cbo presentation to harvard_2!24!12_final
TRANSCRIPT
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C O N G R E S S I O N A L B U D G E T O F F I C E 2
DeficitsorSurpluses,HistoricallyandAsProjected
inCBOsBaseline(PercentageofGDP)
C O N G R E S S I O N A L B U D G E T O F F I C E
EsAmatesfromTheBudgetandEconomicOutlook:FiscalYears2012to2022(January2012).
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C O N G R E S S I O N A L B U D G E T O F F I C E
WhatPolicyAssump7onsUnderlietheBaselineandthe
Alterna7veFiscalScenario?
BaselineProjec7ons:Currentlaw.
Alterna7veFiscalScenario:- llexpiringtaxprovisions(otherthanthepayrolltaxreducAon)are
extended.
- ThealternaAveminimumtax(MT)isindexedforinflaAonaNer2011.
- Medicarespaymentratesforphysiciansservicesareheldconstantatcurrentlevel.
- TheautomaAcspendingreducAonsrequiredbytheBudgetControlctdonottakeeffect(althoughtheoriginalcapsondiscreAonary
appropriaAonsremaininplace).
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C O N G R E S S I O N A L B U D G E T O F F I C E 4
DeficitsorSurpluses,HistoricallyandAsProjectedinCBOs
BaselineandUndertheAlterna7veFiscalScenario(PercentageofGDP)
EsAmatesfromTheBudgetandEconomicOutlook:FiscalYears2012to2022(January2012).
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C O N G R E S S I O N A L B U D G E T O F F I C E
FederalDebtHeldbythePublic,Historicallyand
ProjectedinCBOsBaselineandUndertheAlterna7ve
FiscalScenario(PercentageofGDP)
C O N G R E S S I O N A L B U D G E T O F F I C E 5
EsAmatesfromTheBudgetandEconomicOutlook:FiscalYears2012to2022(January2012).
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C O N G R E S S I O N A L B U D G E T O F F I C E 6
HarmsofHighFederalDebt
ReducestheamountofsavingdevotedtoproducAvecapitalandthusresultsinlowerincomesthanwouldotherwiseoccur.
Leadstohighinterestpayments,meaningthataddiAonaltaxincreasesorspendingcutsareneededtomakefiscalpolicysustainable.
Makesitharderforpolicymakerstorespondtounexpectedproblems,suchasfinancialcrises,
recessions,andwars.
Increasesthelikelihoodofafiscalcrisis.
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WeCannotGoBacktothePastCombina7onofTax
andSpendingPolicies
gingofthepopulaAon:Thenumberofpeopleage65orolderwillincreasebyaboutone-thirdinthenext10years.
Risingcostsforhealthcare:Duringthepast25years,healthcarespendingperpersoninthiscountryhasincreased
nearly2percentagepointsfasterperyearthanGDPper
person.
Thesefactorsandothersmeanthat,inCBOsprojecAonsfor
2022underthealternaAvefiscalscenario,outlaysforSocial
Securityandthemajorfederalhealthcareprogramsare
12.8percentofGDP,comparedwithanaverageof7.3percent
duringthepast40years.
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WeWillNeedtoAdoptANewCombina7onofTax
andSpendingPolicies
chievingasustainablefederalbudgetwillrequiretheUnitedStatestodeviatefromthepoliciesofthepastseveral
decadesinatleastoneofthefollowingways:
RaisefederalrevenuessignificantlyabovetheiraverageshareofGDP;
Makemajorchangestothesortsofbenefitsprovidedformericanswhentheybecomeolder;or
SubstanAallyreducetheroleoftherestofthefederalgovernmentrelaAvetothesizeoftheeconomy.
Thelastofthesethreewilloccurbytheendofthecoming
decadeundercurrentlawand,toalesserextent,underthe
alternaAvefiscalscenario.
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FederalSpending
partfrominterestpaymentsonthedebt:
Mandatoryspending:primarilybenefitprogramsgovernedbyrulesforeligibilityand
benefitformulas.
DiscreAonaryspending:policymakersdecideeachyearhowmuchmoneytoprovideforgivenacAviAes.
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ComponentsofMandatorySpending,Historically
andUndertheAlterna7veFiscalScenario(PercentageofGDP)
EsAmatesfromTheBudgetandEconomicOutlook:FiscalYears2012to2022(January2012).
0
1
2
3
4
5
6
7
8
1972 1977 1982 1987 1992 1997 2002 2007 2012 2017 2022
ctual Projected
SocialSecurity
OtherMandatory
MajorFederalHealthPrograms
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(11%)
Discre7onaryFundingfor2012:$1,199Billion
Defense
$60BillionNondefense
$529Billion
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0
1
2
3
4
5
6
7
8
1972 1977 1982 1987 1992 1997 2002 2007 2012 2017 2022
Defense
Nondefense
OtherMandatory
Discre7onaryandOtherMandatorySpending,
HistoricallyandUndertheAlterna7veFiscalScenario(PercentofGDP)
C O N G R E S S I O N A L B U D G E T O F F I C E
EsAmatesfromTheBudgetandEconomicOutlook:FiscalYears2012to2022(January2012).OtherMandatoryincludesprogramsdesignedtoprovide
incomesecurity,suchastheSupplementalutriAonssistanceProgramandunemploymentcompensaAon;reArementbenefitsforcivilianandmilitary
federalemployees;benefitsforveterans;supportforagriculture;andotheracAviAes.EsAmatesincorporatetheassumpAonthattheautomaAcspending
reducAonsrequiredbytheBudgetControlctdonottakeeffect,althoughtheoriginalcapsondiscreAonaryappropriaAonsremaininplaceandaremet
throughproporAonalreducAonsindefenseandnondefensediscreAonarybudgetauthority.
ctual Projected
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UndertheAlterna7veFiscalScenario
llfederalspendingapartfromSocialSecurity,themajorfederal
healthcareprograms,andinterestwouldbe7.8percentofGDPin2022thelowestshareinmorethan40yearsandroughlytwo-thirds
ofitsaverageshareoverthatperiod.
Undercurrentlawand,toalesserextent,thealternaAvefiscalscenario,thecountryisontracktosubstanAallyreducemostfederal
acAviAesrelaAvetothesizeoftheeconomycomparedwiththe
experienceofthepastseveraldecades.
ThatsubstanAalreducAonisnotenoughtooffsettheincreased
burdenonthebudgetfromrisingspendingforSocialSecurityandthe
majorfederalhealthcareprograms.Somethingelsemustbechanged
aswell.
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ComponentsoftheFederalBudgetasSharesofGDP:
192-2011Averageand2022Projec7onUnderthe
Alterna7veFiscalScenario(PercentageofGDP)
C O N G R E S S I O N A L B U D G E T O F F I C E
EsAmatesfromTheBudgetandEconomicOutlook:FiscalYears2012to2022(January2012).
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HowLargeDoPolicyChangesNeedtoBe?
TokeepdebtfromrisingrelaAvetoGDP,thedeficitin2022wouldneed
tobeabout3percentofGDPsmallerthanunderthealternaAvefiscal
scenarioorabout$900billionsmaller.Ifchangesinpolicystartedto
takeeffectsoonbutwerephasedingradually,interestsavingsmightbe
about$150billion.
Then,ifotherspendingwasleNattwo-thirdsofitsaverageshareofGDPduringthepast40years,thechangesinSocialSecurity,healthcare
programs,andtaxeswouldneedtototalabout$750billionin2022.
IfthechangesoccurredenArelyinSocialSecurityandhealthcareprograms,thecutswouldbeaboutone-quarterofwhatwouldbespent
inthosecategorieswithoutpolicychanges.Ifthechangesoccurred
enArelyintaxes,theincreaseswouldbeaboutone-sixthofwhatwould
becollectedintaxeswithoutpolicychanges.
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C O N G R E S S I O N A L B U D G E T O F F I C E
OneApproach
(andSomeSpecificOp7ons):
ReduceSpendingonSocialSecurityandthe
MajorFederalHealthCarePrograms
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C O N G R E S S I O N A L B U D G E T O F F I C E
0
1
2
3
4
5
6
1972 1977 1982 1987 1992 1997 2002 2007 2012 2017 2022
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SpendingonSocialSecurityandMajorFederalHealth
CarePrograms,HistoricallyandUndertheAlterna7ve
FiscalScenario(PercentageofGDP)
SocialSecurity
Medicare
Medicaid,CHIP,andExchangeSubsidies
andRelatedSpending
EsAmatesfromTheBudgetandEconomicOutlook:FiscalYears2012to2022(January2012).
ctual Projected
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C O N G R E S S I O N A L B U D G E T O F F I C E
IncreasetheEligibilityAgesforSocialSecurityand
Medicare
PolicyOp7on AnnualBudgetImpactatEndofDecade*
SomeImplica7ons
RaisetheMedicare
eligibilityagegradually
from65to67
$32Billion
Wouldresultindelayed
accesstoMedicareformost
people;manyoftheaffectedpeoplewouldpaymorefor
healthcare
RaisethefullreArement
ageforSocialSecurity
graduallyfrom67to70
$31Billion Wouldresultinreduced
benefitsoveralifeAme
*EsAmatesfromReducingtheDeficit:RevenueandSpendingOpCons(March2011).EsAmateisfor2021.
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C O N G R E S S I O N A L B U D G E T O F F I C E
PolicyOp7on AnnualBudgetImpactatEndofDecade*
SomeImplica7ons
BaseSocialSecuritycost-
of-livingadjustmentson
thechainedCPI
$22Billion Wouldreducebenefits
especiallyforolder
beneficiaries
LinkiniAalSocialSecurity
benefitstoaverageprices
insteadofaverageearnings
$41Billion Wouldnolongerallow
beneficiariestoshareinoverall
economicgrowth(althoughaverageinflaAon-adjusted
benefitswouldnotdecline
overAme)
SomeOtherWaystoCutSocialSecuritySpending
*EsAmatesfromReducingtheDeficit:RevenueandSpendingOpCons(March2011).EsAmateisfor2021.
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C O N G R E S S I O N A L B U D G E T O F F I C E
SomeOtherWaystoCutFederalHealthCareSpending
PolicyOp7on AnnualBudgetImpact
atEndofDecade*
SomeImplica7ons
Convertthefederalshareof
Medicaidspaymentsfor
long-termcareservicesinto
blockgrantswithgrants
indexedtochangesintheECI
$58Billion WouldshiNsomeofthe
burdenandrisksofgrowing
Medicaidcoststothestates
Increasecost-sharingin
Medicare(includingchanges
inMedigap)
$13Billion WouldstrengthenincenAves
formoreprudentuseof
medicalservicesbutwould
boostcost-sharingburden
onbeneficiaries
Increasethebasicpremium
forMedicarePartBfrom25
percentto35percentofthe
programscosts
$40Billion Wouldreducedisposable
incomeformanyPartB
enrollees
*EsAmatesfromReducingtheDeficit:RevenueandSpendingOpCons(March2011).EsAmateisfor2021.
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C O N G R E S S I O N A L B U D G E T O F F I C E
AnotherApproach
(andSomeSpecificOp7ons):
IncreaseTaxes
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C O N G R E S S I O N A L B U D G E T O F F I C E 23
RevenuesProjectedinCBOsBaselineandUnderthe
Alterna7veFiscalScenario(PercentageofGDP)
EsAmatesfromTheBudgetandEconomicOutlook:FiscalYears2012to2022(January2012).
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C O N G R E S S I O N A L B U D G E T O F F I C E 24
SelectedMajorTaxExpendituresin2012,Compared
withOtherCategoriesofRevenuesandOutlays(PercentageofGDP)
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C O N G R E S S I O N A L B U D G E T O F F I C E
SomeWaystoReduceTaxExpenditures
PolicyOp7on AnnualBudgetImpactatEndofDecade* SomeImplica7ons
Graduallyeliminatethe
mortgageinterest
deducAon
$75Billion WouldimprovetheallocaAon
ofresourcesintheeconomy
butcoulddelaytherecoveryof
thehousingsectorandreducetherateofhomeownership
EliminatethededucAon
forstateandlocaltaxes
$107Billion Wouldtakeawayasubsidyfor
stateandlocalgovernments
butcould(dependingonones
views)hinderequityinthetaxsystem
*EsAmatesfromReducingtheDeficit:RevenueandSpendingOpCons(March2011).EsAmateisfor2021.
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C O N G R E S S I O N A L B U D G E T O F F I C E
PolicyOp7on AnnualBudgetImpact
atEndofDecade
SomeImplica7ons
llowcertainincometaxand
estateandgiNtaxprovisions
toexpireasscheduledon
December31,2012,anddo
notindextheMTfor
inflaAon
$633Billion* Wouldreducepeoples
incenAvestoworkandsave,
andcauseeconomic
resourcestobeallocatedless
efficiently;alsowouldalter
thedistribuAonoftaxes
acrosshouseholds
llowlowerincometaxrates
onincomesinexcessof
$250,000forcouplesfiling
jointly($200,000forother
filers)originallyenactedin2001toexpireasscheduled
onDecember31,2012
Between
$100and$150Billion**
Sameasabovebuttoalesser
extent
SomeOtherWaystoRaiseTaxes
*EsAmatesfromTheBudgetandEconomicOutlook:FiscalYears2012to2022(January2012).EsAmatefor2022.
**RoughcalculaAonbasedonesAmatesfromAnAnalysisofthePresident'sBudgetaryProposalsforFiscalYear2012(pril2011)andTheBudgetandEconomicOutlook:FiscalYears2012to2022(January2012).
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C O N G R E S S I O N A L B U D G E T O F F I C E
Summary
Toputthefederaldebtonasustainablepath,weneedtochangepoliciesinsignificantways.
llfederalspendingapartfromSocialSecurity,themajorfederalhealthcareprograms,andinterestisontracktobesmallerrelaAve
toGDPby2022thanatanypointinthepast40yearsandonly
abouttwo-thirdsofitsaverageshareofGDPduringthatperiod.
Ifthatoutcomeisachieved,pungfederaldebtonasustainablepathsAllrequireschangesinSocialSecurity,themajorfederalhealth
careprograms,andtaxesthatamounttoabout$750billionin2022.
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C O N G R E S S I O N A L B U D G E T O F F I C E
Summary(cont.)
Tomeetthattargetfor2022:
Ifweextendtheexpiringtaxprovisions(otherthanthepayrolltax
reducAon)andindextheMTforinflaAon,asdescribedinthe
alternaAvefiscalscenario,spendingonSocialSecurityandthe
majorfederalhealthcareprogramswouldneedtobecutbyabout
one-fourth.Becausemostsuchspendinggoestopeopleoverage65,acutofthatmagnitudewouldrepresentamajorchangetothe
sortsofbenefitsprovidedformericanswhentheybecomeolder.
IfwedonotchangespendingonSocialSecurityandthemajorfederalhealthcareprograms,taxrevenuewouldneedtobe
increasedbyaboutone-sixth.Suchanincreasewouldraisefederal
revenuessignificantlyabovetheiraverageshareofGDPinthepast
severaldecades.
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C O N G R E S S I O N A L B U D G E T O F F I C E
Summary(cont.)
Ourcountryfacesfundamentalchoicesaboutfederalbenefitsandservicesandaboutthefederaltaxesneededto
payforthem.Unlesswecutfederalspendingapartfrom
SocialSecurityandthemajorhealthcareprogramsbelow
theunusuallylowshareofGDPitisalreadyprojectedtoreachbytheendofthecomingdecade,stabilizingfederal
debtrelaAvetoGDPwillrequireustocutspendingon
SocialSecurityandfederalhealthcareprogramsbyabout
one-quarter,raisetaxesbyaboutone-sixth,ordosomecombinaAonofthoseapproaches.
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