Slide One (Title Page): Short & Long Term Budget Trends
Slide Two: Composition of Projected federal government revenues and outlays
- This is a projection of where the nation's money came from (revenues) and where the money went (outlays) -- it is a dramatically different picture than the last few years.
- Outlays exceeded revenues by over $1 trillion. Such large deficits can be primarily attributed to the financial crisis, recession, and the slow recovery.
- The main bar to pay attention to here is the “interest costs”. This is the money the government spends annually just to pay interest on the national debt. This money could be put to more productive uses, given that it is such a large sum of money, but instead, like paying interest on a mortgage or credit card, the money goes out the door just to be able to keep borrowing.
- Interests costs are actually lower than one would guess given ther amount of borrowing we have done during the recession. This is because of the unique nature of the current financial crisis and our country's ability to borrow at very low interest rates. This is a temporary phenomenon that will turn around quite quickly once the economy recovers--dramatically altering the effect on interests costs and the budget down the road.
Slide Three: Mandatory spending is consuming a growing share of the budget
- The mix of mandatory and discretionary spending has changed over time.
- It is important to remember that mandatory spending is determined by legal formula and not voted on by Congress. Discretionary spending is voted on each year by Congress in the appropriations process. Thus, much more of our spending is now on autopilot than determined annually by Congress.
- In 1965, most of our spending was discretionary, particularly on defense. Today most is mandatory, specifically on Medicare, Medicaid, Social Security, and interest on the debt.
- Often when you hear politicians talk about wanting to restrain spending, they tend to only focus on discretionary appropriations, and even then, consider that the half of that slice is spent on defense, and thus is basically “off limits” for cuts. That leaves only one-sixth of the budget available for scrutiny.
Slide Four: Social Security, Medicare, & Medicaid as a Percentage of the Federal Budget
- This chart shows federal spending on the "Big Three" entitlement programs--Social Security, Medicare, & Medicaid--as compared to all other federal spending; these three programs currently add up to over 40 percent of the total federal budget.
- This is only going to grow going forward -- I’ll get to why in a little bit.
Slide Five: Outlays of Select Mandatory Spending Programs
- This chart is a snapshot of what the government expects to spend on various mandatory spending programs.
- A vast majority of total mandatory spending is on Social Security, Medicare, and Medicaid.
- Social Security spending is currently the largest of the mandatory programs, but within two decades, Medicare will be the largest.
- The other much smaller programs tend to be safety net programs, and these have recently increased in spending because they are the so-called “automatic stabilizers” that kick in during economic downturns to protect the most vulnerable (food stamps, unemployment, etc.)
Slide Six: Defense Discretionary Spending as a Percentage of GDP
- The amount spent on defense has declined as a percentage of GDP since 1965.
- This might seem a little surprising because often you hear people say that our entire budget problem is the result of the wars in Iraq and Afghanistan. As this chart clearly shows, we are spending less on defense than in our recent past and yet the budget situation has been getting worse.
- These numbers, and all of the numbers for defense in this talk include Iraq and Afghanistan war spending.
- Defense spending is projected to shrink as a share of the economy in the future due to withdrawal from overseas wars and the discretionary budget caps recently enacted.
Slide Seven: Outlays of Select Discretionary Non-Defense Programs
- This shows where the approximately half of discretionary appropriations dollars go (the other half is for defense).
- Congress controls the amount of money that is allocated for each program by voting each year.
- Recall how much larger the amounts were in mandatory spending; annual spending in these discretionary categories is only in the tens of billions
- When you hear candidates discuss the need for spending restraint and yet avoid specifics on hard choices about mandatory, defense or homeland security spending, beware. They’d have to find savings from these specific discretionary programs, which is hard to do in a meaningful way given how small these programs are. Note: there is no category labeled “waste, fraud and abuse.”
Slide Eight: Domestic Discretionary Projected to be Cut Dramatically
- The August 2011 deal to increase the debt ceiling included caps on discretionary spending that over 10 years will reduce such spending well below the historical average and also below the lowest level in modern history.
- The sequester will further reduce domestic discretionary spending.
- Based on past history, sticking to these levels for 10 years seems to be an unrealistic assumption that makes future deficits look smaller than they would with more realistic assumptions for discretionary spending.
Slide Nine: The Sequester
- The sequester reduces deficits by primarily restricting discretionary spending -- ignoring the largest spending programs and the ones projected to increase the most in the future.
Slide 10: Tax Expenditures: The Hidden Entitlement
Slide 11: Largest Tax Expenditures
- Tax expenditures are often called "loopholes"
Slide 12: Federal Spending vs. Revenues as a Percent of GDP
- The size of our economy is measured by Gross Domestic Product, currently around $15 trillion.
- Economists like to measure the size of government not necessarily in dollar terms, but as a share of our economy.
- Outlays have averaged about 21% of GDP over the past few decades and revenues have averaged about 18% of GDP.
- Major political battles are fought over which level is the “right” size of government—is it 21% or 18%?—but the problem is that we tend to have a “big government” spending program (21% of GDP) and a “small government” tax system (18% of GDP). Whatever the right level of government spending is, we have to be willing to pay for it with our taxes.
- You can see that in the late 1990s and early 2000’s we had a unique situation where those averages were reversed--we were taxing at 20% of GDP and spending at 18%--that is why we had a brief period of budget surpluses under the Clinton Administration and the Republican Congress.
- The situation quickly reversed back to deficits after the tax cuts in 2001, then an economic downturn and the Wars in Afghanistan and Iraq. The deficit slowly decreased from its high in 2004 until 2007, but then fell back dramatically due to the recession and the financial crisis.
Slide 13: Current Policy Trends Lead to Large Sustained Deficits
- The fiscal outlook over the short-medium term shows continued deficits. The top blue line shows you the CBO’s projection of spending and revenues for the next ten years. What they do is project where “current law” will take us--basically assuming that Congress and the President take the next 10 years off. Under this scenario, various tax cuts ("extenders") expire, discretionary spending follows the 10-year caps put into place in the August 2011 debt ceiling deal (the "Budget Control Act"), while mandatory spending increases based on where the current law requirements take it. CBO is also conservative in assuming the economy returns to normal pretty quickly. Even with those favorable assumptions, they still project trillions in additional deficits.
- The other line represents CBO's “alternative fiscal scenario.” CBO projects current policy as opposed to current law. The main differences are that they assume tax cuts currently in effect will continue and that discretionary spending increases at the same rate as inflation. They also assume a gradual phase-down of operational costs in Iraq and Afghanistan to about one-third of the current level, and that doctor payments in Medicare are "fixed" to not call for dramatic cuts year after year.
- This current policy baseline, which still has the same economic assumptions used by CBO, shows larger deficits. Such large deficits are unsustainable because the economy cannot be expected to grow fast enough to keep up with that fast an accumulation of debt.
Slide 14: Debt Held by the Public as a Percent of GDP
- Federal debt held by the public is a good measure of the amount of borrowing we do as a country because it takes into account only the debt that is borrowed on the open market, and thus represents the debt that has the most effect on our economic position. (The bigger and more popular “gross national debt” number includes money the federal government owes to itself in various trust funds)
- Debt levels are now at their highest as a percentage of the economy since the period during and immediately after World War II, when it reached a peak of 109 percent of GDP and then quickly fell back down.
- Current policy projections suggest that this debt held by the public is only going to continue rising. This is what economists refer to as an “unsustainable” trend—where debt rises faster than the economy (our capacity to pay back that debt) grows.
- Such high debt and the implications for national saving reduces prospects for economic growth over the longer-term. But it can threaten our short-term financial stability as well if investors in U.S. Treasuries start to view the U.S. government as a risky investment. And these investors are not just Americans…
Slide 15: Percent of Debt Held by the Public Owned by Foreigners
- Unlike in the WWII era when our debt reached unprecedented levels, or even during the high deficits of the 1980’s, our publicly held debt is now largely held by foreign investors. While access to foreign savings is a generally good thing that has helped keep our interest rates low and domestic investment relatively high, it does make our economy more susceptible to decisions that are out of our control and indicates we’re probably not doing enough of our own saving.
- Our low domestic saving and high indebtedness to other countries means that when these debts are repaid they represent flows of income out of the U.S. and into other countries; future generations of Americans won’t benefit as much as has been true in the past when U.S. debts were paid back to mostly American investors.
- The top two major foreign holders of Treasury securities are China and Japan.
Slide 16: Interest Costs Go Through the Roof
- While interest rates are now low due to the unique nature of the current financial crisis, they will eventually go back up, and we will be saddled with a much higher debt due to lower revenues and the dramatic increase in government spending.
- Increased interest costs mean we are dedicating a large amount of money to servicing our debt, a less productive use than other forms of spending. We already spend more on interest than Education, Transportation, and Homeland Security combined.
- The chart shows interest under the current-law baseline, versus under the Concord Plausible Baseline. Having a lot of the deficit-financed spending and tax cuts early in the ten-year budget window makes a dramatic difference as interest rates return to normal and the power of compounding works against us over time.
Slide 17: Sources of Growth in the Federal Budget
- The prior charts deal with the short-term fiscal challenges the country faces, and yet that isn’t the bad news. The bad news is that even if the economy quickly gets back on its feet and Congress becomes more fiscally responsible in their short-term budgeting, the real problem is over the long term where things are going to get much worse.
- That is because over the long term, the federal budget faces rapidly rising federal entitlement spending in just three programs, Social Security, Medicare and Medicaid. All other federal spending in the non-defense discretionary budget, on national defense, and on smaller mandatory programs like unemployment compesnsation, federal emploee retirement funds, etc., is projected to shrink below the levels nessesary to keep up with economic growth.
Slide 18: Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security
- Over the long term, the federal budget faces rapidly rising federal entitlement spending due to a combination of the aging of the population (retirement of the baby boomers) and to health care costs rising faster than economic growth.
- Without those factors, federal spending remains relatively stable as a percent of the economy. Looking at aging explains most of entitlement spending growth between now and 2035, and Health Care cost growth explains most of it beyond 2035. (Spending on Medicare and Medicaid is driven by both factors, while Social Security spending rises due to just the aging/demographic factor.)
Slide 19: America's Population is Aging
- The percentage of the population age 65 and over (those who comprise the bulk of who benefits from the Social Security and Medicare programs) will gradually increase until it grows to over 20% of the population by 2044.
- The baby boom transformation has actually begun. The first baby boomer became eligible for early retirement benefits through Social Security in 2008 and eligible for Medicare benefits in 2011.
Slide 20: Americans Are Living Longer and Having Fewer Children
- When you look at how this affects entitlement programs, especially Social Security it is instructive to think of it on a worker-to-retiree basis. This chart shows how there were five workers support every one Social Security beneficiary in 1960 and that will shrink to two workers for every one beneficiary by 2030. This means there is a much larger burden on workers to support retirees.
Slide 21: Benefits Promised Far Exceed Dedicated Tax Revenues
- This chart shows the resulting deficits in Social Security. These deficits are caused by less workers paying into the system relative to the number of retirees collecting benefits. As such, the only options to close this gap would be to raise tax burdens on workers, shrink benefits for the retirees, a combination of the two, or piling on more debt.
- Note that we will be paying out more in benefits than we are taking in through payroll taxes within 10 years.
- These numbers assume current levels of immigration, both illegal and legal.
Slide 22: Medicare Costs Soar in the Coming Decades
- This shows that general revenue (non-payroll taxes) will be increasingly needed to finance Medicare because dedicated revenues will rise far too slowly.
- In other words, payroll taxes and premiums will have to be accompanied by higher income taxes or revenue from new sources, or under the “do nothing plan” -- added debt.
- The total cost of Medicare -- on paper -- is projected to grow by 50 percent due to the aging of the population and health care inflation. However, this projection may prove optimistic because it omits the cost of continual "fixes" to physician payments under Medicare that Congress often enacts to prevent large set by the SGR formula. It also assumes the Affordable Care Act (ACA) provider cuts are sustainable over the long term -- something that the Medicare Trustees suggests might prove too difficult. Thus, they have an alternative scenario where these cuts do not continue throughout the entire projection period.
- With these more realistic projections, Medicare costs more than double over the long-term.
Slide 23: Projected Increase in Debt Held by the Public Under Current Policy
- If we continue on our current course, we are going to build up debt at an unsustainable rate.
- This chart shows that even under the favorable assumption of current law we will have debt held by the public rivaling the WWII era largest in history; and if current policies on tax cuts and discretionary spending remain in place, debt levels will double that of during WWII--yet not because of a full-scale mobilization of all of the country’s resources to fight global tyranny.
- Instead, these projections assume a relatively peaceful security climate and stable economic growth, but assume that the nation continues to avoid making tough, but not drastic, choices about our levels of domestic spending and taxation.
- Such a large debt buildup will have troubling consequences. Even before reaching its peak, it is likely that the debt buildup will lead to substantially higher interest rates and a depressed economy with less private investment. We will also saddle future generations not only with a poor economy, but also without fiscal flexibility because they will be forced to pay large sums to service debt and they will be constrained by budget priorities they had no part in setting.
Slide 24: Key Points of Agreement
- The Fiscal Wake-Up Tour has demonstrated that people of different political and ideological perspectives can agree on the need to do something to get us off this unsustainable fiscal track.
- Although the potential economic consequences of continued fiscal irresponsibility are severe, they are mostly a concern about the future. That is why the issue should be of greatest concern to those who care about future generations and should be considered a moral issue as much as an economic one.
Slide 25: How Can I Make a Difference
- Individual action to work on solving the nation's fiscal challenges is a difficult thing to explain, because ultimately our political leaders have to make necessary changes in our tax and spending laws.
Slide 26: Support The Concord Coalition