the federal debt, the fiscal cliff, and the federal debt limit steve bell senior director, economic...

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The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

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Page 1: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit

STEVE BELLSENIOR DIRECTOR , ECONOMIC POLICY PROJECTBIPARTISAN POLICY CENTER

Page 2: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

FY 2012 BUDGET

Medicare + Med-icaid21%

Social Security21%

Other Mandatory

15%Interest

7%Defense Discretionary

19%

Non-Defense Discretionary

17%

2

Page 3: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

ABSENT REFORMS, DEBT IS SET TO SKYROCKET IN THE COMING DECADES

19721975

19781981

19841987

19901993

19961999

20022005

20082011

20142017

20202023

20262029

20322035

20382041

20442047

20500%

50%

100%

150%

200%

250%

% o

f GD

P

Note: Unlike current law, the Bipartisan Policy Center’s Plausible Baseline assumes that the 2001, 2003, and 2010 tax cuts are extended, the AMT is indexed to inflation, Medicare’s physician payment rates are maintained at their current rate (the “doc fix”), the looming sequester from the Budget Control Act of 2011 is lifted, and troops stationed overseas decline to 45,000 by 2015

Debt breaches 100% of GDP in 2027

Sources: Congressional Budget Office (January 2012) and Bipartisan Policy Center extrapolations

3

Page 4: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

HEALTH CARE COSTS ARE THE PRIMARY DRIVER OF THE DEBT

20122014

20162018

20202022

20242026

20282030

20322034

20362038

20402042

20442046

20482050

20520%

2%

4%

6%

8%

10%

12%

14%

Health Care Spending

Social Security

Discretionary Spending (Defense and Non-Defense)

Other Mandatory Programs

% o

f GD

P

Sources: Congressional Budget Office’s Alternative Fiscal Scenario (January 2012), additionally assuming that troops overseas decline to 45,000 by 2015; Bipartisan Policy Center extrapolations

4

Page 5: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

Fantasy 1: We can save enough in the rest of the budget to pay for the projected growth in entitlements.

2012 2020 2030 2040 20500%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%Major Entitlement Programs*

Discretionary Spending

Entitlements and Discretionary Spending, as a Percent of GDP, If the Projected Growth in Entitlement Spending Is Paid for Entirely by Cutting Discretionary Spending, 2012-2050

*Social Security, Medicare, Medicaid, CHIP, and exchange subsidiesSource: CBO Alternative Fiscal Scenario (CBO, 2012) and CSIS calculations

5

Page 6: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

Fantasy 2: We can raise taxes enough to pay for the projected growth in entitlements.

Series10%

20%

40%

60%

80%

100%

120%

140%

160%

180%

65%

102%

169%

Required Percentage Increase in the Income Tax Burden for Different Groups of Taxpayers If the Pro-jected Growth in Entitlements from 2010 to 2030 is Paid for Entirely by Raising Income Taxes

Source: CBO Alternative Fiscal Scenario (2012) and CSIS calculations

Increase If Taxes Are Raised for Everyone

Increase for the Top 5 Percent of Taxpayers If Taxes Are Only Raised for the Top 5 Percent

Increase for the Top 1 Percent of Taxpayers If Taxes Are Only Raised for the Top 1 Percent

6

Page 7: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

HOW DID WE GET HERE? 7

• Debt Ceiling

• Budget Control Act (BCA)

• Super committee failure

• Sequester

Page 8: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

MASSIVE FISCAL CONTRACTION IS SCHEDULED TO OCCUR IN 2013

8

• Bush Tax Cuts + AMT $235 b• Payroll Tax Cut

$90 b• Unemployment Insurance$25 b• Tax Extenders & Business Depreciation

$80 b• The Sequester$60 b

• The Debt Ceiling !?!?!?TOTAL:

$525 b

Upcoming Current Law Changes:

• Affordable Care Act Taxes$25 b• Doc Fix

$10 b

Page 9: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

WHAT IS A SEQUESTER? 9

• Automatic reduction to federal government spending for a given fiscal year

• Gramm-Rudman-Hollings – Balanced Budget and Emergency Deficit Control Act of 1985

• Phil Gramm: “It was never the objective of [GRH] to trigger the sequester; the objective of [GRH] was to have the threat of the sequester force compromise and action.”

• ‘80s and ‘90s sequesters were rarely carried out, but pushed Congress to achieve fiscal goals in ‘90s

Page 10: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

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

10

Mandatory$2,160B

Tax Expenditures$1,343B

Defense Discretionary*

$729B

Domestic Discretionary*

$504B

$55B – 50% of Sequester$39B – 35% of Sequester$16B

Non-Defense – 50% Defense – 50%

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.

Cuts Cuts Cuts

Page 11: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

SEQUESTER DELAYS FEDERAL DEBT REACHING 100% OF GDP BY ONLY 2 YEARS

Note: The Bipartisan Policy Center’s (BPC) January 2012 Plausible Baseline assumes that the 2001, 2003, and 2010 tax cuts are extended permanently, Medicare physician payments are frozen (the “doc fix”), the AMT is indexed to inflation, and overseas combat operations wind down.

Sources: Congressional Budget Office; Bipartisan Policy Center projections

20122014

20162018

20202022

20242026

20282030

20322034

20362038

20402042

20442046

20482050

20520%

50%

100%

150%

200%

250%

Fiscal Years

Deb

t H

eld

by t

he P

ublic

as

% o

f GD

P BPC January 2012 Plausible Base-line

Debt post-BCA Se-quester

11

Page 12: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

12

10 Largest Individual Tax Expenditures, Cost in Fiscal Year 2014

Provision Amount (billions of $)

Exclusion of Employer Health Insurance 164

Exclusion of Employer Pensions 163

Mortgage Interest Deduction 100

Exclusion of Medicare 76

Capital Gains Rates 71

Earned Income Credit 58

Deduction of State & Local Income Taxes 54

Gains: Exclusion at Death/Gift Carryover 52

Deduction of Charitable Contributions 52

Employer Benefits under Cafeteria Plans 44

Source: Congressional Research Service calculations based on Joint Committee on Taxation revenue estimates

Page 13: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

DOMENICI-RIVLIN: AN OVERVIEW 13

The consensus, bipartisan plan will:• Create a simple, pro-growth tax system that broadens the base,

reduces rates, makes America more competitive, and raises revenue to reduce the debt – while making the tax system more progressive.

• Reduce the unsustainable rate of growth in health care costs.

• Strengthen Social Security to ensure that it will pay benefits for 75 years and beyond, while protecting the most vulnerable elderly and maintaining the current retirement age.

• Freeze domestic and defense discretionary spending (already achieved by means of the Budget Control Act).

• Cut other spending, including farm and government retirement programs.

Page 14: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

DEBT DROPS DRAMATICALLY UNDER BIPARTISAN PLAN

0%

30%

60%

90%

120%

150%

180%

BPC Plausible Baseline Debt Held by the Public

Bipartisan Plan Debt Held by the Public

% o

f GD

P

Note: Unlike current law, the Bipartisan Policy Center’s Plausible Baseline assumes that the 2001, 2003, and 2010 tax cuts are extended, the AMT is indexed to inflation, Medicare’s physician payment rates are maintained at 2011 levels (the “doc fix”), the looming sequester from the Budget Control Act of 2011 is lifted, and troops stationed overseas decline to 45,000 by 2015

Sources: Congressional Budget Office (January 2012) and Bipartisan Policy Center extrapolations

14

Page 15: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

DEBT LIMIT: KEY QUESTIONS 15

1. When will the federal government next reach its statutory borrowing limit?

2. At that point, what legal actions does Treasury have at its disposal for continued funding of government operations?

3. What is the date after which Treasury will not have sufficient cash to pay ALL of its bills (the “X Date”)?

Page 16: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

REACHING THE DEBT LIMIT – WHAT IT MEANS 16

Layers of Defense Against DefaultThe Treasury Department has multiple means that can be used to pay the nation’s bills. If the debt limit is reached and Congress does not act in time, however, all of these layers of defense will be breached and the nation will default on its obligations.

ISSUE NEW DEBT TO THE PUBLIC IN TRADITIONAL MANNER

EXTRAORDINARY MEASURES

DAILY REVENUE AND CASH ON HAND

DEFAULT ON FINANCIAL OBLIGATIONS

Debt Limit Reached

EM Exhausted

The X Date

Page 17: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

REACHING THE DEBT LIMIT 17

• BPC estimates that the debt limit will be reached and Extraordinary Measures will begin in the last week of December

• Substantial interest on intra-governmental debt (including the Social Security and Medicare trust funds) is due on 12/31/2012

Page 18: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

EXTRAORDINARY MEASURES 18

EXTRAORDINARY MEASURES AVAILABLE BPC ESTIMATE

Do not reinvest the Federal Employees’ Retirement System G-Fund

$154 billion

Do not reinvest the Exchange Stabilization Fund $23 billion

Do not reinvest interest payments and cash receipts to Civil Service Fund and Postal Fund

$21 billion

Do not reinvest maturing securities in the Civil Service Fund and Postal Fund

Not Applicable in Dec. 2012

Total $197 billion

Note: The totals indicate available measures. Treasury may not employ all available measures. Treasury also has measures available (not listed) that assist with cash flow and debt management, but do not extend the date after which Treasury would default on federal obligations absent an increase in the debt limit (the “X Date”). Column does not add due to rounding.

Sources: Government Accountability Office, Congressional Research Service

Page 19: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

EXTRAORDINARY MEASURES WON’T LAST AS LONG 19

• In 2011, Extraordinary Measures lasted from May 16 until August 1

• They won’t buy as much time as they did last summer

• February is a “bad” month for the federal government’s finances

• Fewer measures available

Page 20: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

THE “X DATE” 20

• BPC defines the “X Date” as the date after which Extraordinary Measures have been exhausted and cash on hand is insufficient to pay all of the federal government’s bills in full and on time

• In other words, without an increase in the debt limit, the federal government will begin defaulting on some of its financial obligations on the day after the X Date

• BPC estimates that the X Date will occur in February 2013

Page 21: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

WHAT HAPPENS ONCE WE REACH THE “X DATE”? 21

Monthly Inflows Monthly Outflows

Treasury Cash Flow: February 2012 Monthly Cash Deficit:$261 b

Note: This past February’s cash flows provide a rough estimate of the challenge of meeting the federal government’s obligations in February 2013 without the ability to issue net new debt to the public. Numbers may not add due to rounding.

$202 Billion in revenues

$464 Billion in spending:• $112b IRS Tax Refunds• $62b Medicare and Medicaid• $55b Social Security Benefits• $33b Interest on Debt• $27b Defense Vendor Payments• $26b Education Programs• $14b Federal Salaries• $125b Other Spending

Source: Daily Treasury Statements

Page 22: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

“WILD CARDS” 22

Fiscal Cliff• Income tax withholding

• Expiration of Alternative Minimum Tax “patch”

• Delayed filing season

Additional Deficit Spending?• Disaster relief funds

• “Growth measures” in fiscal cliff deal

Economic Uncertainty• Strengthening/weakening economy

• Monthly fluctuations in spending and revenues

Page 23: The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER

End of 2013 End of 2014$0

$500

$1,000

$1,500

$2,000

$2,500

Billi

ons

SIZE OF THE DEBT LIMIT INCREASE 23

How much would the debt limit need to be increased to get through 2013 or 2014?

High Estimate = $2,200 B

Note: All estimates are based on Congressional Budget Office data. The “low estimate” reflects current law except for freezing physician payments at 2012 levels (“Doc Fix”), indexing the AMT to inflation, and applying the scheduled decline in overseas combat operations (OCO) spending. The “high estimate” assumes that the 2001, 2003, 2009, and 2010 tax cuts are extended along with most of the usual tax extenders, the “Doc Fix” and AMT “patch” are applied, OCO spending declines as scheduled, the sequester does not take effect, and the payroll tax holiday and extended unemployment insurance benefits are continued.

High Estimate = $1,250 B

Low Estimate = $730 B

Low Estimate = $1,300 B