Deficit Negotiations and the Supercommittee Ron Haskins October 19, 2011 2 The Unsustainable Fiscal Path, 2010-2080 70 60 Percent of GDP 50 40 30 20 Average Federal Revenue, 1970-2009 Net Interest Medicare, Medicaid, Exchange Subsidies, and CHIP 10 Social Security 0 2010 2015 2020 2025 2030 2035 2040 2045 2050 Year 2055 2060 2065 Source: Congressional Budget Office, “Supplemental Data for the Congressional Budget Office's Long-Term Budget Outlook (June 2010),” available at http://www.cbo.gov/ftpdocs/115xx/doc11579/LTBO-2010data.xls. Note: Based on the Alternative Fiscal Scenario. 2070 2075 2080 3 Spending and the Deficit as a Percentage of GDP in 2010, 2020, and 2050 30 2010 26.0 25 2020 2050 Percent of GDP 20 16.5 15 12.4 12.9 10.4 10.4 9.4 10 5 4.8 4.8 4.8 4.8 5.2 5.9 6.6 6.5 5.1 3.8 1.4 0 Defense Social Security Medicare, Medicaid, All Other Noninterest CHIP, and Exchange Subsidies Net Interest Deficit Source: Congressional Budget Office, “Supplemental Data for the Congressional Budget Office's Long-Term Budget Outlook (June 2010),” available at http://www.cbo.gov/ftpdocs/115xx/doc11579/LTBO-2010data.xls. Notes: Based on the Alternative Fiscal Scenario. The all other noninterest category includes defense spending. The separate defense category is assumed to grow at the same rate as GDP. 4 Overview of Presentation • • • • Sources of Debt Preconditions for Action The Debt Ceiling Deal Taking Action: Social Security, Medicare, Tax Increases • Public Support for Action 5 Causes of Increased U.S. Debt: Spending, Economic Estimates, Tax Cuts, 2001-2011 Contribution to Debt ($ Trillions) 6 5 4.9 4.1 4 3.5 3 2 1 0 New Spending Source: Pew, “10 Essential Fiscal Charts,” 2011 Economic Estimates Tax Cuts 6 Causes of Increased U.S. Debt: Contribution to Debt ($ Trillions) Spending and Tax Cuts by Category, 2001-2011 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 1.70 1.39 1.33 1.26 0.73 0.69 0.66 0.27 0.02 Spending on Tax Category Source: Pew, “10 Essential Fiscal Charts,” 2011 7 Taking Action: Preconditions • Public recognition that deficits are a problem • Public willingness to pay new taxes and accept spending cutbacks • Everything on the table • Bipartisanship • Presidential Leadership 8 Percentage Change in Spending Actions Necessary to Get to Debt/GDP Ratio of 60 Percent by 2021 50 45 40 35 30 25 20 15 10 5 0 - 46 + 36 - 21 + 16 - 15 8 Discretionary Mandatory Only All Spending Only Income Taxes Only All Revenues Spending Cuts and Revenue Increases Source of Deficit Reduction Note: Current policy baseline; $6.1 trillion deficit reduction in 2021 (assuming tranche 1 of debt ceiling agreement has been achieved, $917 billion cut). Source: Pew, “10 Essential Fiscal Charts,” 2011. 9 August Debt Ceiling/Deficit Reduction Package • Raise Debt Ceiling (up to $2.4 trillion) • Deficit Reduction of $917 Billion • Establish Supercommittee to Reduce Deficit by Additional $1.5 or $1.2 Trillion 10 What Republicans and Democrats Wanted Out of Budget Deal Got What They Wanted? What They Wanted Democrats Republicans Cuts in Defense Yes No No Cuts in Big Entitlements Yes No No Tax Increases No Yes 11 Impact of Debt Ceiling Deal on Increase in the Federal Debt, 2012-2021 Increase to the Debt in Trillions 14 12 11.628 9.511 10 8 6 4 2 0 Extended Policy Baseline After Debt Ceiling Deal Source: Congressional Budget Office, “Summary Data for the Alternative Fiscal Scenario,” from Long Term Budget and Economic Outlook (June, 2011) and “Table 3: Effect on the Deficit of the Budget Control Act of 2011,” from Impact of the Budget Control Act of 2011 (August 1, 2011). 12 Discretionary Spending Caps • 10 Years; $917 Billion • Half Domestic; Half Defense/Security • Firewall Between Domestic and Defense (2012 only) • Action So Far 13 Impacts of Debt Ceiling Cuts on Defense Spending, 2012-2021 1,000 Spending (Billions) 900 800 712 724 738 753 769 786 700 600 700 650 661 675 689 806 826 705 722 847 739 869 756 891 773 500 400 300 200 100 CBO Baseline Baseline with Debt Ceiling Cuts, Round 1 Baseline with Debt Ceiling Cuts, Rounds 1 and 2 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Year Note: Figures are in budget authority. Source: Congressional Budget Office, “Table 1-6: Illustrative Paths for Discretionary Budget Authority Subject to Caps in Budget Control Act” and “Table 1-5: CBO Baseline Projections of Discretionary Spending,” from CBO Budget and Economic Outlook: An Update (August, 2011) and “Table 1: Estimated Savings from Automatic Reductions,” from Estimated Impact of Automatic Budget Enforcement Procedures Specified in the Budget Control Act (September, 2011). 14 Impacts of Debt Ceiling Cuts on NonDefense Spending, 2012-2021 700 Spending (Billions) 600 511 528 538 550 562 576 500 505 400 467 478 489 500 590 511 639 656 606 622 524 538 552 564 300 200 100 CBO Baseline Baseline with Debt Ceiling Cuts, Round 1 Baseline with Debt Ceiling Cuts, Rounds 1 and 2 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Year Note: Figures are in budget authority. Source: Congressional Budget Office, “Table 1-5: CBO Baseline Projections of Discretionary Spending,” and “Table 1-6: Illustrative Paths for Discretionary Budget Authority Subject to Caps in Budget Control Act” from Budget and Economic Outlook: An Update (August, 2011) and “Table 1: Estimated Savings from Automatic Reductions,” from Estimated Impact of Automatic Budget Enforcement Procedures Specified in the Budget Control Act (September, 2011). 15 Overview of Supercommittee • Goal: $1.5 B, 10 Years (begin 2013) • 12 Members (6 Rs; 6 Ds) • Due Dates: – Report to Congress: November 23 – Congress Vote on Proposal: December 23 – Up or Down Vote; No Filibuster; No Amendments – If Fail; Sequester Triggered 16 Taking Action: • Social Security Reforms • Medicare Reforms • Tax Increases 17 Taking Action: Social Security Reforms Reduce COLA by 0.5 Percentage Points 30 Raise the Full Retirement Age to 70 30 Index Earnings in the AIME and Bend Points in the PIA Formula to Prices 60 50 Lower Initial Benefits to Top 70 Percent of Earners Reduce PIA Factors to Index Initial Benefits to Prices Rather Than Earnings 100 Tax Covered Earnings Above the Taxable Minimum; Do Not Increase Benefits 90 Increase the Payroll Tax by 3 Percentage Points Over 20 Years 50 30 Increase the Payroll Tax by 1 Percentage Point in 2012 0 20 40 60 80 100 120 Percentage Improvement in Actuarial Balance Source: Congressional Budget Office, “Summary Figure 1,” in Social Security Policy Options, summary (2010). 18 9 Annual Average Real Growth in GDP and in Health Expenditures 8 7.7% Average Annual Real Health Expenditure Growth 7 Average Annual Real GDP Growth 6.5% Percent Growth 6 5.7% 5 4.5% 4.3% 4.2% 4 3.2% 3.2% 3.4% 3 2 1.5% 1 0 1960s 1970s 1980s 1990s 2000s Note: The 2000s consist of 2000-2009. Sources: Centers for Medicare and Medicaid Services, "Table 1: National Health Expenditures Aggregate, Per Capita Amounts, Percent Distribution, and Average Annual Percent Growth: Selected Calendar Years: 1960-2009," NHE Web Tables; Bureau of Economic Analysis," Table 1.2.4 Price Indexes for Gross Domestic Product by Major Type of Product," National Income and Product Account Tables. 19 Taking Action: Medicare Reform Premium Support • • • • • • Service Areas Mandatory Health Care Services Open Market; Bids from Any Entity Central Clearing House Setting Annual Premium Amounts Adjustments to Premium 20 Taking Action: Reducing Tax Expenditures Item Cost (in Billions) Mortgage Interest $93.8 Property Taxes on Real Property $22.8 Capital Gains on Sales of Principle Residences $16.5 Reduced Rates of Dividends / Long-Term Capital Gains $84.2 Capital Gains at Death $31.7 Investment Income on Life Insurance $25.7 Charitable Contributions $34.5 Employer Contributions for Health Care, Health Premiums $117.3 EITC $52.4 State Taxes $43.6 Total = $522.5 Billion 21 Polls: The Deficit Is Top Priority Percent Who Say Deficit Is Top Priority 70 60 56 50 40 53 60 2009 2010 58 55 51 53 40 30 35 20 10 0 2002 2003 2004 2005 Source: Pew Research Center for the People & The Press, various years. 2006 Year 2007 2008 22 Polls: Public Support for Sacrifice 70% 70% 70% 67% 61% 60% 60% 60% 52% 50% 50% 50% 44% 40% 40% 36% 30% 30% 20% 20% 10% 10% 40% 30% 27% 20% 10% 5% 4% 1% 0% 0% Yes Willing No -10% Source: Gallup, April 2011. 0% Not Some, Don't Willing But Not Know/No Others Answer -10% Source: CBS News Poll, January 2011. Willing Not Willing Don't Know/No Answer Source: CBS News Poll, January 2011. 23 Polls: Willingness To Cut Specific Programs Foreign economic aid 75 Foreign military aid 69 Spending by the regulatoryagencies generally 56 Space programs 54 Federal welfare spending 51 Subsidies to business 51 Farm subsidies 42 Federally funded scientific research programs 42 Federal housing programs 41 Defense spending 41 The food stamp program 40 Pollution control 37 Spending for mass transportation 35 Federal aid to cities 34 Federal jobs programs 33 Federal highway financing 31 Revenue sharing with states and cities 28 Health care 24 Federal aid to education 21 Social security payments 11 0 Source: Harris Interactive Poll, January 17 – 27, 2011 10 20 30 40 50 Percent Supporting Specific Cuts 60 70 80