the federal budget outlook matt fiedler center on budget and policy priorities march 1, 2007
TRANSCRIPT
The Federal Budget Outlook
Matt Fiedler
Center on Budget and Policy Priorities
March 1, 2007
Outline
• Recent budget trends
• The President’s budget proposals
• This year’s Congressional debate
• Dealing with the long-term fiscal problem
I. Recent Budget Trends
From Large Surpluses to Large Deficits in Just 6 Years
$5.6
-$2.8
-$5
-$3
-$1
$1
$3
$5
$7
Jan. 2001 Projection Jan. 2007 Projection
Trillions of dollars
Cumulative Surpluses/Deficits, 2002-2011
Source: CBPP calculations based on Congressional Budget Office data.
Surplus
Deficit
Legislation Adding to Deficits: Mostly Tax Cuts and Defense, Not
Domestic ProgramsCost, 2002-2011, of policy changes since January 2001
49%
36%
10%5%
Tax Cuts
Defense, Homeland Security, and International
Entitlements
Domestic Discretionary (except Homeland Security)
49%
36%
10%
5%
Source: CBPP calculations based on CBO data. Assumes extension of the President’s tax cuts, continuation of AMT relief, a gradual phasedown of operations in Iraq and Afghanistan, and defense spending in line with the President’s FY 2007 budget.
Tax Cuts Cost More Than MostAgency Budgets
EPA
Housing & Urban Development
Education
All tax cuts
Veterans' Affairs
Tax cuts for the top 1%
$0
$50
$100
$150
$200
$250
$300
$350
Billions of dollars
Source: CBPP calculations based on Treasury Department, Congressional Budget Office, Joint Committee on Taxation, and Urban-Brookings Tax Policy Center data.
2006 Agency Budgets, Tax Cuts if Fully in Effect in 2006
2.9%
3.0%
3.1%
3.2%
3.3%
3.4%
3.5%
3.6%
2001 2002 2003 2004 2005 2006 2007
Since 2001, Funding for Domestic Discretionary Programs Has Fallen
as a Share of the Economy
Source: CBPP calculations based on CBO data. To avoid distortions, figures do not include funding for homeland security or hurricane relief.
0.0%
Domestic Discretionary Funding as a Share of the Economy
The Current Path of Federal Revenues and Program Spending Is
Unsustainable
0%
10%
20%
30%
2006 2017 2028 2039 2050
Share of GDP
Defense
Social Security
Medicare
Federal Revenues(If Recent Tax Cuts
Are Extended)
Medicaid
Other Domestic
Source: CBPP projections based on CBO data.
Last 25 Years Have Seen Rapid Income Growth at the Top, Virtually
No Growth at the Bottom
2%11% 15%
23%
63%
153%
0%
45%
90%
135%
180%
Bottom Fifth SecondFifth
Middle Fifth Fourth Fifth Top Fifth Top 1%
Source: CBPP calculations based on Congressional Budget Office data.
Growth in average real pre-tax income, 1979-2004
II. The President’s Budget Proposals
Key Components of the President’s Fiscal Year 2008
Budget Proposal• Permanent extension of the 2001 and 2003 tax cuts
• Large cuts in domestic discretionary programs that grow deeper over time; large increases in security spending
• Cuts in Medicaid that shift significant costs to states
• Proposed funding levels for the State Children’s Health Insurance Program that would likely force states to drop children from the program
• Misses the opportunity to use this year’s reauthorization to invest in the Food Stamps Program
Overall Effects of the President’s Fiscal Year 2008
Budget Proposal
• According to OMB’s own documents, the budget would increase deficits in each of the next five years
• Deficits increase despite domestic cuts due to the defense increases and large tax cuts included in the budget
• Combination of large tax cuts and domestic cuts would worsen recent trends toward increased income inequality
Average Value of the 2001 and 2003 Tax Cuts for Households in
Pennsylvania, 2007
Source: Citizens for Tax Justice
$75 $690$3,750
$41,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
Lowest 20 Percent(Avg. Income
$11,000)
Middle 20 Percent(Avg. Income
$41,000)
Top 20 Percent(Avg. Income
$175,000)
Top 1 Percent(Avg. Income $1.0 Million)
Cuts in Domestic Discretionary Programs Would Hit Pennsylvania
Hard
K-12
Education-$70 M
Vocational and
Adult Education-$37 M
Head Start
-$22 M
Public Housing
Capital Fund-$37 M
Community
Development Block Grant
-$59 M
Community Services
Block Grant-$29 M
LIHEAP-$35 M
-100
-75
-50
-25
0
Source: CBPP calculations based on OMB documents.
Cuts in Pennsylvania in 2012 (millions of dollars)
President’s Medicaid Proposals, 2008-12:
Budget Proposals Shift Federal Costs to States
86%14%
Proposals that shift costs to states= $21.0 billion infederal reductions
Proposals that reduce both federaland state costs = $3.4 billion in federal reductions and $2.6 billion in state reductions
Source: OMB and HHS budget documents.
III. This Year’s Congressional Debate
The Outlook for Discretionary Programs
• President proposed a big increase in security spending, and he is likely to get much of what he asked for
• There appears to be growing support for making substantial investments in domestic programs
• To accommodate both, the ceiling for discretionary funding set in the budget resolution must be well above baseline
• Without a high enough ceiling for overall discretionary, crucial investments in low-income housing, education, environment, etc. will be squeezed out
A Major Change From Prior Years:
PAYGO Rules
• PAYGO requires offsets for tax cuts or entitlement increases; “if something is worth doing, it’s worth paying for”
• Means that investments in SCHIP, Food Stamps, and other areas will require offsets
• But PAYGO is the best defense against extension of the President’s tax cuts (at a cost $3.0 trillion 2008-2017)
• Tax cuts of that size would starve programs of the revenue they need to survive; maintaining a strong PAYGO rule is a top priority
Even Extending Just “Middle-Class”
Tax Cuts Is Costly
10 percent bracket $312 billion
Child tax credit $219 billion
Marriage penalty relief $53 billion
“Middle Class” Tax Cuts Subtotal $585 billion
Extend AMT relief (not repeal) $569 billion
TOTAL, “Middle Class” and AMT $1.15 trillion
Source: Joint Committee on Taxation, CBO
Cost of Extending Tax Cuts, 2008-2017
Extending Higher-Income Tax Cuts Adds Substantially to
Costs
“Middle Class” and AMT Subtotal $1.15 trillion
Extend Remaining 2001 and 2003 Tax Cuts
$1.35 trillion
Accompanying AMT Relief $472 billion
TOTAL, 2001 and 2003 Tax Cuts and AMT Relief
$3.0 trillion
Cost of Extending Tax Cuts, 2008-2017
Source: Joint Committee on Taxation, CBO
Debt With and Without Unpaid for Extension of Recent Tax Cuts
0%
50%
100%
150%
200%
250%
2000 2010 2020 2030 2040 2050
Debt as a Share of the Economy
Additional debt if tax cuts are extended
Debt if tax cuts expire
Source: CBPP projections based on CBO data.
Cost of AMT Repeal Dwarfs Cost of Maintaining Current Funding Levels
for Important Programs
$0
$25
$50
$75
$100
$125
AMT Repeal K-12 andVocationalEducation
Veterans'Medical Care
Student Aid
Source: Tax Policy Center, CBO. Costs shown are 2006 discretionary funding adjusted for inflation.
Cost in Billions, 2010
More Than Half the Cost of AMT Repeal Goes to Shield Highest-Income Households From Tax
$0
$25
$50
$75
$100
$125
Source: Urban-Brookings Tax Policy Center
Cost in Billions, 2010
Cost of ExcludingHouseholds WithIncomes Below
$100,000
Cost of ExcludingHouseholds WithIncomes Below
$200,000
Cost of Repeal
Goals for Tax Policy This Year
Core Goal
• Make sure that budget resolution and all tax legislation (including AMT reform) adhere to PAYGO
Major Challenges
• Budget resolution may show large surpluses after 2010, creating tremendous pressure for unpaid for tax cuts in Senate
• AMT “patch” may be under consideration at the end of the year; some will want to waive PAYGO
The President’s SCHIP Proposals
• Reauthorizes SCHIP for five years at baseline levels of $5.04 billion per year.
• Provides additional $4.8 billion to states, above the baseline funding levels, starting in 2009; presumably distributed to shortfall states.
• Accelerates the redistribution of unspent SCHIP funds, reducing from 3 years to 1 year the time states have to spend their annual allotments. This helps to maximize use of available SCHIP funds, partially addressing federal funding shortfalls.
• Reduces the federal match for certain beneficiaries in SCHIP – namely, parents and children above 200 percent of poverty – to the regular Medicaid match.
• Leaves states with a $7 billion shortfall over five years.
Goals for SCHIP Reauthorization
Growing bipartisan support for:
• Covering immediate (FY 07) and the 5 year federal funding shortfall ($13.4 billion) affecting most states by 2012.
• Providing funding to states to cover, at a minimum, those children who are eligible for SCHIP and Medicaid but not enrolled (7 of 10 uninsured children).
• Preserving current state flexibility in determining income limits for SCHIP. Provide financial support, as resources allow, to support states’ (e.g. PA’s) use of this flexibility to cover more kids.
IV. Dealing with the Long-Term Fiscal Problem
Likely Consequences of Unbalanced Approach to Deficit Reduction
(in Which Large Parts of the Budget Are Off the Table)
• Large cuts over time in programs for the poor.
• Increases in the number of uninsured Americans.
• Federal government may be unable to fulfill some core functions.
• More costs shifted to states.
The Goal: Balanced Approach To Deficit Reduction
(in Which All of the Budget Is On the Table)
• Balanced approach would include revenue increases as well as spending cuts.
• Deficit-reduction measures would focus on “weak claims,” not “weak clients.”
• Balanced approach was taken in 1990 and 1993 by Presidents Bush and Clinton.
Rising Health Costs are the Main Driver of Growth in the “Big
Three”
0%
2%
4%
6%
8%
10%
2007 2050
0%
2%
4%
6%
8%
10%
2007 2050
Demographic changesHealth cost growth faster than economic growth
Sources of cost growth in the “Big Three” as a share of GDP
Medicare
0%
2%
4%
6%
8%
10%
2007 2050
Medicaid Social Security
Source: CBPP calculations based on CBO data.
The Big Enchilada: The U.S. Health Care System
• The largest factor behind the grim budget forecast is the rising cost of Medicare and Medicaid.
• The rising costs of these programs essentially reflect the rapidly rising costs in the entire U.S. health care system.
• To cut future costs in Medicare and Medicaid sharply without restraining costs in the health care system as a whole would necessitate draconian cuts in these programs.
• Thus, the key to addressing the future implosion of the budget is to reform the U.S. health care system, a daunting task given the powerful economic interests involved.