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Averting a FiscalCrisis
The Committee for a Responsible Federal
Budget
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Deficit Projections
Note: Estimates based on CRFB Realistic Baseline.
(Percent of GDP)
1991-2011 Average Deficit:2.8%
2012-2021 Average Current PolicyDeficit: 4.3%
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Gap Between Revenue and Spending
Note: Estimates based on CRFB Realistic Baseline.
(Percent of GDP)
Avg. Historical Spending (1970-2010): 20.8%
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Avg. Historical Revenues (1970-2010): 18.0%
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Components of Revenue and Spending
Revenues and Financing Outlays
Total Outlays = $3.597Trillion
2011
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Total Revenues =$2.314 Trillion
Total Financing =$3.598 Trillion
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Debt Projections
Note: Estimates based on CRFB Realistic Baseline.
(Percent of GDP)
Realistic Projections2010: 62%2025: 90%2040: 145%2080: 399%
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CRFB Realistic Debt
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Consequences of Debt
Crowding Out of publicsector investment leading to
slower economic growth
Higher Interest Paymentsdisplacing other governmentpriorities
Intergenerational Inequityas future generations pay forcurrent government spending
Unsustainable Promises ofhigh spending and low taxes
Uncertain Environment forbusinesses to invest and
households to plan6
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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 tomanage its budget and the government would lose its ability toborrow 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 federalbudget must occur [if we dont act in advance] the needed
fiscal adjustments will be a rapid and painful response to alooming or actual fiscal crisis.
-Ben Bernanke, Chairman of the Federal Reserve
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Debt Drivers
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Short-Term Long-Term
Economic Crisis(lost revenue andincreased spending fromautomatic stabilizers)
Economic Response(stimulus spending/taxbreaks and financialsector rescue policies)
Tax Cuts
(in 2001, 2003, and 2010) War Spending
(in Iraq and Afghanistan)
Rapid Health Care CostGrowth(causing Medicare andMedicaid coststo rise)
Population Aging(causing Social Securityand Medicare costs torise, and revenue to fall)
Growing Interest Costs(from continued debtaccumulation)
Insufficient Revenue(to meet the costs offunding government)
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Federal Spending and Revenues (Percent of GDP)
Growing Entitlement Spending
Note: Estimates based on CRFB Realistic Baseline.
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Why Is Entitlement Spending Growing?
0.08
2.08
4.08
6.08
8.08
10.08
12.08
Drivers of Entitlement Spending Growth (Percent of GDP)
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36%
64%
56
%
44%
Source: CBO Long-term Budget Outlook, 2011.
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Why Is Federal Health Spending Increasing?
The Population Is Aging due toincreased life expectancy and
retirement of the baby boomgeneration, adding more beneficiariesto Medicare and Medicaid
Per Beneficiary Costs Are Growingfaster than the economy in both the
public and private sector. Causes ofthis excess cost growth include:
Americans Are Unhealthy whencompared to populations in similareconomies
Americans Are Wealthy and Willingto Pay More
Fragmentation and Complexitybetween insurers, providers, andconsumers make normal marketcompetition difficult
Incentives Are Backwards by hidingtrue costs of care throu h insurance and11
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Health Care Spending by Country
Percent of GDP (2008)
Source: 2008 Data from the Organization for Economic Cooperation andDevelopment.12
0
2
4
6
8
10
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Number of Workers for Every Social Security Retiree IsFalling
Source: 2011 Social Security Trustees Report.
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1950 1960 2011 2035
16:1
5:1
3:1
2:1
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Living Longer, Retiring Earlier
Source: Social Security Administration and U.S. Census Bureau.
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Looming Social Security Insolvency
Social Security Costs and Revenues (Percent of TaxablePayroll)
Source: 2011 Social Security Trustees Report.
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PayableBenefits
Revenues
ScheduledBenefits
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Interest as a Share of the Budget(Percent of GDP)
Note: Estimates based on CRFB Realistic Projections.
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Total Spending = 24%of GDP
Total Spending = 27%of GDP
Total Spending = 34%of GDP
2010 2030 2050
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Insufficient Revenue
Unpaid for Tax Cuts in 2001,2003, and 2010 lowered revenue
collection without makingcorresponding spending cuts ortax increases to offset thebudgetary effect
Spending in the Tax CodeCosts $1 Trillion annually in lostrevenues through so called "taxexpenditures," which make thetax code more complicated, less
efficient, and force higher rates
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E i S di Th h th T C d
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Excessive Spending Through the Tax Code(Tax Expenditures)
Tax Expenditures as aPercent of Primary
Spending if Included in theBudget
Large Tax Expendituresand Their 2011 Costs
(billions)Employer Health InsuranceExclusion
$174
Mortgage Interest Deduction $89
401(k)s and IRAs $77
Earned Income Tax Credit $62
Special Rates for Capital Gains andDividends
$61
State & Local Tax Deduction $57
Charitable Deduction $49
Child Tax Credit $45
Source: Joint Committee on Taxation.
Source: Office of Management and Budget.
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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 $1.7 trillionthrough 2020
Social Security
Progressive benefit changes,retirement
age increase, tax increase for highearners
Health Care Spending
Cuts to providers, lawyers, drugcompanies, & beneficiaries totaling
$400 billion
Other Mandatory Programs
Reforms to farm, civilian/militaryretirement, & other programs saving$200 billion
Tax Reform and Revenue20
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The Bowles-Simpson Fiscal Commission Plan
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(Debt as Percent of GDP)
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2
4
6
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10
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4
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Its Time for a Fiscal Reform Plan
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Reasons to Enact a PlanSooner Rather than Later
Size of Adjustment to Close 25-year FiscalGap,
Depending on Start Year (Percent of GDP)
Allows for gradual phasein
Improves generational
fairness Gives taxpayers
businesses, andentitlement beneficiaries
time to plan Creates announcement
effect to improvegrowth
Reduces size ofnecessary adjustment
-0.02 0 0.02 0.04 0.06 0.08 0.1 0.12
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The Time For Action Is Now
If not addressed, burgeoningdeficits will eventually lead toa fiscal crisis, at which pointthe bond markets will forcedecisions upon us. If we donotact soon to reassure themarkets, the risk of a crisiswill increase, and the options
available to avertorremedythe crisis will both narrow andbecome more stringent.
-Erskine Bowles and Sen. AlanSimpson, Former co-chairs of the
National Commission on Fiscal