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The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit
STEVE BELLSENIOR DIRECTOR , ECONOMIC POLICY PROJECTBIPARTISAN POLICY CENTER
FY 2012 BUDGET
Medicare + Med-icaid21%
Social Security21%
Other Mandatory
15%Interest
7%Defense Discretionary
19%
Non-Defense Discretionary
17%
2
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
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
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
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
HOW DID WE GET HERE? 7
• Debt Ceiling
• Budget Control Act (BCA)
• Super committee failure
• Sequester
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
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
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
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
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
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.
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
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”)?
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
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
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
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
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
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
“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
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
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