Transcript Slide 1

The Federal Debt, the Fiscal Cliff,
and the Federal Debt Limit
STEVE BELL
SENIOR DIRECTOR, ECONOMIC POLICY PROJECT
BIPARTISAN POLICY CENTER
FY 2012 Budget
Medicare +
Medicaid
21%
2
Social Security
21%
Other
Mandatory
15%
Non-Defense
Discretionary
17%
Defense
Discretionary
19%
Interest
7%
Absent reforms, debt is set to skyrocket in the coming decades
3
250%
200%
% of GDP
150%
Debt breaches 100%
of GDP in 2027
100%
50%
0%
1972
1982
1992
2002
2012
2022
2032
Note: Unlike current law, the Bipartisan Policy Center’s Plausible Baseline assumes that the 2001, 2003, and 2010
tax cuts are extended, the AMT is indexed to inflation, Medicare’s physician payment rates are maintained at their
current rate (the “doc fix”), the looming sequester from the Budget Control Act of 2011 is lifted, and troops
stationed overseas decline to 45,000 by 2015
Sources: Congressional Budget Office (January 2012) and Bipartisan Policy Center extrapolations
2042
2052
Health care costs are the primary driver of the debt
4
14%
12%
Health Care Spending
% of GDP
10%
8%
Social Security
6%
Discretionary Spending (Defense and Non-Defense)
4%
Other Mandatory Programs
2%
0%
2012
2022
2032
2042
Sources: Congressional Budget Office’s Alternative Fiscal Scenario (January 2012), additionally assuming that
troops overseas decline to 45,000 by 2015; Bipartisan Policy Center extrapolations
2052
Fantasy 1: We can save enough in the rest of the budget
to pay for the projected growth in entitlements.
Entitlements and Discretionary Spending, as a Percent of GDP, If the Projected Growth in
Entitlement Spending Is Paid for Entirely by Cutting Discretionary Spending, 2012-2050
20%
18%
16%
Major Entitlement Programs*
Discretionary Spending
14%
12%
10%
8%
6%
4%
2%
0%
2012
2020
2030
*Social Security, Medicare, Medicaid, CHIP, and exchange subsidies
Source: CBO Alternative Fiscal Scenario (CBO, 2012) and CSIS calculations
5
2040
2050
Fantasy 2: We can raise taxes enough to pay for
the projected growth in entitlements.
Required Percentage Increase in the Income Tax Burden for Different Groups of Taxpayers If the
Projected Growth in Entitlements from 2010 to 2030 is Paid for Entirely by Raising Income Taxes
180%
169%
160%
140%
120%
102%
100%
80%
65%
60%
40%
20%
0%
Increase If Taxes Are
Raised for Everyone
Increase for the Top 5 Percent
of Taxpayers If Taxes Are Only
Raised for the Top 5 Percent
Source: CBO Alternative Fiscal Scenario (2012) and CSIS calculations
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Increase for the Top 1 Percent
of Taxpayers If Taxes Are Only
Raised for the Top 1 Percent
How did we get here?
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• Debt Ceiling
• Budget Control Act (BCA)
• Super committee failure
• Sequester
Massive Fiscal Contraction is scheduled to occur in 2013
Upcoming Current Law Changes:
•
•
•
•
•
•
•
•
Bush Tax Cuts + AMT
Payroll Tax Cut
Unemployment Insurance
Tax Extenders & Business Depreciation
The Sequester
Affordable Care Act Taxes
Doc Fix
The Debt Ceiling
TOTAL:
$235 b
$90 b
$25 b
$80 b
$60 b
$25 b
$10 b
!?!?!?
$525 b
8
What is a sequester?
• Automatic reduction to federal government spending for a
given fiscal year
• Gramm-Rudman-Hollings – Balanced Budget and Emergency
Deficit Control Act of 1985
• Phil Gramm: “It was never the objective of [GRH] to trigger
the sequester; the objective of [GRH] was to have the
threat of the sequester force compromise and action.”
• ‘80s and ‘90s sequesters were rarely carried out, but
pushed Congress to achieve fiscal goals in ‘90s
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FY 2013 Sequester Cuts Fall on The Smallest Pieces of the Budget
Tax Expenditures
$1,343B
Mandatory
$2,160B
Defense
Discretionary*
$729B
Domestic
Discretionary*
$504B
Cuts
$16B
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Cuts
Cuts
$39B – 35% of Sequester
Non-Defense – 50%
$55B – 50% of Sequester
Defense – 50%
* These amounts include all discretionary budgetary resources for the duration of FY 2013, not solely the non-exempt monies that are subject
to sequester. Additionally, the figures assume that a continuing resolution at FY 2012 levels is enacted for FY 2013, that war funding
(Overseas Contingency Operations funds) is provided at the level requested by the president. Defense discretionary funds include
unobligated balances from prior years, which are subject to sequester.
Sources: Congressional Budget Office, Donald Marron and Tax Policy Center using data from the Office of Management and
Budget and Treasury
Sequester delays Federal debt reaching 100% of GDP by only 2 years
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Debt Held by the Public as % of GDP
250%
200%
BPC January 2012
Plausible Baseline
150%
Debt post-BCA Sequester
100%
50%
0%
2012
2022
2032
2042
Fiscal Years
Note: The Bipartisan Policy Center’s (BPC) January 2012 Plausible Baseline assumes that the 2001, 2003, and 2010 tax
cuts are extended permanently, Medicare physician payments are frozen (the “doc fix”), the AMT is indexed to inflation,
and overseas combat operations wind down.
Sources: Congressional Budget Office; Bipartisan Policy Center projections
2052
10 Largest Individual Tax Expenditures,
Cost in Fiscal Year 2014
Provision
Amount (billions of $)
Exclusion of Employer Health Insurance
164
Exclusion of Employer Pensions
163
Mortgage Interest Deduction
100
Exclusion of Medicare
76
Capital Gains Rates
71
Earned Income Credit
58
Deduction of State & Local Income Taxes
54
Gains: Exclusion at Death/Gift Carryover
52
Deduction of Charitable Contributions
52
Employer Benefits under Cafeteria Plans
44
Source: Congressional Research Service calculations based on Joint Committee on Taxation revenue estimates
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Domenici-Rivlin: An Overview
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The consensus, bipartisan plan will:
•
Create a simple, pro-growth tax system that broadens the base, reduces
rates, makes America more competitive, and raises revenue to reduce
the debt – while making the tax system more progressive.
•
Reduce the unsustainable rate of growth in health care costs.
•
Strengthen Social Security to ensure that it will pay benefits for 75 years
and beyond, while protecting the most vulnerable elderly and
maintaining the current retirement age.
•
Freeze domestic and defense discretionary spending (already achieved
by means of the Budget Control Act).
•
Cut other spending, including farm and government retirement programs.
Debt Drops Dramatically Under Bipartisan Plan
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180%
BPC Plausible
Baseline Debt
Held by the
Public
150%
% of GDP
120%
90%
Bipartisan Plan
Debt Held by
the Public
60%
30%
0%
2012
2017
2022
2027
2032
2037
2042
Note: Unlike current law, the Bipartisan Policy Center’s Plausible Baseline assumes that the 2001, 2003, and 2010
tax cuts are extended, the AMT is indexed to inflation, Medicare’s physician payment rates are maintained at 2011
levels (the “doc fix”), the looming sequester from the Budget Control Act of 2011 is lifted, and troops stationed
overseas decline to 45,000 by 2015
Sources: Congressional Budget Office (January 2012) and Bipartisan Policy Center extrapolations
Debt Limit: Key Questions
1.
When will the federal government next reach its
statutory borrowing limit?
2.
At that point, what legal actions does Treasury
have at its disposal for continued funding of
government operations?
3. What is the date after which Treasury will not have
sufficient cash to pay ALL of its bills (the “X Date”)?
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Reaching the debt limit – What it means
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Layers of Defense Against Default
The Treasury Department has multiple means that can be used to pay the
nation’s bills. If the debt limit is reached and Congress does not act in
time, however, all of these layers of defense will be breached and the
nation will default on its obligations.
ISSUE NEW DEBT TO THE PUBLIC IN TRADITIONAL MANNER
Debt Limit Reached
EXTRAORDINARY MEASURES
EM Exhausted
DAILY REVENUE AND CASH ON HAND
The X Date
DEFAULT ON FINANCIAL OBLIGATIONS
Reaching the debt limit
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• BPC estimates that the debt limit will be reached
and Extraordinary Measures will begin in the last
week of December
• Substantial interest on intra-governmental debt
(including the Social Security and Medicare trust funds)
is due on 12/31/2012
Extraordinary measures
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EXTRAORDINARY MEASURES AVAILABLE
BPC
ESTIMATE
Do not reinvest the Federal Employees’ Retirement System GFund
$154 billion
Do not reinvest the Exchange Stabilization Fund
$23 billion
Do not reinvest interest payments and cash receipts to Civil
Service Fund and Postal Fund
$21 billion
Do not reinvest maturing securities in the Civil Service Fund
and Postal Fund
Not Applicable in
Dec. 2012
Total
$197 billion
Note: The totals indicate available measures. Treasury may not employ all available measures. Treasury also has measures available
(not listed) that assist with cash flow and debt management, but do not extend the date after which Treasury would default on
federal obligations absent an increase in the debt limit (the “X Date”). Column does not add due to rounding.
Sources: Government Accountability Office, Congressional Research Service
Extraordinary measures Won’t Last As Long
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•
In 2011, Extraordinary Measures lasted from May 16
until August 1
•
They won’t buy as much time as they did
last summer
•
February is a “bad” month for the federal
government’s finances
•
Fewer measures available
The “X Date”
•
BPC defines the “X Date” as the date after which
Extraordinary Measures have been exhausted and
cash on hand is insufficient to pay all of the federal
government’s bills in full and on time
•
•
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In other words, without an increase in the debt limit, the
federal government will begin defaulting on some of its
financial obligations on the day after the X Date
BPC estimates that the X Date will occur in
February 2013
What happens once we reach the “X Date”?
Treasury Cash Flow: February 2012
Monthly Inflows
$202 Billion in revenues
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Monthly Cash Deficit:
$261 b
Monthly Outflows
$464 Billion in spending:
• $112b IRS Tax Refunds
• $62b Medicare and Medicaid
• $55b Social Security Benefits
• $33b Interest on Debt
• $27b Defense Vendor Payments
• $26b Education Programs
• $14b Federal Salaries
•$125b Other Spending
Note: This past February’s cash flows provide a rough estimate of the challenge of meeting the federal government’s obligations in
February 2013 without the ability to issue net new debt to the public. Numbers may not add due to rounding.
Source: Daily Treasury Statements
“Wild cards”
Fiscal Cliff
• Income tax withholding
• Expiration of Alternative Minimum Tax “patch”
• Delayed filing season
Additional Deficit Spending?
• Disaster relief funds
• “Growth measures” in fiscal cliff deal
Economic Uncertainty
• Strengthening/weakening economy
• Monthly fluctuations in spending and revenues
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Size of the DEBT LIMIT Increase
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How much would the debt limit need to be
increased to get through 2013 or 2014?
$2,500
Billions
$2,000
$1,500
High Estimate
= $2,200 B
$1,000
$500
Low Estimate
= $730 B
High Estimate
= $1,250 B
Low Estimate
= $1,300 B
$0
End of 2013
End of 2014
Note: All estimates are based on Congressional Budget Office data. The “low estimate” reflects current law except for
freezing physician payments at 2012 levels (“Doc Fix”), indexing the AMT to inflation, and applying the scheduled decline in
overseas combat operations (OCO) spending. The “high estimate” assumes that the 2001, 2003, 2009, and 2010 tax cuts are
extended along with most of the usual tax extenders, the “Doc Fix” and AMT “patch” are applied, OCO spending declines as
scheduled, the sequester does not take effect, and the payroll tax holiday and extended unemployment insurance benefits
are continued.