The Budget Debate:Key Facts for Leaders

“The views expressed in this presentation/article are those of the authorand do not reflect the official policy or position of the National DefenseUniversity, the Department of Defense, or the U.S. Government.”

Ricardo AguileraDirector

Chief Financial Officer AcademyNational Defense University, iCollege

The Fiscal Future:Issues and Options

• Issue: Balance Budget Debt limit agreements to date do not balance the budget Current FY 14 President’s Budget plans for deficits into future Option: Start long-term revenue increases and/or spending cuts

• Issue: Pay Down National Debt Requires initial balanced budgets and long-term surpluses Option: Control growth in mandatory spending and/or raise revenue

• Issue: Ensure Long-Term Social Insurance Programs solvency Social Security will be able to pay out full benefits until 2036 After this point tax revenue will fund pay outs of 75% of full benefits Medicare will fund full benefits until 2024. Option: Reduce benefits and/or increase revenue

The Fiscal Future:Federal Leaders Watch List

• UnderstandPoliticsCalendar/ProcessBaselines

Federal Debt Held by the Public and Gross

Dolla

rs in T

rilli

ons

Source: OMB

2013 2014 20150

2

4

6

8

10

12

14

16

18

20

11.912.9 13.6

4.7

5.05.1

Government AccountPublic

0.7 0.6 0.6Deficit:

18.717.916.7

5

Congressional Issues

Democrats 200 Republicans 232 Vacant 3

Democrats 53 (including 2 independents) Republicans 45

Issues:• May 18, 2013• October 1, 2013• October 17, 2013• December 13, 2013• January 15-18, 2014• February 7, 2014• March 4, 2014• October 1, 2014• November 4, 2014

Debt Reduction Remaining

• All budget-related legislation to date brings annual deficits to “historic norm” of about 4% of GDP

• Most economists agree $4T in savings/revenue increases over 10 years needed to balance the budget and initially pay down the debt

• Debt Reduction Required: ___ ($T)

Required 4.0 Achieved to date 2.7 Difference 1.3

• $1.3T additional still needed to a achieve $4T in savings/revenue

Source: Bi-Partisan Policy Center

Sequestration’s Effect on Debt

In current (as-spent) dollars, both Federal receipts and outlays have grown rapidly and are expected to continue growth.

Federal Budget Trends: 1948-2016

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

Fiscal Year (w/o TQ)

Curr

ent Dollars

in B

illions

Receipts Outlays

Source: Office of Management and Budget

Federal Budget Trends

One measure of fiscal stress is the additional borrowing required by a government relative to the size of its economy. This slide from OECD indicates that, for the FY 2006-9 period, the US and UK were in the middle of a group – seemingly worse off that Germany, Japan or France, but less stressed than Ireland, Spain or Greece.

Budget Deficits Around the World

10

Fiscal Year 2015The President’s Budget

Receipts

FY 2015 Deficit = $564B

Average Annual Deficit FY 16-24 ~ $485B

$3,337B

Outlays$3,901B

Source: OMB

FY 12/13 DoD Requests vs. Appropriation(Budget Authority in $ Billions)

142

Source: OMB

142 135

Does not include $26B from Initiative Fund in FY 15 or $79B OCO

FY 2013 FY 2014 FY 20150

100

200

300

400

500

600

135.4 135.9 135.2

194 192.8 198.7

91.1 92.4 90.4

63.3 62.8 63.5Revolving Funds

Family Housing

Military Construction

Research, Development, Test and Evaluation

Procurement

Operation and Maintenance

Military Personnel

11.8

495.5

12.0

496.0 495.6

7.8

Defense16%

Other Discre-tionary

15%

Social Security23%Medicare

13%

Medicaid9%

Other Mandatory18%

Net Interest6%

Immigration Reform**0%

12

Fiscal Year 2015 President’s Budget(Outlays)

Mandatory $2,709B(69% of total)

Discretionary $1,192B(31% of total)

TOTAL $3,901B

* Includes $6B in disaster costs** About $8B in Implementation costs

Source: OMB

Baby Boom Births by Year

19431944

19451946

19471948

19491950

19511952

19531954

19551956

19571958

19591960

19611962

19631964

19651966

19672.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

4.3

4.5

Mill

ions

of B

irths

= Baby Start/End Year Source: Statistical Abstract of the United States

October 14, 2010

Howard G. Borgstrom

14

All unlisted agencies – NASA, Education, Energy, Interior, Commerce, State and Foreign Aid, Justice, Homeland Security, SBA, EPA, Judicial Branch, Legislative Branch, etc. – compete for less than 10% of the spending.

Distribution of Outlays by Agency

0

10

20

30

40

50

60

70

80

90

100

Perc

ent of Tota

l

Treasury (Int) Soc. Secur. HHS DOD (Military) VA/ OPM/ AG/ DOT/ DOL

Growth in Outlays by Agency

15

Fiscal Year 2015 President’s Budget(Revenue)

TOTAL $3,337B

*

Source: OMB

Indiv Income Tax46%

Social Se-curity23%

Corp Tax13%

Medicare7%

Othe Social Insurance

2%

Excise, Estate,

Customs5%

Other Receipts4%

Immigration Reform0%

Much of what people see as a growing tax burden is through increased payments into Social Security and Medicare; the personal income tax per se has been very stable and corporate income taxes are proportionately decreased since WWII.

Federal Revenue Sources 1948-2016

0

10

20

30

40

50

60

70

80

90

100

Fiscal Year (w/o TQ)

Per

cen

t o

f T

ota

l

Ind Inc Tax Corporate Inc Tax Social Insurance All other

Source: OMB

1994 1997 2000 2003 2006 20090%

5%

10%

15%

20%

25%

30%

35%

$1-5M$5-50M50-500M500M+

Corporate Taxes Paid as a Percent of Taxable Income

Source: Internal Revenue Service

Perc

ent o

f Tax

able

Inco

me

Asset Value of Corporation

In 2008, the US had one of the lowest tax burdens among OECD nations, in terms of tax revenues as a percent of GDP.

Comparative Tax Burden, 2008

0 10 20 30 40 50 60

MexicoChile

TurkeyUnited States

KoreaAustralia

JapanIreland

SwitzerlandSlovak

CanadaGreece

SpainNew Zealand

IsraelPoland

OECD - TotalPortugal

LuxembourgUnited

Czech RepublicIceland

GermanySlovenia

NetherlandsHungaryNorwayAustriaFinlandFrance

ItalyBelgiumSweden

Denmark

Taxes as Percent of GDP

Source: OECD

287 328 365 377 400 411 432479 513 528 528 530 496 496

496

535 544 551 559

91 763 116

8 166

187 146 162

159115

82 85 79

$0

$250

$500

$750

FY01 FY02 FY03

FY04

FY05 FY06 FY07 FY08 FY09

Base Budget OCO

FY10

FY11

Other

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

345

Budget Totals in President’s FY 2015 Budget RequestDoD Topline, FY 2001 – FY 2019

(Current Dollars in Billions)

575 565

438468 479

535

601

666 666691 687

645

574

316 6

23

3

71

17

589

30* 30* 30*

* Reflects FY13 Enacted level excluding Sequestration* Placeholders only

Focus Only On Base Budget For Remainder Of Briefing No FY 2015 OCO Budget Yet

*578 581

30*

2

614*581

73

Source: DoD

Since 2001, real growth has occurred in all major categories, but O&M has grown the most in dollar

terms

FY14$ in billions, base budget FY 2001Actual

FY 2014Enacted

Dollar Growth

Percent Change

Percent of Total Growth

Military Personnel 101.1 135.2 34.8 34% 30%

Operation and Maintenance(ex. DHP)

114.0 160.5 46.5 41% 40%

Defense Health Program (DHP)* 16.0 32.3 16.3 102% 14%

Procurement 81.6 92.4 10.9 13% 9%

Research, Development, Test, and Evaluation

54.4 62.8 8.4 15% 7%

Military Construction 7.1 8.4 1.3 18% 1%

Family Housing 4.8 1.4 -3.4 -70% -3%

Other 1.4 2.2 0.8 56% 1%

TOTAL 380.5 496.0 115.6 30% 100%

*The DOD Unified Medical Budget ($48 billion in FY 2015) includes both DHP and some additional Military Personnel funding.

Source: OMB

475

500

525

FY14 FY15

PB14

FY16 FY17

Sequester - Level Budgets

FY18 FY19

PB15

Sequester - Level Budgets

559551

550541

535

575

($B)

600

FY 2014 President’s Budget (PB14)

496500

537

577

PB15 DoD Base-Budget Topline

PB15

3

Source: DoD

500

Sequester - Level Budgets

475

525

550

575

FY14 FY15

PB14

FY16 FY17

Sequester - Level Budgets

FY18 FY19

PB15

$115B Cut

($B)

600

FY 2014 President’s Budget (PB14)

PB15 DoD Base-Budget Topline(Effects Of Sequester-Level Budgets)

PB15

15

Source: DoD

475

$26BInitiati

ve500

525

550541

575

($B)

600

FY 2014 President’s Budget (PB14)

FY14 FY15

PB14

FY16 FY17

Sequester - Level Budgets

FY18 FY19

PB15

PB15 DoD Base-Budget Topline(Opportunity, Growth, and Security Initiative)

Sequester - Level Budgets496

PB15

13

Source: DoD

FY 2015 Opportunity, Growth, and Security Initiative

• Total $26 billion for DoD• Readiness enhancements

– Training adds in Army– Spares and logistics in Navy– Unit training in USMC– Training in Air Force

• Investment increases– Army Helicopters (56)– Navy P-8 (8), E-2D Aircraft (1)– USMC Light Armored Vehicle

– Air Force F-35 (2), C-130J (10),MQ-9 Aircraft (12)

– Science and Technology ($335M)

• Installation support increases– All Services increase

base sustainment– All Services add

MilCon funding

14

Source: DoD

The OMB budget review schedule

July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June

Passback/Appeals

Program/Budget Review with Agency HQ

• Director’s Review• Revised Economic Assumptions

• Review of Congressional Testimony and Actions• Ongoing Budget Oversight• Mid-Session Corrections•Apportionments

• Review of Congressional Testimony and Actions• Ongoing Budget Oversight• Mid-Session Corrections•Apportionments

Review Proposed Authorizations with Budget impact

MAX Database: Prior YearsMAX Database: Prior YearsMAX Database: Budget YearsMAX Database: Budget Years

Budget Chapter Writing Budget Chapter Writing

Budget Review BoardMeetings

Review Agency Budget Justifications

July: OMB issuedsrevised A-1l guidance State of the

Union andBudgetSubmission

The Budget Calendar andthe PPBE Process

FY11 Q3 FY12 FY13 FY14 FY15 FY16Q2 Q4 Q3Q2 Q4 Q3Q2 Q4 Q3Q2 Q4 Q3Q2 Q4 Q3Q2

FY 2014Budget

FY 2015 Budget

FY 2016 Budget

Planning Prog/Budget Congressional Action Execution

Planning

Planning

Prog/Budget Execution

Execution

TodayFY 2014 – 2016 Budget Status

Congressional Action???

Congressional ActionProg/Budget

Congressional Action

Front End AssesProg. Review??

DoD Planning, Programming, Budgeting, and Execution (PPBE) System Overview

Yearly PPBE Process and MilestonesFeb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

Planning (QDR, DPPG, GEF)

Program/Budget Estimates

Components submit estimates

PDMs3-Star3-Star

Final JCS risk assessment

Execution Review

OUSD(C) performs anExecution review. Result: Omnibus Reprogramming

PBD = Program Budget Decision; PDM = Program Decision Memorandum

Dep. Mgmt Act. GrpDep. Mgmt Act. Grp

PPBE PhasesPPBE Phases

Strategic Planning

Program Review

ExecutionReview

BudgetReview

PBDs

BudgetSubmission

BudgetReview

BudgetJustification BudgetJustification

3-Star3-Star

Small Group/Large Group

Small Group/Large Group

JCS Chairman’s Program Assessment

Dep. Mgmt Act. GrpDep. Mgmt Act. Grp

Prog DecisionMemo

Resource MgmtDecision

Small Group/Large Group

Small Group/Large Group

JCS Chairman’s Joint Planning Document Budget

Estimate Submission(BES)

Program Objective Memorandum(POM)

Authorizers

President’s Budget

Hearings, briefings, questions

Congressional Process and Timeline

Hearings, briefings, questions

Appropriators

House Committee Senate Committee

Conference

Bill

President Signs

HAC, Subcommittee SAC, Subcommittee

Conference

Bill

President Signs

Congress:Budget Committees

JRJR

CR

PL

Omni

Feb

Mar

Sep-

Aug-

July

What does it mean for us?Building Better Budgets

• Future Budget Pressures Decisions made within short deadlines at aggregated levels Budget leaders are in the room when decisions are made

Do they have the facts that can sway a decision your way?

• Get Better Numbers Analysts ask: “What is the impact of $1 more/less on this program?” Metrics need to link funding to agency outcomes/goals

Output measures are no good. Self audit: Be honest

Self examine the programs - criteria, condition, cause, and effect

• Tell Better Stories Program officials must explain simply how previous funding brought gains Program’s story for future funds needs to be compelling and well-reasoned Tell your story consistently and often