the u.s. fiscal situation (alison acosta fraser)

8/7/2019 The U.S. Fiscal Situation (Alison Acosta Fraser)

1/18

The U.S. Fiscal Situation:Tough Choices Ahead

Alison Acosta Fraser The Heritage Foundation

May, 2006


2/18

Spending driven by entitlements threatenslong-term fiscal stability

MedicareMedicaid

Social SecurityDefense

OtherInterest Taxes

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 20500%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Source: The Heritage Foundation's Interactive Budget Calculator using CBO and Trustees Data.

Federal Spending and Revenue as a Percentage of GDP with Optimistic Discretionary Assumptions


3/18

Under current trends federal spendingconsumes of the economy

MedicareMedicaid

Social Security

Defense

Other

Interest Taxes

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 20500%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Defense and "Other" Spending as a Constant Share of GDP


4/18

H istory suggests a natural level of revenueregardless of rate

Top r l I i i l I ome Tax ates and

eceipts

Individual Income Tax

ate

Income Tax

eceipts as a ercentage o f

6

6 6

Top Individual Tax

ate (

ercentage

Source :

ates from J oint ommittee on Taxation publication #J X-6- ;

eceipts from Y istorical Tables, udget o f the U nited States overnment, Table . .


5/18

Future tax levels trend upward anddont come close to resolving the spending problem

10%

12%

14%

16%

18%

20%

22%

24%

26%

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Long - r r l nue e r en t ge of

u t E i r e nde r u rr en t Law

ush ax u t s ade e r anen t

ou r e : ! " # Long - $ e r % " udge t # u tl ook , & ecembe r 2005 , ( cena r io 2 & a t a)

is t o r ica l l eve l of t axa t ion


6/18

Entitlements crowd out everything else andcollide with historical level of taxes

Med i ' ( r e

Med i ' ( i )

0 1 ' i ( l 0 ecu rit 2

3 i 4 t 1 ri ' ( l Leve l 1 f5

( x 6 evenues

0%

5%

10%

15%

20%

25%

1962 1972 1982 1992 2002 2012 2022 2032 20420%

5%

10%

15%

20%

25%

Sou r ' e : Spend i 7 g ( 7 ) 6 evenues fr 1 m 8 9 @ L 1 7 g -5

e rm 9 A ) ge t @ A tl 1 1 k , B ecembe r 2005 ( Scena ri 1 2 B ( t ( ) , 2006 Soc i ( l Secu rit 2 ( 7 ) Med i ' ( r e

5

r A 4 t ees 6 epo rt.

r ee Majo r E titl emen t and a x eve nu es as a e r e n t a ge o f


7/18


8/18

Choice 1: Balanced Budget

ConsiderationsBy 2050, federal tax revenue will grow fromabout 17% of GDP today to about 30%.

With State and local taxes total taxation would be about 40% of GDP.

By comparison: Germany 36%, TheNetherlands 39%, UK 36%, Greece 36%,France 44%.

What about economic consequences?


9/18

W hat if European-level taxes = European-level growth?

3 .3%

2 . C %

2 .3%

1 . D %

2 .2%

1 . E %

1 . D %

2 . E %

2 . D %

3 . E %

3 . D %

U. F . F G eden F r H I P e Ge r Q H I R S U-15

Real GDP Growth ve r Ten -y ea rs (1994-2004 )

F ou r P e : T S U D in Figu res : 2005 edition .


10/18

Slower economic growth = slower income growth

$ 39,700

$ 30,400$ 29, 6 00

$ 28,500 $ 28,700

$ 30,533

$ 15,000

$ 20,000

$ 25,000

$ 30,000

$ 35,000

$4 0,000

$4 5,000

U. V . V weden F r W X Y e Ge r ` W X y EU-15 a kl W b c ` W

V c u r Y e : d c unt ry GDP e W ta f r c ` a EC D in Figu res : 2005 edition ; V tate GSP e W ta f r c ` f EA.

GDP pe r Ca pit a f r 200 4 (Using C u rr ent PPPs )


11/18

Slower economic growth = slower job creation

5 .5%

6.6 %

10 .1%9 .9%

8 .3%

2 .0%

3 .0%

4 .0%

5 .0%

6. 0%

7 .0%

8 .0%

9 .0%

10 .0%

11 .0%

U. g . g weden F ranc e Ge r h any EU-15

Sou rce : i EC D i n Figu res : 2005 editio n .

Un emplo ym e n t Ra te f o r 200 4


12/18

Choice 2: H old taxes constant and let deficit rise

Medic areMedic aid

Soci al Security

Defe ns e

Other

Int erestTax es

0

5

1015

20

25

30

35

40

45

50

1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

0

5

1015

20

25

30

35

40

45

50

Sourc e: The H e rit age Found a tion's Int e racti v e Bud ge t C a lcul a tor usin g CB O and Trust ee s Da ta .

F ederal Sp endin g Wit h Rea listic Discr etion ary Sp endin g

And Historic al Lev el o f Tax Rev enu e


13/18

P ast debt has not been closely linked to interest ratesF ederal Debt as a Percentage o f DP and Real Interest on a -Y ear Treasury Security

Real interest on a p q -year Treasury

Security

Debt ( r eld by Public)

-4 %

-2%

0%

2%

4 %

6 %

8%

10%

1980 1985 1990 1995 2000

0%

10%

20%

30%

40 %

5 0 %

6 0 %

Source : s conomic Report o f the President, 2 00 6 , Tables t - u 9 , t - u 3 , and t -6 3 .


14/18

But future deficits will be unprecedentedF ederal De f icit as a Percentage o f DP

F ederal De f icit

Historical v

w erage

-5%

0%

5%

10%

15%

20%

25%

19 6 2 1972 1982 1992 2002 2012 2022 2032 20 4 2

Source : CBO x ong -Term B udget O utlook, December 2005 , ( Scenario 2 Data ) .


15/18

Choice 3: Let entitlements preempt other spending

Me d i y a re

Me d i y a id

Soc ia l Sec u rit y

is t o ri y a l Leve l o fTa x eve nu e s

0%

5%

10%

15%

20%

25%

1962 1972 1982 1992 2002 2012 2022 2032 20420%

5%

10%

15%

20%

25%

Sou r y e : Spe nd in g and eve nu e s fr o m CBO Lon g -Te rm Bud ge t Ou tl oo k , ecembe r 2005 ( Sce na ri o 2 a t a ) , 2006 Soc ia l Sec u rit y and Me d i y a re Trus t ee s ep o rt.

Th ree Majo r En titl eme n t s and Ta x eve nu e s as a e r e n t a ge o f


16/18

Some options for cutting spendingeven with optimistic assumptions

Medic areMedic aid

Soci al SecurityDefe ns e

OtherInt erest Tax es

0

5

10

15

20

25

30

35

40

45

50

1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

0

5

10

15

20

25

30

35

40

45

50

Elimin atin g NEA, For eign Aid, NA SA, and Por k hav e littl e impact


17/18

Ultimately Defense spending will be crowded out

Medi areMedi aid

Soc ial Sec urit yefens eOthe r

Interest

Taxe s

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 20500%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%The spe nd ing problem isn 't so lve d eve n if efens e is also elimina ted


18/18

Choice 3: Considerations

M iddle class entitlements should not take precedenceover spending priorities - whether a conservativepriority like defense or liberal priority like education.By 2041, the budget will only have room for Social Security, M edicare, and M edicaid.

M andatory and discretionary is not an appropriatedistinction. All spending functions should compete on alevel playing field in the budget.

We should establish a long-term budget for entitlementswith budget triggers to change benefits automatically.

We should rethink principles of social insurance and focus on the truly needy.

the u.s. fiscal situation (alison acosta fraser)

Documents