Intro Slide: Short & Long Term Budget Trends
Slide: America is on an Unsustainable Fiscal Path
- If we continue on our current course, we are going to build up debt at an unsustainable rate.
- This chart shows the history of the nation's debt held by the public (the debt we borrow on the open market from citizens, foreign savers, and foreign governments) as a share of its economy. We are on a trajectory where in a short time, debt will rival the WWII era's largest level in history; and if current policies 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 slower economic growth and less private investment, and possibly much higher interest rates. We will also saddle future generations not only with a poorer standard of living, but with less flexibility to make their own fiscal and budgetary choices 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: Composition of Projected Federal Government Outlays and Revenues
- This is a projection of where the nation's money came from (revenues) and where the money went (outlays)
- The deficit, the mathematical difference between outlays and revenues, has dropped substantially from the over trillion-dollar-deficits the nation experience during the four-year period of the recession (2009-2012) Such large deficits can be primarily attributed to the financial crisis, recession, and the slow recovery. With the continued recovery, deficits get smaller for a limited time that is almost up.
- 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, 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 the recent amount of borrowing. This is because of our country's unique ability to borrow at very low interest rates. As the economy recovers, interest rates return to normal, dramatically increasing interests costs and the budget down the road.
Slide: Automatic Expenditures Are Consuming a Growing Share of the Budget
- The mix of "automatic" spending -- spending dictated by permanent law instead of the annual Congressional appropriations process -- has changed over time.
- Both mandatory spending and interest costs are determined by legal formula and are 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.
- During the 1970s and earlier, 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 -- about half of which is defense spending and half non-defense, and thus about two-thirds of the budget is basically “off limits” for cuts.
Slide: 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 nearly half of the total federal budget.
- This is only going to grow going forward -- I’ll get to why in a little bit.
Slide: 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.). Spending on these programs is on the way back down as the recovery continues.
Slide: 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 budget caps and sequester cuts recently enacted.
Slide: Outlays of Select Discretionary Non-Defense Programs
- The non-defense discretionary programs are much smaller in magnitude than the mandatory programs.
- Congress controls the amount of money that is allocated for each program by voting each year.
- By relying on caps to this type of spending, politicians get to avoid specifics on the hard choices required to cut these individual programs. Note: there is no category labeled “waste, fraud and abuse.” That is one reason why the appropriations process has broken down -- it is very difficult to enact the specific cuts implied in the overall discretionary spending caps.
- This is the part of the budget where investments are made for future economic growth -- in infrastructure, human capital, and science and technology. Cutting this part of the budget while avoiding hard choices in taxes and mandatory spending is shortsighted and concerning.
Slide: Projected Domestic Discretionary Spending
- The August 2011 deal to increase the debt ceiling and the December 2013 budget deal included caps on discretionary spending and sequester cuts that over 10 years will reduce such spending well below the historical average and also below the lowest level in modern history.
- 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: Tax Expenditures: The Hidden Entitlement
- One characteristic of the budget that is receiving a lot of attention in policy debates are the numerous deductions, exclusions, loopholes and special provisions in the tax code.
- Because these are economically equivalent to mandatory spending programs in that they involve the government encouraging and incentivizing behaviors with economic resources -- and that such decisions are written into law -- they have been given the name "tax expenditures" or "tax entitlements."
- Almost half of all individual income tax revenue and corporate income tax revenue is lost due to these provisions.
Slide: Largest Tax Expenditures
- While the shorthand "loopholes" is sometimes used to describe tax expenditures, one glance at the list of the largest tax expenditures shows how they are large federal programs, deeply embedded in the fabric of the nation's economic and social life. That is why they are as difficult to tackle as other entitlement programs.
- The problem with using the tax code for these purposes is that it is an inefficient and regressive delivery system for these benefits. They increase the complexity of the tax code -- reducing efficiency. They also provide a larger benefit to those who earn the most income -- making them regressive.
- Over 70% of Americans don't earn enough income or benefit enough from the provisions to itemize their deductions. And, those in the higher tax brackets get substantially higher subsidies from the government for these behaviors because a deductions' benefits are determined by one's tax bracket percentage.
Slide: Federal Spending vs. Revenues as a Percent of GDP
- The size of our economy is measured by Gross Domestic Product (GDP), currently around $17 trillion.
- Economists like to measure the size of government not necessarily in dollar terms, but as a share of our economy.
- Major political battles are fought over which level is the “right” size of government—is it 20.5% or 17.5%? -- but the problem is that we tend to have a “big government” spending program (20.5% of GDP) and a “small government” tax system (17.5% 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 20.5% of GDP and spending at 17.5% -- 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 increased dramatically due to the recession and the financial crisis.
- The projection for the next ten years has a brief period of lowering deficits that reverts back to larger deficits soon after.
Slide: Interest Costs Rise Sharply
- 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 10 year Congressional Budget Office baseline. As interest rates return to normal and the power of compounding works against us, these costs will be the fastest growing program in the federal budget.
Slide: Percent of Debt Held by the Public Owned by Foreigners
- A majority of the interest payments we make flow overseas as a majority of our debt is held by foreign investors.
- This is a change from during the WWII era when our debt reached unprecedented levels, or even during the high deficits of the 1980’s. 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: 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 fully recovers from the recession and Congress maintains their austere caps on discretionary spending, the real problem is that over the long term 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 compensation, federal employee retirement funds, etc., is projected to shrink quite dramatically when measured against the size of the economy.
- Interest on the debt grows rapidly because of a return to average interest rates and the mismatch between the growth in the "big three" and the revenue taken in from the inefficient and inadequate tax system.
Slide: 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.)
- The Medicaid expansion and exchange subsidies are one-time contributors to growth in that they increase rapidly in the next few years, then settle in and grow along with the growth in health care inflation -- cost growth attributable to their beneficiary population is expected to remain more stable than Medicare's.
Slide: 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. Nearly 10,000 individuals become eligible for Medicare every day.
Slide: Americans Are Living Longer and Having Fewer Children
- When you look at how this aging affects entitlement programs, especially Social Security, it is instructive to think of the worker-to-retiree ratio since current benefits are paid for by current workers (one's own benefits are not pre-paid as far as the Federal Budget is concerned). This chart shows how there were five workers supporting 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: 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.
- These numbers assume current levels of immigration, both illegal and legal.
Slide: Medicare Costs Under Alternative Scenarios
- 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 assumes the Affordable Care Act (ACA) cost control and 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: 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 is the main point from the beginning of our talk and the fundamental challenge for our nation's fiscal future.
- Solving this problem is not out of our reach as a nation and numerous bi-partisan commissions made up of current members of Congress, former members, policy experts and business leaders have developed plans that stabilize the debt and even bend that curve of debt back down.
- Thus, action on this challenge is a matter of political will, not policy know how.
Slide: Key Points of Agreement
- The Fiscal Wake-Up Tour and our other grassroots initiatives have 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: 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. One way to get involved and stay informed is to sign up for Concord's Washington Budget Report, a weekly newsletter that has the latest developments on the federal budget and straightforward analysis on major tax and spending issues.