our fiscal future (npf)

8/7/2019 Our Fiscal Future (NPF)

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Why Deficits MatterWhy Deficits MatterAnd What We Could Do About ThemAnd What We Could Do About Them

Isabel Sawhill, Senior Fellow, Brookings InstitutionJune 2008


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The ProblemThe Problem Current Deficit (FY 2007): $162 BCurrent Deficit (FY 2007): $162 B

Projected by 2017: $678 BProjected by 2017: $678 B

Over longerOver longer--run totally unsustainable because ofrun totally unsustainable because ofrising costs of entitlementsrising costs of entitlements

By about 2040, three major programs absorb allBy about 2040, three major programs absorb all

revenues under current lawrevenues under current law

Need to reform both revenues and entitlementsNeed to reform both revenues and entitlements

1


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Budget ProjectionsBudget Projections

2Source: Authors calculations from Brookings-Urban Tax Policy Center, Budget OutlookTables, August 2007, Appendix 2

-$678 billion

$

09 billion

.

.

.

.

.

.

.

3

5

9

3

5

Surplus(Deficit),$B

illions

djusted B se

ine

B Uni ied Budget B se

ine

ugust

ctu


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Federal Revenue and OutlaysFederal Revenue and Outlays

3

Source: FY 2007 Budget of the United States Government, Historical Table 1.2; Authors

calculations from Brookings-Urban Tax Policy Center, Budget Outlook Tables, March2007, Appendix 3a

Revenues

Outlays

Average

Revenues,!1

" #5-

200#

$

Average Outlays,

! 1 " # 5-200 #$

15.0

1 .0

17.0

1 .0

1 .0

20.0

21.0

22.0

23.0

24.0

25.0

1

5

1

7

1 1

71

1

73

1

75

1

77

1

7

1

1

1

3

1

5

1

7

1 1

1

1

3

1

5

1

7

1 2001

2003

2005

2007

200

2011

2013

2015

2017

PercentageofG

PredictedActual


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Why Deficits MatterWhy Deficits Matter Dependence on foreign lendersDependence on foreign lenders

Rapidly rising debt service costsRapidly rising debt service costs Burden on future generationsBurden on future generations

Weakened ability to meet contingenciesWeakened ability to meet contingencies

or invest in futureor invest in future

4


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Rapidly Rising Interest CostsRapidly Rising Interest Costs

6

Projected Debt Service Payments

0

100

200

00

00

500

600

2007 2008 2009 2010 2011 2012 201 201 2015 2016 2017Billionsofcurrentdollars

Source :Authors calculations from Congressional Bu dget Office, Budget andEconomic Outlook:An Update,August 2007 ,Current Budget Projections Data


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The Burden on Future GenerationsThe Burden on Future Generations

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Dealing with an Aging PopulationDealing with an Aging Population

8

0

0.0

0.10.1

0.2

0.2

0.3

0.3

0.4

1

0

1 1

60

1

6

1

70

1

7

1

80

1

85

1

0

1

5

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

Ratio of Population Aged 65+

to Working Age Population 20-64), 1 50-2045

Source: Concord Coalition


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Prerequisites for a CompromisePrerequisites for a Compromise Balance of spending cuts and revenue increasesBalance of spending cuts and revenue increases

Spending cuts can come from holding the line onSpending cuts can come from holding the line on

increased spending and from reformingincreased spending and from reformingentitlements, health care in particularentitlements, health care in particular

Revenue increases can come from not extending allRevenue increases can come from not extending all

of the Bush tax cuts, from closing loopholes, orof the Bush tax cuts, from closing loopholes, orfrom new taxes (e g , on energy consumption)from new taxes (e g , on energy consumption)

9


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Social Security Reform OptionsSocial Security Reform Options Adjust age of retirement or index to longevityAdjust age of retirement or index to longevity

Encourage people to work longerEncourage people to work longer

Reduce future benefits for betterReduce future benefits for better--off whileoff whilemaintaining for less wellmaintaining for less well--offoff

MandateMandate additionaladditionalsavings for retirement insavings for retirement in

personal accountspersonal accounts

Raise payroll tax capRaise payroll tax cap

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Tax Reform OptionsTax Reform Options Fix the AMTFix the AMT

Do not extend all of the Bush tax cutsDo not extend all of the Bush tax cuts

Eliminate or reform existing deductions,Eliminate or reform existing deductions,credits, and other preferencescredits, and other preferences

Increase complianceIncrease compliance

Enact new taxes (e g on energy and/or onEnact new taxes (e g on energy and/or on

consumption)consumption)

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What Needs To HappenWhat Needs To Happen First and foremost, public recognition that deficitsFirst and foremost, public recognition that deficits

are a problemare a problem

Public willingness to forgo tax cuts or acceptPublic willingness to forgo tax cuts or acceptspending cutbacksspending cutbacks

The sooner this is done, the less costly it will beThe sooner this is done, the less costly it will be

Bipartisanship to make the tough choicesBipartisanship to make the tough choices Rules to help politicians stay fiscally responsibleRules to help politicians stay fiscally responsible

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The CandidatesThe Candidates They are making promises that are notThey are making promises that are not

affordable Digging the hole deeperaffordable Digging the hole deeper

They are pretending that a war dividendThey are pretending that a war dividendor faster growth or ending earmarks oror faster growth or ending earmarks orrolling back tax cuts for the wealthy willrolling back tax cuts for the wealthy willsolve the problemsolve the problem

Result: the public remains uneducated andResult: the public remains uneducated andthe candidates have no mandate to make thethe candidates have no mandate to make thetough choices after the electiontough choices after the election

The big loser: the nationThe big loser: the nation14


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www brookings edu/budgetwww brookings edu/budget

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our fiscal future (npf)

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