Transcript The Upcoming Fiscal Cliff: What We Will Be Facing At The

The Near-Term Outlook for States:
A Period Full of Downside Risks
Barry Anderson
Deputy Director
National Governors Association
[email protected]
February 2013
1
Some Views on Our Fiscal Future
• Near Term
– The next fiscal cliff, and what it means over
the next few months.
• Medium Term
– Next year, and the years right after that.
• Long Term
– The major fiscal problem that the US faces
is long term fiscal sustainability.
2
About Me—Experience
• 30+ Years in Federal Budgeting
– GAO
– OMB: Senior Career Civil Servant
– CBO: Acting & Deputy Director
• FASAB
•
•
•
•
IMF in Washington
OECD in Paris
Independent Consultant
National Governors Ass’n
3
3
About Me—Personal
 Not an ‘R’ or a ‘D’, but an SOB!
 A “Middle of the Roader”
4
4
The Near Term Fiscal Future:
The Next Fiscal Cliff
• March 1: Sequester I (the
Supercommittee sequester)
– A lower nominal rate, but over 7
months instead of 9
• Defense: was 9.4%; now 7.9%
• Non-defense: was 8.2%; now 5.3%
• March 27: Continuing Resolution
– TANF Reauthorization
– Sequester II (the BCA sequester)
• April 15: House & Senate Budget
Resolutions
– Needed for Members to get paid
– Entitlement & Tax Reform (?)
• May 19/Late Summer: Debt Limit
5
Impact of FY2013 Sequesters*
(Budget Authority, in billions of dollars)
BCA
Caps
Revised
Caps
Revised Caps
w/
Adjustments
CR
March 27
Sequester
CR After
March 27
Sequester
March 1
Sequester
CR After
Both
Sequesters
Security
686
684
803
810
-7
803
-51
751**
NonSecurity
361
359
394
395
-1
394
-21
389**
1,047
1,043
1,197 1,205
-8
1,197
-71
1,140**
Total
Source: CBO Budget & Economic Outlook: FYs 2013-2023, February, 2013.
*Total appropriations for FY2012 were $1,180B, including $137B of adjustments for Overseas Contingency
Operations, disasters, & program integrity.
**Includes additional CBO adjustments, mainly $20B in mandatory savings in the CR that were reclassified
to mandatory accounts, and a re-estimate of an additional $4B in FHA receipts.
6
The Major Fiscal Issue Is Long-Term
Sustainability: How Do We Cut the Debt &
at What Level of Government?
7
What Level of Government?
(% of GDP, CBO Projections as of dates shown)
1987-2011 2012
Average Actual
Spending
Medicare
Medicaid
Social Security
Nondefense
Defense
Other
Interest
Total Spending
Revenues
Deficits
Debt
2.5
1.2
4.4
3.7
4.2
2.4
2.4
20.8
17.9
-2.9
44
3.5
1.6
5.0
4.1
4.2
3.0
1.4
22.8
15.8
-7.0
73
2022
2/13
4.1
2.2
5.4
2.6
3.0
2.4
3.2
22.9
19.0
-3.9
76
2037
8/12
6.7
3.7
6.2
}
} 9.6
}
9.5
35.7
18.5
-17.2
199
8
We Can’t Grow Our Way Out
(Percentage change in real GDP; year to year)
2012
Actual
2.3
2013
1.4
2014
2.6
20152018
20192023
20232037
3.7
2.3
2.5
Sources of projections: for 2012-2023, CBO’s Budget & Economic Outlook: FYs 2013 to 2023,
February, 2013; for 2023-2037, CBO’s 2012 Long-Term Budget Outlook, June, 2012.
9
Debt Projections Before & After the January Fiscal Cliff Deal
(Percent of GDP)
Source: CBO. The Alternative Fiscal Scenario assumes that the sequester is waived, “doc fixes”
are enacted, & expiring tax breaks are extended.
10
How Much More Do We Need To
Do To Stabilize the Debt?
• President Obama: $1.5 Trillion
• Center for Budget Policy & Priorities: $1.4
Trillion
• Columnist Paul Krugman: “a problem that is
already, to a large degree, solved.”
• Committee for A Responsible Federal Budget:
at least $2.2 Trillion
11
Most of the deficit reductions so far have come from
discretionary spending--& the sequester will only add to that
(Deficit reduction from FY2013-22, dollars in billions)
Appropriations
2011
Budget
Control Act
2011
Discretionary
Spending
615
850
25
790
2,280
Mandatory
Spending, net
--
--
-5
169
164
Revenue, net
--
--
545
--
545
Interest
105
135
85
169
494
Total: $
$720
$985
$650
$1,128
$3,483
.4%
.5%
.3%
.6%
1.7%
Total: %/GDP
American
Taxpayer
Relief Act
2012*
Sequester
March 1
Total
Sources: CBO; Committee for A Responsible Federal Budget; The Economist.
*Includes $75B in tax cuts & $30B in extended unemployment benefits that added to deficits.
12
Public Debt Projections With and Without Prior Savings*
(Percent of GDP)
Source: Committee for a Responsible Federal Budget
*”Prior Savings” include those enacted in the Budget Control Act of 2011, the American
Taxpayers Reduction Act of 2012, and in appropriations since CBO’s August 2010 baseline.
13
Reasons to Support Reducing the
Debt Below 80%/GDP in 2023
• Encourages higher economic growth as the
economy moves towards full capacity
• Addresses sustainability beyond 10 years,
especially given the certainty of higher boomer
retirement costs
• Provides a margin for error in case of lower-thanforecasted growth or higher interest rates
• Provides for fiscal flexibility for unknowns, such
as natural disasters or national security threats
14
Health is by Far Our Biggest Problem!
Health Expenditures, 2010
(% GDP)
Country
Public
Total
US
8.1
17.4
France
9.2
11.8
Germany
8.8
11.6
Denmark
9.8
11.5
Switzerland
6.8
11.4
United Kingdom
8.2
9.8
Australia
6.0
8.7
OECD Average
7.0
8.6
Japan
7.0
8.5
Source: OECD Health Data 2012
15
US National Health Expenditures
(% of GDP)
CY
2007
2008
2009
2010
2011
2012
2013
2014
2019
2020
2021
2010 Projection
Before ACA
15.9
16.2
17.3
17.3
---17.4
19.3
---
2011 Projection
After ACA
-16.6
17.6
17.6
17.7
17.6
17.6
18.1
-19.8
--
2012 Projection
After ACA
--17.9
17.9
17.9
17.9
17.8
18.2
--19.6
Source: Sean Keehan (CMS), et al., “National Health Expenditure Projections”, Health Affairs, 2010-2012
16
Life Expectancy & Health Expenditures
84
JPN
Life expectancy at birth (years)
82
ISR
80
KOR
PRTSVN
CHL
CHE
ITA
ISLSWE
ESP AUS
FRA
CAN
AUT
NZL
DEU NLD
FIN BEL IRL
GRCGBR
LUX
NOR
DNK
78
USA
CZE
76
MEX
POL
74
TUR
SVK
EST
HUN
72
0
1 000
2 000
3 000
4 000
5 000
6 000
7 000
8 000
Total health spending per person (2008 USD PPP)
Source: OECD Government at a Glance, 2011.
17
Where Does the Money Go?
Higher Prices!
(Procedure prices as a % of US prices, 2009)
Procedure
AUS
CAN
DEN
FIN
FRA
SWE
Appendectomy
63
63
37
47
57
62
Normal delivery
67
63
40
34
65
58
Caesarean delivery
95
64
50
64
78
90
Coronary angioplasty
50
64
23
39
49
65
Coronary artery bypass
63
66
41
68
67
62
Hip replacement
91
69
51
62
64
66
Knee replacement
98
66
67
66
83
89
Source: OECD Health at a Glance, 2011
18
And Higher Spending on Every Category
Category of Health Spending, 2009
Percentage of
OECD Average
Public Health & Administration
274
Physicians, Specialists, Dentists
238
Hospitals & Nursing Homes
163
Pharmaceuticals & Medical Goods
152
Source: OECD Health at a Glance, 2011
19
And We “Use” More Health Services
Procedure
US Use Relative to 30
OECD Countries
MRI Units
MRI Exams
CT Scanners
CT Exams
Tonsillectomy
Coronary Angioplasty
Knee Replacements
Caesarean Sections
2nd
2nd
5th
2nd
2nd
3rd
1st
8th
Source: OECD Health at a Glance, 2011
20
Quality of US Health Care is Mixed
Measure
US
OECD
Average
Breast cancer, 5-year survival rate
89.3
83.5
Colorectal cancer, 5-year survival rate
68.0
59.9
Asthma hospital admission rates, age 15 &
over
120.6
51.8
Chronic obstructive pulmonary disease
hospital admission rates, age 15 & over
230.0
198.0
Source: OECD Health at a Glance, 2011
21
Factors to Lower Health Care Costs
• Eliminate fee-for-service (FFS); replace with systems of care (SoC)
– FFS creates incentives for providers to function as revenue centers &
promote unneeded services
– SoC can create incentives for outcomes & not reward either volume or
stinting
• Methods can involve partial capitation, episode pricing, shared
savings, & high-cost reinsurance
• Create larger provider systems
– More patients with comprehensive services permits better
measurement of performance
• Rely on competition to set prices
– Administratively-set prices, even if “right”, create lobbying pressures
• Reform legal impediments
– Malpractice; product liability; corporate practice of medicine
• Review administrative costs
• Address data availability, prevention, caps, & everything else
22
How Do We Fix Social Security?
First, Its Fundamental Characteristics
Intergenerational
Pay as you go
Obligations defined
Not funded by invested taxes
Zaps higher income earners
23
Fundamental Characteristics - Restated
Pay as you go
Obligations defined
Not funded by invested taxes
Zaps higher income earners
Intergenerational
24
Three Ways To Look At Social Security
METHOD
MEASURE
GOAL
Accounting
Trust Fund
Solvency
Budget
Balance
Sustainability
Economic
Growth
Higher Standard of
Living
25
Spending on the Elderly1 as a Percentage of GDP
1Social
Security + all health. Source CBO Long-Term Budget Outlook, June 2012
26
Spending on the Elderly1 as a Percentage of GDP
1Social
Security + all health. Source CBO Long-Term Budget Outlook, June 2012
27
SOCIAL SECURITY SOLUTIONS*
• Increase Net National Savings
– Run surpluses!
• Cut benefits
– Increase retirement age
– Index to prices, not wages
• Cut everything else
• Increase SS taxes
• Convert to private accounts
– DB to DC: uncertainty of returns, of longevity, of annuity
– Administrative costs: you get what you pay for
• Borrow
• Swap Treasury debt for equities
– Government ownership of means of production
* See http://www.esquire.com/blogs/politics/federal-budget-statistics-1110
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2013 Marginal Tax Rates for Selected Provisions
(Married filing jointly; employee only1. Rate changes bolded.)
Income2
Federal
Income
Social
Security
Medicare
Base
Medicare
Investment3
Pease4
Total
0-$17,8505
10.0
6.2
1.45
0
0
17.65
$17,850-72,500
15.0
6.2
1.45
0
0
22.65
$72,500-113,700
25.0
6.2
1.45
0
0
32.65
$113,700-146,400
25.0
0
1.45
0
0
26.45
$146,400-223,050
28.0
0
1.45
0
0
29.45
$223,050-250,000
33.0
0
1.45
0
0
34.45
$250,000-300,000
33.0
0
2.35
3.8
0
39.15
$300,000-398,350
33.0
0
2.35
3.8
.99
40.34
$398,350-450,000
35.0
0
2.35
3.8
1.05
42.20
$450,000+
39.6
0
2.35
3.8
1.19
46.94
1Employers
don’t pay the additional .9% Medicare Base or 3.8% Medicare Investment taxes.
income for Federal Income; earned income for Social Security & Medicare Base; AGI for Medicare Investment & Pease.
3This rate applies to the lessor of net investment income or the excess of Modified AGI over $250,000.
4Pease reduces itemized deductions (except medical, investment interest, & casualty & theft) by 3% of the amount by which AGI exceeds
$300,000, but not more than 80% of the value of itemized deductions. PEP (Personal Exemption Phaseout) is not included; it reduces the
$3,900/person exemptions by 2% for the first dollar of each $2,500 increment in exemptions for AGI over $300,000.
5Does not include Earned Income Credit and various other credits for low income filers.
2Taxable
Tax Expenditures: How Do We Limit Them?
(2013, in billions of dollars)
Rank
Tax Expenditure
Cost
1
Exclusion of employer payments for health insurance
181
2
Provisions that benefit states
105
Deductibility of state & local income, sales & property taxes
(69)
Exclusion of interest on public purpose state & local bonds
(36)
3
Deductibility of mortgage interest on owner occupied homes
101
4
Tax treatments of 401(k)-type retirement plans
73
5
Treatment of capital gains
62
6
Tax treatment of employer pension plans
52
7
Exclusion of imputed rental income
51
8
Deductibility of charitable contributions
49
9
Deferral of income from controlled foreign corporations
42
10
Accelerated depreciation of machinery & equipment
33
30
Percentage of households paying income or payroll taxes
where payroll—including employer’s share— is bigger
Income Quintile
2009
Lowest
99
2nd
96
Middle
86
4th
78
Highest
49
Top 1%
2
All Quintiles
Source: CBO
80
31
Average Social Insurance Tax Rates By Quintiles
1979
2009
Lowest
4.9
8.3
2nd
7.6
7.9
Middle
8.5
8.4
4th
8.5
9.1
Highest
5.5
7.2
Top 1%
1.0
2.5
All
6.8
8.0
Source: CBO
32
Marginal Federal Income Tax Rates
Next Highest
Highest
2000
36.0
39.6
2001
35.5
39.1
2002
35.0
38.6
2003-12
33.0
35.0
2013
35.0
39.6
33
Average Tax Rates & Shares
by Quintiles, 2009
Income
Rates
Rates
Shares
Shares
Quintile
Total
Income
Total
Income
Lowest
1.0
-9.3
0.3
-6.6
2nd
6.8
-2.6
3.8
-3.5
Middle
11.1
1.3
9.4
2.7
4th
15.1
4.6
18.3
13.4
Highest
23.2
13.4
67.9
94.1
Top 1%
28.9
21.0
22.3
38.7
All
17.4
7.2
100.0
100.0
Source: CBO
34
Average Incomes & Shares by
Quintiles, 2009
($ in thousands)
Income
Quintile
Lowest
Average Incomes
Pre-Tax
After-Tax
Shares
Shares
Pre-Tax
After-Tax
$23.5
$23.3
5.1
6.2
2nd
44.4
40.5
9.8
11.1
Middle
64.3
57.1
14.7
15.8
4th
93.8
79.6
21.1
21.6
Highest
223.5
171.6
50.8
47.2
Top 1%
1,219.7
866.7
13.4
11.5
88.4
73.1
100.0
100.0
All
Source: CBO
35
The Laffer Curve
36
The Neo-Laffer Curve
37
37
Can Another Deal Be Made?
Recent Deals and Offers
(10-Year Savings; $ in Billions)
Category
Revenues
July 2011 Dec 14 2012 Dec 17 2012
Almost Deal GOP Offer
WH Offer
Jan 1 2013
Deal
800
1,000
1,200
545
400
--
400
25
Social Security
75
--
0
--
Chained CPI
75
(150)
125
--
250
--
200
-30
800
--
725
-5
Discretionary, net
1,300
--
25
25
Total Spending
2,100
1,000
850
20
300
300
300
85
3,200
2,300
2,250
650
Spending
Entitlements
Health
UI, Farm, & other
Total Entitlements
Interest
Total
38