fiscal austerity & the federal system (paul posner, 2013 abfm conf)
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Fiscal Austerity and the Federal System
Paul L. PosnerGeorge Mason University
Current U.S. federal fiscal system is unsustainable
• Major shifts in social and economic forces generating revenue and spending pressures – Globalization– Advancing technologies– Knowledge based economy– Aging of population– Rise in health care costs
BABY BUST, BABY BOOM, BABY BUST
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
2075
2080
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0 Fertility Rate (Births per woman)
Note: Projections based on intermediate assumptions of the 2002 Trustees’ reports.
Source: The 2002 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.
LABOR FORCE GROWTH
197519761977197819791980198119821983198419851986198719881989199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120122013201420152016201720182019202020212022202320242025202620272028202920302031203220332034203520362037203820392040204120422043204420452046204720482049205020512052205320542055205620572058205920602061206220632064206520662067206820692070207120722073207420750
1
2
3
Percent change (5-year moving average)
Note: Projections based on intermediate assumptions of the 2002 Trustees’ reports.
Source: The 2002 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.
Medicare Beneficiaries
SOURCE OF LONG-TERM GROWTH(CBO’S ALTERNATIVE BASELINE, PRIMARY SPENDING AS A PERCENT OF GDP)
Source: Congressional Budget Office, The Long-Term Budget Outlook (June 2009), http://www.cbo.gov/doc.cfm?index=10297. Note: The Alternative long-term baseline follows CBO’s published 10-year baseline projections with some changes to the economic and demographic assumption which incorporates policy changes that are widely expected to occur and that policymakers have regularly made in the past.
FACTORS EXPLAINING FUTURE FEDERAL SPENDING ON MEDICARE, MEDICAID, AND SOCIAL SECURITY( AS A PERCENTAGE OF GDP)
Source: Congressional Budget Office, The Long-Term Budget Outlook (June 2009), http://www.cbo.gov/doc.cfm?index=10297.
All Proposals Exceed the 2014 Cap
2012Enacted
2013After
Sequester
2014Caps
2014House
2014President& Senate
DefenseDiscretionary
554 509 498 552 552
Non-DefenseDiscretionary
517 477 469 415 506
Total 1,071 986 967 967 1,058
Source: Barry Anderson, National Governors Association. August, 2013.
Long Term Federal Debt
State sales tax bases have been eroding
14
The Great Recession and States
Long Term State and Local Fiscal Outlook
State and Local Fiscal Gap
Composition of State and Local Spending
The evolution of fiscal interdependence and conflict
• Dual Federalism• Cooperative Federalism• Coercive Federalism• Contentious Federalism
20
State Revenues: Key and Increasing Role of Federal Grants
Source: GAO Analysis of U.S. Census Bureau Government Finance Statistics.
Note: The components of general revenue are own-source revenues (taxes, charges, miscellaneous revenues, etc.) and intergovernmental revenues (revenues received from federal and local government). These data represent aggregates for the sector. State revenue sources vary considerably by state. For example, seven states have no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two others, New Hampshire and Tennessee, tax only dividend and interest income.
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20110
100
200
300
400
500
600
TRENDS IN FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS(Outlays in billions of dollars)
Payments for IndividualsPhysical CapitalOther GrantsTotal
Year
Cons
tant
(FY
2005
) Dol
lars
Federal Grants to State and Local Governments
• Categorical – Over 900 programs• Block Grants – 25 programs• General purpose assistance – 0 programs• Tax expenditures
– Deductibility for state and local taxes– Tax exemption for state and local bonds
Tools of Regulatory Federalism
• Direct order mandates• Program Specific Grant Conditions• Crosscutting Requirements• Crossover Sanctions• Preemptions
– Total – Partial
Centralizing Forces
• National and global economy• Shifting nature of political incentives• Growth of more competitive national media• Interest group activism• Collapsing constraints on the federal role• Chronic federal fiscal pressures• Eclipse of federalism as a primary value
Number of Federal Preemption Statutes Enacted per Decade
State Driver’s Licensure: Growing Federal Encroachment
• Air quality requirements• Motor voter registrations• Drunk driving requirements• Commercial drivers license requirements• Real ID Act
Emergence of State Resistance
• No Child Left Behind• Real ID• Recovery Act programs• Health Reform
Growing Role of States
Inflection Point? Fiscal Austerity and the Intergovernmental System
• Fiscal Pressures Sweep in From Outside the Beltway• The Three Fiscal Commissions• Conservative Tide in the Congress and the States• Federal Retrenchment May Affect The Federal Role
– Banker for Recessions– Federal Grants– Regulations– Tax expenditures– Tax policy
Centralizing Effects of Austerity for the Federal System
• Growing Federal Reliance on States for Implementation of Federal programs
• Growing Federal Reliance on Mandates• Growing Dependence of States on Federal
Grants• Potential Nationalization of State Tax Sources
Centralizing Effects of Deficit Commission Proposals
Reduced discretionary budgets will prompt cuts in federal grants
Tax expenditures reexaminedState and local deductionTax exempt bonds
Cost shifts and mandates Extend social security coverage
Revenue nationalization - VATCap and consolidate
Medicaid long term careHomeland security grants
Federalism in an Age of Austerity
Go it alone federalismPartial and ineffective solutionsPublic confusion
Cost shiftingUnfunded mandatesFiscal substitution
Fiscal coordinationWin-win strategiesVATSorting out responsibilities
Barriers to Intergovernmental Collaboration
• Weak electoral incentives for national leaders• Conflict among state and local officials• Insufficient focus on long term• Absence of national intergovernmental
institutions
Expand States’ Capacity to Cope in An Age of Austerity
• Strengthen capacity of state groups to represent longer term states’ interests
• Rainy day fund expansions• Long term budgeting• Enhance collective capacity for joint national, not
federal, programs– Sales tax simplification– Insurance standards– Potential collective action for pension solvency?
Future Prospects for Reform: Intergovernmental Institutions:
• 1980– ACIR– OMB– GAO– Congressional IGR
subcommittees– Academy for State and
Local Government
• 2010– CBO cost estimation– GAO
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