CBO Presentation to Harvard_2!24!12_final

8/2/2019 CBO Presentation to Harvard_2!24!12_final

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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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WhatPolicyAssump7onsUnderlietheBaselineandthe

Alterna7veFiscalScenario?

BaselineProjec7ons:Currentlaw.

Alterna7veFiscalScenario:- llexpiringtaxprovisions(otherthanthepayrolltaxreducAon)are

extended.

- ThealternaAveminimumtax(MT)isindexedforinflaAonaNer2011.

- Medicarespaymentratesforphysiciansservicesareheldconstantatcurrentlevel.

- TheautomaAcspendingreducAonsrequiredbytheBudgetControlctdonottakeeffect(althoughtheoriginalcapsondiscreAonary

appropriaAonsremaininplace).

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DeficitsorSurpluses,HistoricallyandAsProjectedinCBOs

BaselineandUndertheAlterna7veFiscalScenario(PercentageofGDP)



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FederalDebtHeldbythePublic,Historicallyand

ProjectedinCBOsBaselineandUndertheAlterna7ve

FiscalScenario(PercentageofGDP)




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HarmsofHighFederalDebt

ReducestheamountofsavingdevotedtoproducAvecapitalandthusresultsinlowerincomesthanwouldotherwiseoccur.

Leadstohighinterestpayments,meaningthataddiAonaltaxincreasesorspendingcutsareneededtomakefiscalpolicysustainable.

Makesitharderforpolicymakerstorespondtounexpectedproblems,suchasfinancialcrises,

recessions,andwars.

Increasesthelikelihoodofafiscalcrisis.


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8/29C O N G R E S S I O N A L B U D G E T O F F I C E 8

WeCannotGoBacktothePastCombina7onofTax

andSpendingPolicies

gingofthepopulaAon:Thenumberofpeopleage65orolderwillincreasebyaboutone-thirdinthenext10years.

Risingcostsforhealthcare:Duringthepast25years,healthcarespendingperpersoninthiscountryhasincreased

nearly2percentagepointsfasterperyearthanGDPper

person.

Thesefactorsandothersmeanthat,inCBOsprojecAonsfor

2022underthealternaAvefiscalscenario,outlaysforSocial

Securityandthemajorfederalhealthcareprogramsare

12.8percentofGDP,comparedwithanaverageof7.3percent

duringthepast40years.



WeWillNeedtoAdoptANewCombina7onofTax

andSpendingPolicies

chievingasustainablefederalbudgetwillrequiretheUnitedStatestodeviatefromthepoliciesofthepastseveral

decadesinatleastoneofthefollowingways:

RaisefederalrevenuessignificantlyabovetheiraverageshareofGDP;

Makemajorchangestothesortsofbenefitsprovidedformericanswhentheybecomeolder;or

SubstanAallyreducetheroleoftherestofthefederalgovernmentrelaAvetothesizeoftheeconomy.

Thelastofthesethreewilloccurbytheendofthecoming

decadeundercurrentlawand,toalesserextent,underthe

alternaAvefiscalscenario.



FederalSpending

partfrominterestpaymentsonthedebt:

Mandatoryspending:primarilybenefitprogramsgovernedbyrulesforeligibilityand

benefitformulas.

DiscreAonaryspending:policymakersdecideeachyearhowmuchmoneytoprovideforgivenacAviAes.



ComponentsofMandatorySpending,Historically

andUndertheAlterna7veFiscalScenario(PercentageofGDP)


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



(11%)

Discre7onaryFundingfor2012:$1,199Billion

Defense

$60BillionNondefense

$529Billion



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)


EsAmatesfromTheBudgetandEconomicOutlook:FiscalYears2012to2022(January2012).OtherMandatoryincludesprogramsdesignedtoprovide

incomesecurity,suchastheSupplementalutriAonssistanceProgramandunemploymentcompensaAon;reArementbenefitsforcivilianandmilitary

federalemployees;benefitsforveterans;supportforagriculture;andotheracAviAes.EsAmatesincorporatetheassumpAonthattheautomaAcspending

reducAonsrequiredbytheBudgetControlctdonottakeeffect,althoughtheoriginalcapsondiscreAonaryappropriaAonsremaininplaceandaremet

throughproporAonalreducAonsindefenseandnondefensediscreAonarybudgetauthority.

ctual Projected



UndertheAlterna7veFiscalScenario

llfederalspendingapartfromSocialSecurity,themajorfederal

healthcareprograms,andinterestwouldbe7.8percentofGDPin2022thelowestshareinmorethan40yearsandroughlytwo-thirds

ofitsaverageshareoverthatperiod.

Undercurrentlawand,toalesserextent,thealternaAvefiscalscenario,thecountryisontracktosubstanAallyreducemostfederal

acAviAesrelaAvetothesizeoftheeconomycomparedwiththe

experienceofthepastseveraldecades.

ThatsubstanAalreducAonisnotenoughtooffsettheincreased

burdenonthebudgetfromrisingspendingforSocialSecurityandthe

majorfederalhealthcareprograms.Somethingelsemustbechanged

aswell.



ComponentsoftheFederalBudgetasSharesofGDP:

192-2011Averageand2022Projec7onUnderthe

Alterna7veFiscalScenario(PercentageofGDP)




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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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OneApproach

(andSomeSpecificOp7ons):

ReduceSpendingonSocialSecurityandthe

MajorFederalHealthCarePrograms

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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


ctual Projected


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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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PolicyOp7on AnnualBudgetImpactatEndofDecade*

SomeImplica7ons

BaseSocialSecuritycost-

of-livingadjustmentson

thechainedCPI

$22Billion Wouldreducebenefits

especiallyforolder

beneficiaries

LinkiniAalSocialSecurity

benefitstoaverageprices

insteadofaverageearnings

$41Billion Wouldnolongerallow

beneficiariestoshareinoverall

economicgrowth(althoughaverageinflaAon-adjusted

benefitswouldnotdecline

overAme)

SomeOtherWaystoCutSocialSecuritySpending


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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


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AnotherApproach

(andSomeSpecificOp7ons):

IncreaseTaxes

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RevenuesProjectedinCBOsBaselineandUnderthe

Alterna7veFiscalScenario(PercentageofGDP)



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SelectedMajorTaxExpendituresin2012,Compared

withOtherCategoriesofRevenuesandOutlays(PercentageofGDP)


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SomeWaystoReduceTaxExpenditures

PolicyOp7on AnnualBudgetImpactatEndofDecade* SomeImplica7ons

Graduallyeliminatethe

mortgageinterest

deducAon

$75Billion WouldimprovetheallocaAon

ofresourcesintheeconomy

butcoulddelaytherecoveryof

thehousingsectorandreducetherateofhomeownership

EliminatethededucAon

forstateandlocaltaxes

$107Billion Wouldtakeawayasubsidyfor

stateandlocalgovernments

butcould(dependingonones

views)hinderequityinthetaxsystem


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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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Summary

Toputthefederaldebtonasustainablepath,weneedtochangepoliciesinsignificantways.

llfederalspendingapartfromSocialSecurity,themajorfederalhealthcareprograms,andinterestisontracktobesmallerrelaAve

toGDPby2022thanatanypointinthepast40yearsandonly

abouttwo-thirdsofitsaverageshareofGDPduringthatperiod.

Ifthatoutcomeisachieved,pungfederaldebtonasustainablepathsAllrequireschangesinSocialSecurity,themajorfederalhealth

careprograms,andtaxesthatamounttoabout$750billionin2022.

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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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Summary(cont.)

Ourcountryfacesfundamentalchoicesaboutfederalbenefitsandservicesandaboutthefederaltaxesneededto

payforthem.Unlesswecutfederalspendingapartfrom

SocialSecurityandthemajorhealthcareprogramsbelow

theunusuallylowshareofGDPitisalreadyprojectedtoreachbytheendofthecomingdecade,stabilizingfederal

debtrelaAvetoGDPwillrequireustocutspendingon

SocialSecurityandfederalhealthcareprogramsbyabout

one-quarter,raisetaxesbyaboutone-sixth,ordosomecombinaAonofthoseapproaches.

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Documents

CBO Presentation to Harvard_2!24!12_final