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Averting a Fiscal Crisis

The Committee for a Responsible Federal Budget

Deficit Projections
(Percent of GDP)
12% 10% 8% 6%

1992-2012 Average Deficit: 2.9% 2012-2022 Average Current Policy Deficit: 4.7%

4%
2% 0% -2% -4%

Current Policy

Current Law

Note: Estimates based on CRFB Realistic Baseline.


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Gap Between Revenue and Spending


(Percent of GDP)
26% 24% 22% 20% 18% 16% 14% 12% 10% 2000 2002 2004 2006 2008 2010 Current Law Spending CRFB Realistic Spending 2012 2014 2016 2018 2020 Current Law Revenues CRFB Realistic Revenues 2022
Avg. Historical Revenues (1972-2011): 17.9% Avg. Historical Spending (1972-2011): 21.0% Actual Projected

Note: Estimates based on CRFB Realistic Baseline.


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Components of Revenue and Spending


Revenues and Financing Outlays

Interest Non- 7% Defense 7% Borrowing 32% Individual Income Tax 27%

Medicare 15% Medicaid & Other Health 8% Social Security 23%

2012

Defense 21%

Other 6%

Corporate Tax 5% Social Insurance Taxes 23%

Other Mandatory 18%

Total Revenues = $2.456 Trillion Total Financing = $3.627 Trillion

Total Outlays = $3.627 Trillion

Debt Projections
(Percent of GDP)
400% 350%

300%
250% 200% 150% 100% 50% 0% -50%

Realistic Projections 2010: 63% 2025: 92% 2040: 147% 2080: 384%

What the Debt Will Realistically Look Like


Current Law

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 dont 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)

Rapid Health Care Cost Growth


(causing Medicare and Medicaid costs to rise)

Economic Response
(stimulus spending/tax breaks and financial sector rescue policies)

Population Aging
(causing Social Security and Medicare costs to rise, and revenue to fall)

Tax Cuts
(in 2001, 2003, and 2010)

Growing Interest Costs


(from continued debt accumulation)

War Spending
(in Iraq and Afghanistan)

Insufficient Revenue
(to meet the costs of funding government)

Growing Entitlement Spending


Federal Spending and Revenues (Percent of GDP)
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

Actual Average Historical Revenues Revenues

Projected

Interest

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% Excess Health Care Cost Growth

56%

36%
64%

Aging

44%

10%
8%

Source: CBO Long-term Budget Outlook, 2011.


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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 18% 16% 14% 12% 10% 8% 6% Revenues Scheduled Benefits

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 81%

Interest 19%

Primary Spending 73%

Interest 27%

Total Spending = 24% of GDP

Total Spending = 27% of GDP

Total Spending = 34% 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

Tax Expenditures 24%

401(k)s and IRAs


Earned Income Tax Credit

$77
$62

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

Special Rates for Capital Gains and Dividends State & Local Tax Deduction
Charitable Deduction Child Tax Credit

$61

$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 $1.2 trillion.

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.
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The Bowles-Simpson Fiscal Commission Plan


(Deficits 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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Its 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

2013

4.8%

2015

5.2%

Creates announcement
effect to improve growth

2020

6.8%

Reduces size of necessary


adjustment

2025

9.7%

0%

2%

4%

6%

8%

10%

12%

Source: Congressional Budget Office


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Whats 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

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How Big Is the Fiscal Cliff?


Policy 2001/2003/2010 Income and Estate Tax Cuts AMT Patches (w/ Tax Cut Interactions) 2013 Fiscal Impact $110 billion 2013-2022 Fiscal Impact $2.8 trillion

$125 billion
$65 billion $10 billion $115 billion $30 billion $25 billion ~$500 billion ~2%

$1.7 trillion
$980 billion $270 billion $150 billion $455 billion $420 billion $8.1 trillion N/A

Sequester Doc Fixes


Jobs Measures Various Tax Extenders Taxes from the Affordable Care Act Total Fiscal Impact Total Economic Impact (% GDP)

Note: Congressional Budget Office estimates and CRFB calculations. 2013-2022 estimates include interest.
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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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