us fiscal policy challenges to a sustainable fiscal future march 2010
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US Fiscal PolicyChallenges to a Sustainable Fiscal Future
March 2010
The Need For a Fiscal Wake-Up Call
• the US accumulated deficit has doubled in the past decade to a mind-numbing $ 13,000bn.
• The budget deficit for 2011 is forecast at $1,300bn, slightly more than 2010 but down from $1,700bn in 2009
• The US second-quarter GDP growth estimate was lowered to 1.6 per cent from 2.4 per cent.
• The US ratio of debt to GDP jumped to 83 per cent and is expected to reach 94 per cent by the year’s end = Insolvency with double-dip recession?
• Most of the defaults are on foreign-currency denominated debt.
• The US only issues bonds in domestic currency and has no foreign currency denominated bonds.
• Using market-derived cost of borrowing as a default meter, the two-year US Treasury is currently yielding only 1/2 per cent.
• The five-, 10- and 30-year Treasuries are at 1.45, 2.69, and 3.75 per cent respectively.
• When these are adjusted for inflation, investors are willing to accept negative yields in return for safety.
• Such historically low rates make it easy for the US to inexpensively raise debt.
• US Treasuries continue to pass the market stress test.
• US Treasuries continue to pass the market stress test.
Composition of Projected FY 2010 Federal Government Revenues and Outlays
(Deficit: $1.35 Trillion)
Outlays: $3.52 trillion
*Includes all appropriated domestic spending such as education, transportation, homeland security, housing assistance, and foreign aid.
Source: CBO January 2010.
Estate & Gift Taxes ($21 billion)
Other Taxes
Corporate Taxes
Social Insurance Taxes
Individual Income Taxes
Revenue: $2.18 trillion
Federal Spending vs. Revenues as a Percent of GDP (FY 1980-2020)
CBO January Baseline Compared to the President’s Budget
Per
cen
tage
of
GD
P
Average outlays: 21.0%
Actual Projected
Average revenues: 18.3%
Percent of Debt Held by the Public Owned by Foreigners (1987-2009)
Bil
lion
s of
Dol
lars
Interest Costs Go Through The Roof
Mandatory spending is consuming a growing share of the budget
1970 1990 2010
62%
31%
7%
40% 45%
15%
39% 55%
6%
Mandatory DiscretionaryNet Interest
Source: Congressional Budget Office, January 2009.
Defense Discretionary Spending as a Percentage of GDP
As
a P
erce
nta
ge o
f G
DP
Social Security, Medicare, & Medicaid as a Percentage of the Federal Budget
All other Federal Spending
$2.09 Trillion
59%
Social Security, Medicare and Medicaid
$1.43 Trillion
41%
America’s Population is AgingPopulation age 65 and Over
Per
cen
tage
of
Pop
ula
tion
Age
d 6
5 an
d O
ver
Health Care Costs are Rising Faster Than the Economy
Per
cen
tage
of
GD
P
Historic Level of
Federal Spending
Historic Level of
Federal Revenues
Social Security, Medicare, Medicaid and Interest Consume All Federal Revenues in under 20 Years
Per
cen
tage
of
Rev
enu
es
Social Security, Medicare and Medicaid Interest
Take Away• Current fiscal policy is unsustainable
• The rising payments on the national debt will force reductions in other budget
priorities such as housing, education or even defence.• the increasing size of debt sales by the US Treasury will start to crowd out bond
offerings for productive investments in the private sector. This will lead to
significant decreases in economic growth
• These two problems cannot be solved simply by raising taxes on the rich – defined
by the Obama administration as taxpayers with adjusted gross incomes of more
than $250,000 per year.
• Given the size of the budget challenge, Congress will have to constrain the growth
of entitlements for Social Security and Medicare as well as find new sources of tax
revenue such as a carbon tax.
• Since entitlement reform is a political hot potato, it would be best accomplished by
a broad package of reforms designed by the bipartisan Budget Commission.