Consequences of Debt 7 “Crowding Out” of private sector investment, leading to slower economic growth Higher Interest Payments displacing other government priorities and investments 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
The Risk of Fiscal Crisis 8 “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 (ret.), 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 9 What the Debt Will Realistically Look Like Short-TermLong-Term Economic Crisis (lost revenue and increased spending on safety net programs like Food Stamps) Economic Response (stimulus spending/tax breaks and financial sector rescue policies) Tax Cuts (in 2001, 2003, and 2010) War Spending (in Iraq and Afghanistan) Rapid Health Care Cost Growth (causing Medicare and Medicaid costs to rise) Population Aging (causing Social Security and Medicare costs to rise, and revenues to fall) Growing Interest Costs (from continued debt accumulation) Insufficient Revenue (to meet the costs of funding government)
How Did We Get Here? 10 Drivers of the Debt Since 2001 Note: Estimates from The Pew Charitable Trusts based on CBO data. Increases in Debt: Technical & Economic Changes: 27% Tax Cuts: 27% Spending Increases: 41% Other Means of Financing: 6%
Federal Spending and Revenues (Percent of GDP) Growing Entitlement Spending Note: Estimates based on CRFB Realistic Baseline. 11
Why Is Entitlement Spending Growing? 12 Drivers of Entitlement Spending Growth (Percent of GDP) Source: CBO Long-term Budget Outlook, 2011. 36% 64% 56% 44%
Why Is Federal Health Spending Increasing? 13 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 among 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
Health Care Spending by Country 14 Percent of GDP (2008) 36% 64% Source: 2008 Data from the Organization for Economic Cooperation and Development.
Number of Workers for Every Social Security Retiree is Falling 15 36% 64% 1950196020122035 16:1 5:13:12:1 Source: 2012 Social Security Trustees Report.
Living Longer, Retiring Earlier 16 Source: Social Security Administration and U.S. Census Bureau.
Looming Social Security Insolvency Social Security Costs and Revenues (Percent of Taxable Payroll) Source: 2011 Social Security Trustees Report. 17 Payable Benefits Revenues Scheduled Benefits
Interest as a Share of the Budget (Percent of GDP) Note: Estimates based on CRFB Realistic Projections. 18 Total Spending = 24% of GDP Total Spending = 27% of GDPTotal Spending = 34% of GDP 2010 2030 2050
Insufficient Revenue 19 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 Over $1 Trillion annually in lost revenues through so called "tax expenditures," which make the tax code more complicated, less efficient, and force higher rates
Excessive Spending Through the Tax Code (Tax Expenditures) 20 In order to stabilize Debt at 60% of the economy by 2021: 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$174 Mortgage Interest Deduction$89 401(k)s and IRAs$77 Earned Income Tax Credit$62 Special Rates for Capital Gains and Dividends $61 State & Local Tax Deduction$57 Charitable Deduction$49 Child Tax Credit$45 Source: Joint Committee on Taxation. Source: Office of Management and Budget.
How Much Do We Need to Save? *Estimates based on CRFB Realistic Baseline. 21 In order to stabilize debt at 60% of the economy by 2022: (2012-2022 Savings) Current Law Baseline Assuming No Trigger Savings Current Policy Baseline Assuming Upper-Income Tax Cuts Expire* Current Policy Baseline Assuming All Tax Cuts Continued* Debt in 2022 w/ No Savings (% GDP) 63%77%81% Required Savings to Stabilize Debt at 60% $0.8 Trillion$4.2 Trillion$5.3 Trillion
How Much Do We Need to Save? (cont’d) *Estimates based on CRFB Realistic Baseline. 22 In order to stabilize debt at 65% of the economy by 2022: (2012-2022 Savings) Current Law Baseline Assuming No Trigger Savings Current Policy Baseline Assuming Upper-Income Tax Cuts Expire* Current Policy Baseline Assuming All Tax Cuts Continued* Debt in 2022 w/ No Savings (% GDP) 63%77%81% Required Savings to Stabilize Debt at 65% $0.7 Trillion$3.0 Trillion$4.1 Trillion
How Much Do We Need to Save? (cont’d) *Estimates based on CRFB Realistic Baseline. 23 In order to stabilize debt at 70% of the economy by 2022: (2012-2022 Savings. Negative numbers reflect increase in deficits.) Current Law Baseline Assuming No Trigger Savings Current Policy Baseline Assuming Upper-Income Tax Cuts Expire* Current Policy Baseline Assuming All Tax Cuts Continued* Debt in 2022 w/ No Savings (% GDP) 63%77%81% Required Savings to Stabilize Debt at 70% -$0.6 Trillion$1.7 Trillion$2.8 Trillion
How Much Do We Need to Save? (cont’d) 24 So even if lawmakers were to stabilize debt at 70% of the economy in 2022—a level higher than the internationally recognized threshold of 60%—they would have to enact at least $2.8 trillion in savings beyond the $920 billion enacted in the Budget Control Act, compared to realistic assumptions of future debt. That calls for a Go Big approach to debt reduction.
We Can’t Inflate or Grow Our Way Out 25 InflationGrowth An unexpected increase in inflation could temporarily reduce the real value of debt and federal interest payments to investors However, higher inflation would prompt investors to demand higher interest payments, increasing the costs of financing new debt Higher inflation would also push up spending for all inflation-indexed programs, including Social Security, food stamps, military pensions, veterans’ benefits. Strong economic growth is a necessary but not sufficient condition for debt reduction Many spending programs grow as the economy does, and would outpace revenue growth Social Security payments would increase as wages and, thus, benefits grew over time Health care spending would grow even faster, given that costs continually grow notably faster than the overall economy The levels of growth needed to significantly reduce medium-term debts would be way above historical norms
Debt Reduction and Economic Growth 26 CBO studied the economic impact of an illustrative $2.4 trillion debt reduction plan and found that real output would be between 0.6% and 1.4% higher, depending on the magnitude of the effects. Real Output Growth (Percent) *Estimates from CBO, “The Macroeconomic and Budgetary Effects of an Illustrative Policy for Reducing the Federal Budget Deficit.”
How to Reduce the Deficit 27 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
“Go Small”: Lots of Pain for Little Gain A smaller package would offer some improvement to our fiscal situation, but it would not offer the benefits of a declining debt path The public would see a package of tough choices and a debt burden that continues to grow. In essence, it would deliver political pain with not so much gain Would leave in place considerable policy uncertainty, affecting businesses and markets A smaller package and an incremental approach to debt reduction would not offer the political tradeoffs necessary to solve our fiscal challenges 28
What Could “Go Small” Look Like? 29 Possible Policy ChangesSavings Government-Wide$250 billion from chained CPI Discretionary $100-200 billion from modestly slower growth in BCA caps Health CareNegligible savings Other Mandatory $150-250 billion from farm subsidies, federal civilian and military retirement and benefits, Fannie and Freddie, and others Social SecurityNegligible savings RevenuesNegligible savings Net Interest$100 billion Total$600-800 billion Without addressing health care reforms or revenues, it will be very difficult to achieve significant savings And even then, there is no guarantee that significant savings in other areas of the budget could be agreed on
Adding Serious Entitlement Reforms and Revenues Pushes You into “Go Big” Democrats will only agree to serious entitlement reforms if there are revenues Republicans will only agree to revenues in the context of comprehensive tax reform Democrats will only agree to a comprehensive tax reform that replaces the Bush tax cuts if it raises at least the $800 billion they would get if President Obama vetoes extension of upper income tax cuts Republicans will not agree to revenues anywhere near that amount without health savings that go beyond the amount proposed by the President 30
Advantages of “Go Big” Debt stabilized and falling as a share of the economy later in the decade, and all the benefits associated with a declining debt burden: Less “crowding out” of private sector investment Stronger confidence in businesses and markets Greater certainty and stability Stronger economy over the long-term Lower interest payments and increased fiscal space Intergenerational equity Reduced or eliminated risk of fiscal crisis 31
Advantages of “Go Big” (cont’d) Increased chances of enacting a comprehensive debt solution of at least $3 - $4 trillion in savings: Political trade offs necessary to address entitlement growth and revenues Shared sacrifice in Go Big approach Realize the gains of debt reduction by stabilizing and reducing the debt, and not just making difficult decisions that solve only part of the problem Restore America’s faith in the political system 32
The Announcement Effect Just announcing the adoption of a debt reduction plan can provide a boost in confidence, aiding the recovery Prominent lawmakers, government officials, economists, and experts have reiterated the benefits of the announcement effect, including: Ben Bernanke, Fed Chairman Erskine Bowles and Alan Simpson The International Monetary Fund Glenn Hubbard, former Chair of the President’s CEA Mark Zandi, Chief Economist, Moody’s Analytics Michael Bloomberg, Mayor of New York City Alan Blinder, former Fed Vice Chairman Larry Summers, former Director, NEC Various editorial boards and magazines, including the Washington Post, Financial Times, and The Economist 33 Note: For more information on the “announcement effect,” see CRFB at http://crfb.org/blogs/announcing-announcement-effect-club http://crfb.org/blogs/announcing-announcement-effect-club
“Go Big”: Shared Sacrifice Expanding the size and scope of a package can promote a sense of shared sacrifice on behalf of the American public and key interest groups, making it more likely that they would accept changes if everyone was contributing to the solution. An incremental approach would allow advocates for parts of the budget to argue that they are bearing an unfair burden. A Go Big approach which achieves savings in all parts of the budget neutralizes that argument. In a recent Washington Post op-ed, Fiscal Commission co-chairs Erskine Bowles and Alan Simpson highlighted this lesson from the Fiscal Commission deliberations: “The more comprehensive we made it, the easier our job became. The tougher our proposal, the more people came aboard. Commission members were willing to take on their sacred cows and fight special interests — but only if they saw others doing the same and if what they were voting for solved the country’s problems.” 34
What Could “Go Really Big” Look Like? 35 Possible Policy Changes $600 - $800 Billion Plan $3 Trillion Plan$4 Trillion Plan Government-Wide$250 billion Discretionary$100- 200 billion$300 billion$400 billion Health CareNegligible savings$650 billion$900 billion Other Mandatory$150 - $250 billion$350 billion Social SecurityNegligible savings$150 billion$300 billion RevenuesNegligible savings$850 billion$1.2 trillion Net Interest$100 billion$450 billion$600 billion Total$600 - $800 billion$3 trillion$4 trillion Including serious entitlement reforms and revenues pushes the overall savings well above the $1.2 trillion mandate Note: $4 trillion plan is a more ambitious version of the types of reforms in the $2.8 trillion plan.
The Bowles-Simpson Fiscal Commission Plan 36 Discretionary Spending Cuts to defense and non-defense programs, totaling an additional $400 billion over ten years [on top of the savings already enacted]. 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 tax rates, broaden the base, and raise $1.2 trillion.
The Bowles-Simpson Fiscal Commission Plan 37 (Deficits as Percent of GDP)
Illustrative Tax Rates 38 Bottom RatesMiddle RatesTop Rates Corporate Rate Current Rates for 2012 10%15%25%28%33%35% Scheduled Rates for 2013 15%28%31%36%39.6%35% Eliminate All Tax Expenditures 8%14%23%26% Keep Child Tax Credit and EITC 9%15%24%26% Fiscal Commission’s Illustrative Tax Plan 12%22%28% 2012 Rates, Expiration of the Tax Cuts, and Fiscal Commission’s Illustrative Plan Fiscal Commission’s illustrative tax plan would reduce or eliminate most tax expenditures and use the savings to reduce tax rates and reduce the deficit.
What’s in the Fiscal Cliff? At the end of 2012, the following is scheduled to occur: All of the 2001/2003/2010 tax cuts will expire at once The “sequester” will immediately cut defense by 10%, non-defense discretionary by 8%, and other spending across-the-board The payroll tax holiday and extended unemployment benefits will expire The AMT will hit 30 million taxpayers instead of 4 million All the tax extenders will expire Physicians will see a 30% cut in their Medicare payments Tax increases from the Affordable Care Act will begin The country will once again hit the debt celling 39
Components of the Fiscal Cliff 40 Source: Congressional Budget Office. Numbers are rounded. Enacted in the 2011 BCA to pressure the Super Committee to enact a plan, the sequester would cut spending across the board in January 2013. The Sequester % Reduction in 2013 (Budget Authority) 2012-2022 Cuts (Budget Authority) Defense Spending10%$550 billion Non-Defense Disc. Spending8%$360 billion Medicare2%$125 billion Other Non-Exempt Spending8%$45 billion InterestN/A$170 billion Total Cuts+$100 billion$1,250 billion
Components of the Fiscal Cliff 41 Other Policies Set to Activate or Expire Jobs Measures 2% payroll tax holiday Extended duration for unemployment benefits Annual Doc Fixes Affordable Care Act Tax Increases 0.9% increase in HI tax for higher earners and applying the full 3.8% tax to net investment income 2.3% tax on medical devices Other measures Various “Tax Extenders” R&E tax credit Alcohol fuel tax credit Subpart F for active financing income Other extenders
How Big Is the Fiscal Cliff? 42 Policy2013 Fiscal Impact 2013-2022 Fiscal Impact 2001/2003/2010 Income and Estate Tax Cuts $110 billion$4.3trillion AMT Patches (w/ Tax Cut Interactions) $105 billion$1.7 trillion Sequester $55 billion$1.1 trillion Doc Fixes $10 billion$280 billion Jobs Measures $115 billion$150 billion Various “Tax Extenders” $30 billion$455 billion Taxes from the Affordable Care Act $25 billion$420 billion Total Fiscal Impact~$450 billion$8.1 trillion Total Economic Impact (% GDP)~3%N/A Note: Congressional Budget Office estimates and CRFB calculations. 2013-2022 estimates include interest.
Budgetary and Economic Impact 43 Billions of Dollars 36% 64% Source: Congressional Budget Office estimates and rough CRFB calculations.
Short-Term Economic Impact of the Fiscal Cliff Expiring/activating measures will create a “fiscal shock” of about 4 percent of GDP, which could take about 2 percent out of the economy in the short-term and increase unemployment by over 1 percent Under current law, CBO projects negative growth in the first quarter of 2013 and negligible growth in the second quarter 44 Current Law vs. Current Policy 20132022 Difference in Real GDP Level -2.1%+1.0% Difference in Real GDP Growth (Q4 to Q4) -1.6%+0.2% Difference in Unemployment Rate +1.1%n/a Source: Congressional Budget Office.
Long-Term Economic Impact of the Fiscal Cliff The Fiscal Cliff could improve the long-term, BUT: Savings in the Fiscal Cliff will not deal with the long-term debt drivers – growing health and retirement costs Revenue will come largely from higher marginal rates, which will reduce incentives to work, save, and invest Spending cuts will come from mindless across-the-board cuts instead of cuts to low-priority and anti-growth spending 45
Lawmakers Face a Fiscal Cliff and a Mountain of Debt WORST CASE: A Mountain of Debt If lawmakers waive or extend policies at the end of the year, they could add more than $7.5 trillion to the debt over the next ten years, compared to current law. BAD CASE: A Fiscal Cliff If lawmakers allow all policy expirations and the sequester to proceed as scheduled, the economy could take a 2 percent hit over 2013-2014, while not addressing entitlement spending growth or fundamental tax reform. 46
Is There a Smart Path Forward? Instead of a Fiscal Cliff or Mountain of Debt, we should enact a comprehensive and thoughtful plan which would: Go Big A plan must stabilize and reduce the debt relative to the economy A go big plan would make bipartisan compromise more likely by allowing for the necessary tradeoffs Go Smart Replace mindless, abrupt deficit reduction with thoughtful changes that reform the tax code and cut low-priority spending Go Long Enact gradual reforms that address the long-term costs of growing entitlement spending 47
Is There a Smart Path Forward? Deficit Projections as a Percent of GDP 48 Note: Illustrative plan loosely based on Fiscal Commission savings. Current policy based on CRFB Realistic Baseline.
Benefits of Replacing the Fiscal Cliff with a Go Big Plan Achieves long-term growth without short-term contraction Avoids both a double-dip recession and a potential downgrade from credit rating agencies Allows for sensible policy decisions to make the tax code more competitive, reform entitlement programs, and eliminate wasteful spending Reduces market and public uncertainty over future tax and spending policies 49
What Savings Have Lawmakers Enacted So Far? 50 (Billions of Dollars through 2021) Note: Estimates based on realistic budget projections.
What Would the President and Governor Romney Do? 51 Debt Projections (Percent of GDP) Note: Estimates based on CBO and CRFB calculations. Romney w/o credit for unspecified base broadening
It’s Time for a Fiscal Reform Plan 52 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 Creates “announcement effect” to improve growth Reduces size of necessary adjustment Source: Congressional Budget Office
It’s Time for a Fiscal Reform Plan…Now 53 We Can’t Wait Until After the Election Every month and year that passes, the debt grows larger and larger and the solutions become more difficult Elections can take policy options off the table and back candidates into positions that make bipartisan solutions more difficult Addressing the fiscal situation as soon as possible would make governing easier – not harder – after the election
Who Supports “Go Big”? 54 Calls for a $4+ Trillion, Bipartisan Solution to the Debt 45 Members of the Senate 102 Members of the House of Representatives 200 Business Groups, including the Chamber of Commerce, National Association of Manufacturers, and Business Roundtable Other groups: Partnership for New York City, American Business Conference, National Conference of State Legislatures 60+ former government officials, business leaders, and experts Editorial boards and other outside experts Countless concerned citizens
Principles of Fiscal Responsibility 55 For the 2012 Campaign 1. Make Deficit Reduction a Top Priority 2. Propose Specific Fiscal Targets 3. Recommend Specific Policies to Achieve the Targets 4. Do No Harm 5. Use Honest Numbers and Avoid Budget Gimmicks 6. Do Not Perpetuate Budget Myths 7. Do Not Attack Someone Else’s Plan Without Putting Forward an Alternative 8. Refrain from Pledges That Take Policies Off the Table 9. Propose Specific Solution for Social Security, Health Programs, and the Tax Code 10. Offer Solutions for Temporary and Expiring Policies 11. Encourage Congress to Come Up with a Budget Plan as Quickly as Possible 12. Remain Open to Bipartisan Compromise
The Time For Action Is Now 56 “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
Current Bipartisan Efforts 57 The Fix the Debt Campaign 100+ Members of the House of Representatives 45+ Senators Hundreds of business leaders, associations, and other experts calling for a broad, bipartisan plan to stabilize and reduce debt Thousands of concerned citizens Fix the Debt
Useful Resources The Committee for a Responsible Federal Budget http://crfb.org http://www.fixthedebt.org Policy Papers: Between a Mountain of Debt and a Fiscal Cliff Primary Numbers: The GOP Candidates Going Big Could Improve the Chances of Success Slideshow on Our Fiscal Challenges: Averting a Fiscal Crisis Congressional Budget Office July 16, 2011 reportJuly 16, 2011 report: The Macroeconomic and Budgetary Effects of an Illustrative Policy for Reducing the Federal Budget Deficit 58