Transcript from large surpluses to large deficits in just 6 years

The Federal Budget Outlook
Matt Fiedler
Center on Budget and Policy Priorities
March 1, 2007
Outline
• Recent budget trends
• The President’s budget proposals
• This year’s Congressional debate
• Dealing with the long-term fiscal problem
I. Recent Budget Trends
From Large Surpluses to Large Deficits in
Just 6 Years
Cumulative Surpluses/Deficits, 2002-2011
$7
Surplus
Trillions of dollars
$5
$5.6
$3
$1
-$1
-$2.8
-$3
Deficit
-$5
Jan. 2001 Projection
Jan. 2007 Projection
Source: CBPP calculations based on Congressional Budget Office data.
Legislation Adding to Deficits: Mostly Tax Cuts
and Defense, Not Domestic Programs
Cost, 2002-2011, of policy changes since January 2001
49% Tax Cuts
Defense, Homeland
36% Security, and
International
10% Entitlements
10%
5%
49%
36%
Domestic
5% Discretionary (except
Homeland Security)
Source: CBPP calculations based on CBO data. Assumes extension of the President’s
tax cuts, continuation of AMT relief, a gradual phasedown of operations in Iraq and
Afghanistan, and defense spending in line with the President’s FY 2007 budget.
Tax Cuts Cost More Than Most
Agency Budgets
2006 Agency Budgets, Tax Cuts if Fully in Effect in 2006
$350
Billions of dollars
$300
All tax cuts
$250
$200
$150
$100
$50
Tax cuts for
the top 1%
Education
Veterans'
Affairs
Housing & Urban
Development
EPA
$0
Source: CBPP calculations based on Treasury Department, Congressional Budget Office,
Joint Committee on Taxation, and Urban-Brookings Tax Policy Center data.
Since 2001, Funding for Domestic Discretionary
Programs Has Fallen as a Share of the Economy
Domestic Discretionary Funding as a Share of the Economy
3.6%
3.5%
3.4%
3.3%
3.2%
3.1%
3.0%
0.0%
2.9%
2001
2002
2003
2004
2005
2006
2007
Source: CBPP calculations based on CBO data. To avoid distortions, figures do not
include funding for homeland security or hurricane relief.
The Current Path of Federal Revenues and
Program Spending Is Unsustainable
30%
Share of GDP
Federal Revenues
(If Recent Tax Cuts
Are Extended)
Other
Domestic
Defense
20%
Medicaid
10%
Medicare
Social Security
0%
2006
2017
2028
Source: CBPP projections based on CBO data.
2039
2050
Last 25 Years Have Seen Rapid Income Growth
at the Top, Virtually No Growth at the Bottom
Growth in average real pre-tax income, 1979-2004
180%
153%
135%
90%
63%
45%
2%
11%
15%
23%
0%
Bottom Fifth
Second
Fifth
Middle Fifth Fourth Fifth
Top Fifth
Source: CBPP calculations based on Congressional Budget Office data.
Top 1%
II. The President’s Budget Proposals
Key Components of the President’s
Fiscal Year 2008 Budget Proposal
• Permanent extension of the 2001 and 2003 tax cuts
• Large cuts in domestic discretionary programs that grow
deeper over time; large increases in security spending
• Cuts in Medicaid that shift significant costs to states
• Proposed funding levels for the State Children’s Health
Insurance Program that would likely force states to drop
children from the program
• Misses the opportunity to use this year’s reauthorization
to invest in the Food Stamps Program
Overall Effects of the President’s Fiscal
Year 2008 Budget Proposal
• According to OMB’s own documents, the budget
would increase deficits in each of the next five years
• Deficits increase despite domestic cuts due to the
defense increases and large tax cuts included in the
budget
• Combination of large tax cuts and domestic cuts
would worsen recent trends toward increased
income inequality
Average Value of the 2001 and 2003 Tax
Cuts for Households in Pennsylvania, 2007
$50,000
$41,000
$40,000
$30,000
$20,000
$10,000
$75
$690
$3,750
$0
Lowest 20 Percent Middle 20 Percent
(Avg. Income
(Avg. Income
$11,000)
$41,000)
Source: Citizens for Tax Justice
Top 20 Percent
(Avg. Income
$175,000)
Top 1 Percent
(Avg. Income
$1.0 Million)
Cuts in Domestic Discretionary Programs
Would Hit Pennsylvania Hard
Cuts in Pennsylvania in 2012 (millions of dollars)
0
-25
-50
-75
Head Start
-$22 M
Vocational and
Public Housing
Adult Education
Capital Fund
-$37 M
-$37 M
K-12
Education
-$70 M
Community
Services
Block Grant
-$29 M
Community
Development
Block Grant
-$59 M
-100
Source: CBPP calculations based on OMB documents.
LIHEAP
-$35 M
President’s Medicaid Proposals, 2008-12:
Budget Proposals Shift Federal Costs to States
Proposals that
reduce both
federal
and state
costs
= $3.4 billion
in federal
reductions and
$2.6 billion in
state reductions
14%
Source: OMB and HHS budget documents.
86%
Proposals that
shift costs to
states
= $21.0 billion in
federal
reductions
III. This Year’s Congressional Debate
The Outlook for Discretionary Programs
• President proposed a big increase in security spending,
and he is likely to get much of what he asked for
• There appears to be growing support for making substantial
investments in domestic programs
• To accommodate both, the ceiling for discretionary funding
set in the budget resolution must be well above baseline
• Without a high enough ceiling for overall discretionary,
crucial investments in low-income housing, education,
environment, etc. will be squeezed out
A Major Change From Prior Years:
PAYGO Rules
• PAYGO requires offsets for tax cuts or entitlement
increases; “if something is worth doing, it’s worth paying
for”
• Means that investments in SCHIP, Food Stamps, and
other areas will require offsets
• But PAYGO is the best defense against extension of the
President’s tax cuts (at a cost $3.0 trillion 2008-2017)
• Tax cuts of that size would starve programs of the
revenue they need to survive; maintaining a strong
PAYGO rule is a top priority
Even Extending Just “Middle-Class”
Tax Cuts Is Costly
Cost of Extending Tax Cuts, 2008-2017
10 percent bracket
$312 billion
Child tax credit
$219 billion
Marriage penalty relief
“Middle Class” Tax Cuts Subtotal
Extend AMT relief (not repeal)
TOTAL, “Middle Class” and AMT
Source: Joint Committee on Taxation, CBO
$53 billion
$585 billion
$569 billion
$1.15 trillion
Extending Higher-Income Tax Cuts Adds
Substantially to Costs
Cost of Extending Tax Cuts, 2008-2017
“Middle Class” and AMT Subtotal
$1.15 trillion
Extend Remaining 2001 and 2003
Tax Cuts
$1.35 trillion
Accompanying AMT Relief
TOTAL, 2001 and 2003 Tax Cuts
and AMT Relief
Source: Joint Committee on Taxation, CBO
$472 billion
$3.0 trillion
Debt With and Without Unpaid for
Extension of Recent Tax Cuts
Debt as a Share of the Economy
250%
Debt if tax cuts
expire
200%
Additional debt if tax
cuts are extended
150%
100%
50%
0%
2000
2010
2020
2030
Source: CBPP projections based on CBO data.
2040
2050
Cost of AMT Repeal Dwarfs Cost of Maintaining
Current Funding Levels for Important Programs
Cost in Billions, 2010
$125
$100
$75
$50
$25
$0
AMT Repeal
K-12 and
Vocational
Education
Veterans'
Medical Care
Student Aid
Source: Tax Policy Center, CBO. Costs shown are 2006 discretionary funding adjusted for inflation.
More Than Half the Cost of AMT Repeal Goes to
Shield Highest-Income Households From Tax
Cost in Billions, 2010
$125
Cost of Repeal
$100
Cost of Excluding
Households With
Incomes Below
$200,000
$75
$50
$25
Cost of Excluding
Households With
Incomes Below
$100,000
$0
Source: Urban-Brookings Tax Policy Center
Goals for Tax Policy This Year
Core Goal
• Make sure that budget resolution and all tax
legislation (including AMT reform) adhere to PAYGO
Major Challenges
• Budget resolution may show large surpluses after
2010, creating tremendous pressure for unpaid for tax
cuts in Senate
• AMT “patch” may be under consideration at the end of
the year; some will want to waive PAYGO
The President’s SCHIP Proposals
• Reauthorizes SCHIP for five years at baseline levels of $5.04
billion per year.
• Provides additional $4.8 billion to states, above the baseline
funding levels, starting in 2009; presumably distributed to
shortfall states.
• Accelerates the redistribution of unspent SCHIP funds, reducing
from 3 years to 1 year the time states have to spend their
annual allotments. This helps to maximize use of available
SCHIP funds, partially addressing federal funding shortfalls.
• Reduces the federal match for certain beneficiaries in SCHIP –
namely, parents and children above 200 percent of poverty – to
the regular Medicaid match.
• Leaves states with a $7 billion shortfall over five years.
Goals for SCHIP Reauthorization
Growing bipartisan support for:
• Covering immediate (FY 07) and the 5 year federal
funding shortfall ($13.4 billion) affecting most states
by 2012.
• Providing funding to states to cover, at a minimum,
those children who are eligible for SCHIP and
Medicaid but not enrolled (7 of 10 uninsured
children).
• Preserving current state flexibility in determining
income limits for SCHIP. Provide financial support,
as resources allow, to support states’ (e.g. PA’s) use
of this flexibility to cover more kids.
IV. Dealing with the Long-Term Fiscal
Problem
Likely Consequences of Unbalanced
Approach to Deficit Reduction
(in Which Large Parts of the Budget Are Off the Table)
• Large cuts over time in programs for the poor.
• Increases in the number of uninsured Americans.
• Federal government may be unable to fulfill some
core functions.
• More costs shifted to states.
The Goal: Balanced Approach To Deficit Reduction
(in Which All of the Budget Is On the Table)
• Balanced approach would include revenue
increases as well as spending cuts.
• Deficit-reduction measures would focus on
“weak claims,” not “weak clients.”
• Balanced approach was taken in 1990 and
1993 by Presidents Bush and Clinton.
Rising Health Costs are the Main Driver of
Growth in the “Big Three”
Sources of cost growth in the “Big Three” as a share of GDP
Medicare
Medicaid
Social Security
10%
10%
10%
8%
8%
8%
6%
6%
6%
4%
4%
4%
2%
2%
2%
0%
0%
0%
2007
2050
2007
Demographic changes
2050
2007
Health cost growth faster
than economic growth
Source: CBPP calculations based on CBO data.
2050
The Big Enchilada:
The U.S. Health Care System
• The largest factor behind the grim budget forecast is the
rising cost of Medicare and Medicaid.
• The rising costs of these programs essentially reflect the
rapidly rising costs in the entire U.S. health care system.
• To cut future costs in Medicare and Medicaid sharply without
restraining costs in the health care system as a whole would
necessitate draconian cuts in these programs.
• Thus, the key to addressing the future implosion of the
budget is to reform the U.S. health care system, a daunting
task given the powerful economic interests involved.