Averting a Fiscal Crisis

The Committee for a Responsible Federal Budget

Deficit Projections
(Percent of GDP)
12% 10% 8% 6% 4% 2% 0% -2% -4%

1991-2011 Average Deficit: 2.8% 2012-2021 Average Current Policy Deficit: 5.3%

Current Policy

Current Law

Note: Estimates based on CRFB Realistic Baseline.

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Gap Between Revenue and Spending

(Percent of GDP)
26%
Actual Projected

24% 22% 20% 18% 16% 14% 12% 10% 2000 2002 2004 2006 2008 2010 Current Law Spending CRFB Realistic Spending 2012 2014 2016 2018 Current Law Revenues CRFB Realistic Revenues 2020
Avg. Historical Revenues (1970-2010): 18.0% Avg. Historical Spending (1970-2010): 20.8%

Note: Estimates based on CRFB Realistic Baseline.

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Components of Revenue and Spending

Revenues and Financing Outlays

Interest 6%

Medicare 13% Medicaid & Other Health 8%

Borrowing 39%

Individual Income Tax 27%

Non-Defense 18%

2011
Corporate Tax 5% Social Insurance Taxes 23% Defense 20% Social Security 20%

Other 6%

Other Mandatory 15%

Total Revenues = $2.230 Trillion Total Financing = $3.629 Trillion

Total Outlays = $3.629 Trillion

Debt Projections
(Percent of GDP)
600% 500% 400% 300% 200% 100%
Current Law

Realistic Projections 2010: 62% 2024: 100% 2040: 180% 2080: 500%

CRFB Realistic Debt

0%

Note: Estimates based on CRFB Realistic Baseline.

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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

made
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The Risk of Fiscal Crisis

Rising Debt increases the likelihood of a fiscal crisis during which investors would lose confidence in the government's 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 Reserve

Debt Drivers
Short-Term Long-Term

 Economic Crisis

(lost revenue and increased spending from automatic stabilizers) (stimulus spending/tax breaks and financial sector rescue policies) (in 2001, 2003, and 2010) (in Iraq and Afghanistan)

 Rapid Health Care Cost Growth

(causing Medicare and Medicaid costs to rise) (causing Social Security and Medicare costs to rise, and revenue to fall) (from continued debt accumulation) (to meet the costs of funding government)

 Economic Response  Tax Cuts

 Population Aging

 Growing Interest Costs  Insufficient Revenue

 War Spending

Growing Entitlement Spending

Federal Spending and Revenues (Percent of GDP)
60% 50% 40%
Revenues

Actual Average Historical Revenues

Projected

Interest

30% 20% 10% 0%

Health Care Social Security Other Spending

Note: Estimates based on CRFB Realistic Baseline.

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Why Is Entitlement Spending Growing?

Drivers of Entitlement Spending Growth (Percent of GDP)
26% 24% 22% 20% 18% 16% 14% 12% 10% 8% Excess Health Care Cost Growth

56% 36% 64%

Aging

44%

Source: CBO Long-term Budget Outlook, 2010.

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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 overspending
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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.
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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.

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Living Longer, Retiring Earlier

90 85 80 75
Normal Retirement Age Average Age of Retirement

70 65 60 55 50 45 40
Life Expectancy Early Retirement Age

Source: Social Security Administration and U.S. Census Bureau.

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Looming Social Security Insolvency

Social Security Costs and Revenues (Percent of Taxable Payroll)
20%
Payable Benefits Scheduled Benefits

18% 16% 14% 12% 10% 8% 6%

Revenues

Source: 2011 Social Security Trustees Report.

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Interest as a Share of the Budget

(Percent of GDP)
2010 2030 2050

Primary Spending 94%

Interest 6%

Primary Spending 79%

Interest 21%

Primary Spending 69%

Interest 31%

Total Spending = 24% of GDP

Total Spending = 29% of GDP

Total Spending = 39% of GDP

Note: Estimates based on CRFB Realistic Projections.

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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 rates

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Excessive Spending Through the Tax Code (Tax Expenditures)

Tax Expenditures as a Percent of Primary Spending if Included in the Budget Large Tax Expenditures and Their 2011 Costs (billions)
Employer Health Insurance Exclusion Mortgage Interest Deduction
Defense Discretionary 16%

$174 $89 $77 $62 $61

Tax Expenditures 24%

401(k)s and IRAs Earned Income Tax Credit Special Rates for Capital Gains and Dividends

Non-Defense Discretionary 15% Health Spending 18% Social Secutity 16% Other Mandatory 12%

State & Local Tax Deduction Charitable Deduction Child Tax Credit

$57 $49 $45

Source: Joint Committee on Taxation. Source: Office of Management and Budget.

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 Reform

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The Bowles-Simpson Fiscal Commission Plan

Discretionary Spending  Equal cuts to defense and non-defense in
2013 totaling $1.7 trillion through 2020

Social Security  Progressive benefit changes, retirement

age increase, tax increase for high earners

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 $200 billion

Tax Reform and Revenue  Comprehensive reform to lower tax

rates, broaden the base, and raise $1 trillion
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The Bowles-Simpson Fiscal Commission Plan

(Debt as Percent of GDP)
10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

Plausible Baseline

Commission Plan

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It s Time for a Fiscal Reform Plan

Reasons to Enact a Plan Sooner Rather than Later
Size of Adjustment to Close 25-year Fiscal Gap, Depending on Start Year (Percent of GDP)

 Allows for gradual phase in  Improves generational fairness  Gives taxpayers

businesses, and entitlement beneficiaries time to plan

2011

4.8%

2015

5.7%

2020

7.9%

 Creates announcement
effect to improve growth

2025

12.3%

 Reduces size of necessary

adjustment

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

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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 Reform

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