11

Cliffs, Policy, & Politics: “The Rubik Cube”

G. WILLIAM HOAGLANDOCTOBER 31, 2012

George Mason University

Osher Lifelong Learning Institute

22

Recession as announced by National Bureau of EconomicResearch

Surplus

Deficit

Trend

Actual Alternative Projections

Source: The Budget and Economic Outlook: Fiscal Years 2012 to 2022” Congressional Budget Office, January 2012.0

TOTAL BUDGET SURPLUS/DEFICIT- FY 1965- 2012

Tax Cuts Expire/Sequester Tax Cuts Extended/No Sequester

22

2

33

2011

Actual

2012

Est

2013

Proj→2014 2015 2016 2017

% ∆ annual

2012-2017

Receipts 2,303 2,432 2,660 2,873 3,147 3,378 3,583 + 8.1%

Spending 3,603 3,627 3,660 3,826 4,030 4,312 4,520 + 4.5 %

Deficits

% of GDP

1,300

8.7%

1,195

7.7%

1,000

6.3%

953

5.8%

883

5.0%

934

5.0%

936

4.8%

NA

NA

Public Debt

% GDP

Debt Subject Limit*

% GDP

10,128

68%

14,747

98%

11,370

73%

16,334

104%

12,479

78%

17,532

106%

13,536

82%

18,485

106%

14,515

82%

19,412

105%

15,545

83%

20,379

104%

16,577

84%

21,315

103%

+7.8%

+5.4%

Source: CBO, Updated Budget Projections: Fiscal Years 2012 to 2022. March, 2012.

Nominal GDP estimated to increase 4.9 % annually 2012-2017. * Debt subject to limit currently set at $16.4 trillion.

BUDGET OUTLOOK- FY 2011-2017 (IN BILLIONS OF DOLLARS) 3

44

Sources: Congressional Budget Office, Moment of Truth, Chairman Ryan’s The Path to Prosperity, The President’s Budget for Fiscal Year 2013

100%

90%

85%

80%

75%

50%

95%

% of GDP

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Plausible Baseline

President Obama’s Budget

Bowles-Simpson/Domenici-Rivlin

Chairman Ryan’sBudget

70%

65%

60%

55%

DEBT HELD BY THE PUBLIC UNDER VARIOUS BUDGET PROPOSALS (% OF GDP) 4

55

Forecast

2012

Forecast

2013

Real GDP Growth– Administration

– CBO

– Blue Chip

+2.3%

+2.1%

+2.1%

+2.7%

-0.3%

+2.3%

Inflation (CPI)– Administration

– CBO

– Blue Chip

+2.1%

+1.8%

+2.0%

+1.9%

+1.4%

+1.9%

Unemployment Rate– Administration

– CBO

– Blue Chip

8.0%

8.2%

8.2%

7.7%

8.8%

7.8%

10 Year Note– Administration

– CBO

– Blue Chip

2.0%

1.8%

1.9%

2.7%

1.8%

2.4%

Sources: Congressional Budget Office, August 2012; Office of Management and Budget, Mid-Session FY 2013 Budget of the U.S. Government. July 2012; Blue Chips July 2012.

ECONOMIC FORECASTS CALENDAR YEARS 2012 – 2013

Recession

5

66

250

200

150

100

50

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Policy Uncertainty Index

1st Gulf WarBalanceBudgeted Act Black

Monday

Clinton Election

RussianCrisis/LTCM

BushElection

9/11

2nd Gulf War

Largeinterest

rates cuts,stimulus

LehmanandTARP

Debt Ceiling Dispute;Euro Debt

BankingCrisis,ObamaElection

Notes: Index of Policy-Related Economic Uncertainty composed of 4 series: monthly news articles containing uncertain or uncertain, economic oreconomy, and policy relevant terms (scaled by the smoothed number of articles containing ‘today’); the number of tax laws expiring in coming years,and a composite of IQ ranges for quarterly forecasts of federal, state, and local government expenditures and 1-year CPI from the Phil. Fed Survey ofForecasters. Weights: 1/2 News-based, 1/6 tax expirations, 1/6 CPI disagreement, 1/6 expenditures disagreement after each index normalized to havea standard-deviation of 1. News query run Jun 4, 2011. Index normalized mean 100 1985-2009. Data www.policyuncertainty. com

Trend 1985-2012

Trend 2007-2012

INDEX OF ECONOMIC POLICY UNCERTAINTY 6

77

CBO’s Alternative Fiscal Scenario assumes expiring tax provisions (other than the payroll tax reduction) are extended, the AMT is indexed for inflation after 2011, Medicare’s payment rates for physicians’ services are held constant at their current level, and automatic spending reductions required by the Budget Control Act do not take effect. CBO January 2012. President’s Budget: FY 2013 Federal Budget, OMB; February 2012.

President’s Budget

Avg.

22.7%

SPENDING: BASELINE & ALTERNATIVE FISCAL SCENARIO % OF GDP 7

88

CBO’s Alternative Fiscal Scenario assumes expiring tax provisions (other than the payroll tax reduction) are extended, the AMT is indexed for inflation after 2011, Medicare’s payment rates for physicians’ services are held constant at their current level, and automatic spending reductions required by the Budget Control Act do not take effect. CBO January 2012. President’s Budget: FY 2013 Federal Budget, OMB; February 2012.

President’s Budget

Avg.

20.8%

REVENUES: BASELINE & ALTERNATIVE FISCAL SCENARIO % OF GDP 8

99

FEDERAL DEBT HELD BY THE PUBLIC: BASELINE, ALTERNATIVE FISCAL SCENARIO,

PRESIDENT’S BUDGET % OF GDP

CBO’s Alternative Fiscal Scenario assumes expiring tax provisions (other than the payroll tax reduction) are extended, the AMT is indexed for inflation after 2011, Medicare’s payment rates for physicians’ services are held constant at their current level, and automatic spending reductions required by the Budget Control Act do not take effect. CBO January 2012. President’s Budget estimates from FY 2013 Federal Budget, OMB, February 2012.

President’s Budget

Avg. 2012-22: 77%Avg. 2012-22: 84.4%Avg. 2012-22: 68.6%

62.0%

94.2%

76.5%

72.5%

9

1010

FEDERAL SPENDING PROJECTED FOR 2021

“Other Health Programs” includes: Health insurance subsidies, exchanges, and related spending;Department of Defense Medicare-Eligible Retiree Health Care Fund (including TRICARE for Life);Children’s Health Insurance Program, and other programs.

Medicare(15%)

Medicare(15%)

Defense(14%)

Defense(14%)

Medicaid(11%)

Medicaid(11%)

Social Security

(24%)

Social Security

(24%)

Other Mandatory Spending

(9%)

Domestic Discretionary

(12%)

Other Mandatory Spending

(9%)

Domestic Discretionary

(12%)

NetInterest

(11%)

NetInterest

(11%)

Other Health Programs(3%)

Other Health Programs(3%)

Source: The Congressional Budget Office. The Budget and Economic Outlook: Fiscal Years 2012 to 2022. January 2012.

10

1111

Source: Federal Reserve, Sept. 20, 2012

2005 2006 2007 2008

Year

2009

$2321.2 $2368.0

$2541.0

$1906.4

$1063.3

$1436.9$1325.9

$1945.9

2012(2Q)2010 2011

Borrowing by Domestic Non-Financial Sector

Excluding Interest Income Billions of Dollars, Annual Figures (Seasonally adjusted annual rates)

1212

Source: Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2010 to 2022: January 2012.

The 2012 Long-Term Projections for Social Security: Additional Information. October 2012.

2006-2022 ($ in Billions)

Annual Social Security Trust Fund SurplusesExcluding Interest Paid to Trust Fund (Primary Surplus/Deficit

2010

Outlays equal Income

2010

Outlays equal Income

2011

Outlays exceed Income

2011

Outlays exceed Income

Total Trust Fund Exhausted

19% probability 2030

81% probability 2040

Total Trust Fund Exhausted

19% probability 2030

81% probability 2040

1313

(Trust Fund Ratio: Assets as a % of annual expenditures)

Outlook for Medicare Trust Fund

Pre and Post Patient Protection and Affordable Care Act

Assets fall below 100% of outgo 2011

Assets fall below 100% of outgo 2011

Assets exhausted

2017 Pre-PPACA

2024 Post-PPACA

Assets exhausted

2017 Pre-PPACA

2024 Post-PPACA

Source: 2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and FederalSupplementary Medical Insurance Trust Funds. May 11, 2009. CMS, Office of the Actuary,

“Estimated Effects of the Patient Protection and Affordable Care Act,” Solomon M. Mussey, April 22,2010

1414

“THE FISCAL CLIFF” 14

Lame Duck ~ November 13-December 21(20 days)

•Government Funding FY 2013 (Six-month CR)

•December 31: Expiration 2001, 2003, 2009 & 2010 tax provisions, ACA taxes -- $400 billion increase in 2013

•December 31: “Doc Fix” 27% cut; payroll tax reduction; unemployment expiration: one year fix $23.4 billion

•January 2, 2013: Spending reductions: $1.2 trillion ($109 billion – 2013)

•Late 2012 or Early 2013 -- Debt Limit increase: $16.394 trillion

1515

15

$109.3 Billion Sequester 2013

Defense Non-Defense

Discretionary $ 54.6 bn(9.4% reduction)

$ 38.0 bn(8.2% reduction)

Mandatory $ 0.1 bn(10.0% reduction)

$16.6 bn(7.6% /2.0%

Medicare

reduction)

Total $54.7 bn $54.7 bn

IMPACT OF THE SEQUESTER: 2013 AND 2013 - 21

1616

16

Sources: Congressional Budget Office, Donald Marron and Tax Policy Center using data from the Office of Management and

Budget and Treasury

* 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.

Mandatory$2,160B

Tax Expenditures$1,343B

Defense Discretionary*

$729B

Domestic Discretionary*

$504B

$55B – 50% of Sequester$38B – 35% of Sequester$17B

Non-Defense – 50% Defense – 50%

Cuts Cuts Cuts

FY 2013 SEQUESTER CUTS FALL ON THE SMALLEST PIECES OF THE BUDGET

1717

Federal Tax Rates Pre – Post Fiscal Cliff

Individuals and Small Businesses with

Taxable Income in the Following Ranges:

Tax Rate -- Pre Cliff

2012

Tax Rate –Post Cliff

2013

Up to $8,700 for single filers and

Up to $17,400 for married couples10 % 15 %

Between $8,700 and $35,350 for single filers and

Between $17,400 and $70,700 for married couples15% 15%

Between $35,350 and $85,650 for single filers and

Between $70,700 and $142,700 for married couples.25% 28%

Between $85,650 and $178,650 for single filers and

Between $142,700 and $217,450 for married

couples

28% 31%

Between $178,650 and $388,350 for single filers

And

Between $217,450 and $388,350 for married

couples

33% 36%

Over $388,350 for both single filers and

married couples35% 39.6% - 40.8%

(Reinstatement of PEP & Pease

Top Rate on Long – Term Capital Gains 15% 20% - 25%

(Health Care Net Investment 3.8% + PEP/Pease

Top Rate on Qualified Dividends 15% 39.6% - 44.6%

(Health Care Net Investment 3.8% + PEP/Pease

17

1818

Political Setting

1919

Make-up of

113th Congress

White

House

Potential Policy

Outcome*

D

R

R

D

R

D

R

D

Lame Duck 112th

Nov. 13 – Dec. 21

Delay & Kick

Delay, Kick, Negotiate

19

“The specter of harmful across-the-

board cuts to defense and nondefense

programs was intended to drive both

sides to compromise. The sequestration

itself was never intended to be

implemented. The Administration

strongly believes that sequestration is

bad policy and that Congress can and

should take action to avoid it by passing

a comprehensive and balanced deficit

reduction package.”

OMB Report (P.L.112-155) 9/14/12

SPLITStatus QuoS=D/H=R

19POTENTIAL FISCAL CLIFF OUTCOMES PENDING THE FALL ELECTIONS

* Partial Punt all Scenarios: AMT 2012/SGR 2013

2020

Date: 10/15 – 10/24 Spread

+0.6

50

49

48

47

46

45

44

43

42

PRESIDENT OBAMA VS. ROMNEYREAL CLEAR POLITICS POLLING 20

Obama(47.1)

Romney(47.7)

10/25/20122/01/2011 6/08/2011 2/17/201210/13/2011 6/15/2012

2121

ELECTORAL MAP: BATTLE FOR WHITE HOUSE

270 ELECTORAL VOTES TO WIN REAL CLEAR POLITICS POLLING : OCTOBER 1, 2012 21

Romney 206 � Obama 201 � Toss-Ups 131

2222

U.S. CONGRESS: 112TH

SEPTEMBER 2012 22

U.S. Congress House Senate

D R Margin D+I R Margin

112th (2011-2012) 190

Vacant 3

242 R + 52 53 47 D/I + 6

Retiring/Running Different Office:

House: 23 D 18 R Senate: 7 D/I 3R

As of September 10, 2012

2323

7 Republican Incumbents

16 Democratic Incumbents

3 Retiring Republicans

No election

7 Retiring Democrats

Estimates as of October 1, 2012

POLITICAL ENVIRONMENT

33 U.S. SENATE ELECTIONS: 23 D AND 10 R 23

* Lost GOP Primary

Toss Ups = 4with 1 Dem Pickup Toss Ups = 6 with 1 Rep Pickups

Source: Real Clear Politics

242424Confidential, unpublished property of Cigna. Do not duplicate or distribute. Use and distribution limited solely to authorized personnel. © 2012 Cigna

It could be worse!

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