The document discusses the federal budget deficit and its drivers. It notes that the deficit grew significantly from large surpluses in the early 2000s due to tax cuts, defense spending increases, and rising healthcare costs. Making the tax cuts permanent would cost trillions over time. The president's proposed budget would cut domestic programs and Medicaid while extending the tax cuts, worsening deficits. A balanced approach of spending cuts and revenue increases is recommended to reduce deficits in a responsible way.

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.