedicareTrustees 2.18 3.12 3.22 4.10 5.21 6.21CMS Actuary 3.56 5.38 4.58 6.34 6.64 8.56CBO Alternative 3.67 5.97 4.69 6.91 6.76 9.16
  • 21. Fiscal Gaps (Percent of GDP) CBO Baseline Obama Budget Extended PolicyHealth Spending Through Through ThroughAssumptions 2089 Permanent 2089 Permanent 2089 PermanentMedicareTrustees 2.18 3.12 3.22 4.10 5.21 6.21CMS Actuary 3.56 5.38 4.58 6.34 6.64 8.56CBO Alternative 3.67 5.97 4.69 6.91 6.76 9.16
  • 22. Fiscal Gaps (Percent of GDP) CBO Baseline Obama Budget Extended PolicyHealth Spending Through Through ThroughAssumptions 2089 Permanent 2089 Permanent 2089 PermanentMedicareTrustees 2.18 3.12 3.22 4.10 5.21 6.21CMS Actuary 3.56 5.38 4.58 6.34 6.64 8.56CBO Alternative 3.67 5.97 4.69 6.91 6.76 9.16
  • 23. The Outlook Elsewhere• In most developed countries, also large fiscal gaps
  • 24. Fiscal Gaps through 2060 0.15 0.1 0.05Fraction of GDP 0 JA SE USA CA FI FR NZ DE NL IE ES BE AT AU DK EL NO UK PT IT -0.05 -0.1 -0.15 -0.2 Baseline No Initial Debt No Pension or Health Growth 23
  • 25. Fiscal Gaps through 2060 0.15 0.1 0.05Fraction of GDP 0 JA SE USA CA FI FR NZ DE NL IE ES BE AT AU DK EL NO UK PT IT -0.05 -0.1 -0.15 -0.2 Baseline No Initial Debt No Pension or Health Growth 24
  • 26. Fiscal Gaps through 2060 0.15 0.1 0.05Fraction of GDP 0 JA SE USA CA FI FR NZ DE NL IE ES BE AT AU DK EL NO UK PT IT -0.05 -0.1 -0.15 -0.2 Baseline No Initial Debt No Pension or Health Growth 25
  • 27. Share of U.S. Federal Non-Interest Spending, 1972-2022 70 60Percent of Non-Interest Spending Discretionary 50 40 Social Security + Medical 30 20 10 0 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017 2022 Year
  • 28. The Nature of a Long-Term Solution• For the United States and other countries, old- age entitlement programs are the key problem• But tax increases are almost certainly in the picture as well, since the overall changes required will be very large• A particular challenge, given – Current economic weakness around the world – Need for long planning horizon to restructure spending

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