Why Deficits Matter
Paul R. Cullinan, Research Director for Budgeting
for National Priorities Project, Brookings Institution,
April 2008
1
The Problem




FY 2007 Deficit: $162 B (1.2% of GDP)
Projected with plausible policies (2018): $700 B
(3.1% of GDP)
Such deficits reduce national savings and
jeopardize future living standards
Current fiscal policy is unsustainable over the long
run because of rising costs of entitlements,
primarily the health care programs
2
Federal Revenue and Outlays
Actual
25
24
Outlays
Average
Outlays,
(1965-2007)
23
Percentage of GDP
Predicted
22
21
20
19
Revenues
18
17
16
Average
Revenues,
(1965-2007)
15
2017
2015
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
Source: BEA, NIPA Table 1.1.5; FY 2008 Budget of the United States Government,
Historical Table 1.1; Author’s calculations from Brookings-Urban Tax Policy Center,
Budget Outlook Tables, March 2008, Appendix 3a.
3
Dealing with an Aging Population
Ratio of Population Aged 65+
to Working Age Population (20-64), 1950-2045
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
2045
2040
2035
2030
2025
2020
2015
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
Source: Concord Coalition
4
Why Deficits Matter



Reduce national savings
Increase dependence on foreign lenders
Increase burden on future generations:
– Through rising debt service costs;
– By reducing productivity-enhancing
investments

Weakened ability to meet contingencies or
new challenges
5
Budget Deficits Reduce Saving
($ billions in FY 2007)
Personal saving:
53
Business saving:
373
State and local govt. saving:
1
Non-federal saving:
427
Federal govt. saving:
-209
Net national saving:
218
Source: BEA, NIPA Table 5.1. Components may not sum to totals because of rounding.
6
National Savings and Investment
by Historical Standards
20
15
Investment
Percent of GDP
10
5
0
Savings
-5
-10
1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Source: Author’s calculations from BEA, NIPA Tables 1.1.5 and 5.1
7
Dependence on Foreign Lenders
Foreign Holdings as a Share of Net Federal Debt
(debt held by the public)
$5.5
$5.0
Trillions of Current Dollars
$4.5
$4.0
$3.5
$3.0
$2.5
$2.0
$1.5
41.7%
$1.0
$0.5
41.9%
41.8%
2005
2006
44.5%
36.8%
29.7%
33.5%
2001
2002
$2003
Foreign Holdings of Treasury Securities
2004
2007
Domestic Holdings of Treasury Securities
Source: U.S. Treasury Department (through September 2007) and U.S. Bureau of Public Debt
(through September 2007)
8
Rapidly Rising Interest Costs
Projected Debt Service Payments
600
Billions of Current Dollars
500
400
300
200
100
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: Author’s calculations from data from Congressional Budget Office, Budget
and Economic Outlook: Fiscal Years 2008 to 2018, March 2008
9
Other Costs of Deficits



Deficits raise uncertainty about future
policies
Deficits reduce the government’s flexibility
for dealing future contingencies and crises
Deficits undermine budget discipline
10
Social Security Income and
Outlays
7
6
Percent of GDP
5
4
3
2
1
0
2084
2080
2076
2072
2068
2064
2060
2056
2052
2048
2044
2040
2036
2032
2028
2024
2020
2016
2012
2008
Calendar Year
Outlays
Income
Source: Author’s calculations based on Social Security Administration’s Office of
Chief Actuary data from 2008.
11
Effects of Various Proposals on
Social Security Imbalance
Source: Author’s calculations based on Social Security Administration’s Office of Chief
Actuary data from 2005.
12
The Relative Importance of
Social Security, 2005
Source: SSA, Fast Facts & Figures About Social Security, 2007.
13
OECD Health Spending and
Outcomes, 2005
Source: OECD, Health at a Glance: OECD Indicators 2007
14
Spending on Health Care as a
1
Percentage of GDP
1
Assuming excess cost growth continues at historical averages
Source: CBO, The Long-Term Outlook for Health Care Spending, retrieved from Peter
Orszag’s presentation for AEI, November 27, 2007.
15
Variations Among Academic
Medical Centers
Source: Elliot Fisher, Dartmouth Medical School, retrieved from Peter Orszag’s presentation
for AEI, November 27, 2007.
16
Reform Options for Federal
Health Programs





Improve Price Setting
Develop Information
Improve Health Care Delivery
Promote Consumerism and Competition
Budget for Health Care Spending
17
Why We Should Address the
Future Deficits Now



Changes now improve national savings and
enhance future living standards
Burden of government commitments would
be spread over more taxpayers and
beneficiaries
Exposure to an international crisis would be
reduced
1817
What Needs To Happen





First and foremost, public recognition that deficits
are a problem
Public willingness to accept tax increases (relative
to current levels) and spending cutbacks (relative
to current promises)
The sooner this is done, the less costly it will be
Bipartisanship to make the tough choices
Rules to help politicians stay fiscally responsible
19
www.brookings.edu/budget
20