Fiscally Speaking Tour Putting Federal Finances in Order
Featured Speaker Series Dallas Business Club
Dallas, TX August 30th, 2011
Hon. David M. Walker Founder and CEO
The Comeback America Initiative and
Former Comptroller General of the United States
“If we do not take steps to keep our economy strong for both today and tomorrow, our national security,
international standing, standard of living, social safety net, and even our domestic tranquility will suffer over
time.”
-Hon. David M. Walker, Former Comptroller General of the United States (1998-2008)
The Bottom Line
2
Growth of Government
3
20%
19%
23%
20%
12%
6%
42%
20%
4%
15%
12%
7%
Defense Other Discretionary Medicare and MedicaidSocial Security Other Mandatory Net Interest
2010 Source: CBO, Budget and Economic Outlook: Fiscal Years 2011 Through 2021, Historical Tables Note: All numbers are in constant 2010 dollars .
($944 Billion) ($2.901 Trillion)
Composition of Federal Spending (% of Total Outlays)
1970
4
307 % Growth in 2010 Dollars
Federal Spending & the Political Party in Power
5
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,50019
45
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Bill
ions
of C
onst
ant 2
005
Dol
lars
Fiscal Years
Democratic Controlled Congress Republican Controlled CongressSplit Congress Republican PresidentDemocratic President
Source: OMB, Budget, Historical Tables, Table 1.3—Summary of Receipts, Outlays, and Surpluses or Deficits (−) in Current Dollars, Constant (FY 2005) Dollars, and as Percentages of GDP: 1940–2016
Social Security Act of 1965 (Medicare)
Medicare Prescription Drug, Improvement, and Modernization Act of 2003and the Invasion of Iraq
America Recovery and Reinvestment Act of 2009
Patient Protection and Affordable Care Act of 2010
Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act of 1985
Budget Enforcement Act of 1990
Deficit Reduction Act of 1993 2001 Invasion
of Afghanistan
Vietnam Conflict 1960-75
Korean Conflict 1950-53
End of WWII
End of Statutory Budget Controls 2002
Federal Debt Burdens
6
$3.4 Trillion 35% of GDP
$9.9 Trillion 66.1% of GDP $2.3 Trillion
23% of GDP
$4.7 Trillion 31.1% of GDP
$0
$2
$4
$6
$8
$10
$12
$14
$16
Sepetember 30th 2000 August 11th 2011
In T
rilli
ons o
f U.S
. Dol
lars
Intragovernmental HeldDebt
Publicly Held Debt
$5.6 Trillion 58% of GDP
$14.6 Trillion 96% of GDP
SOURCE: U.S. Department of Treasury, Bureau of the Public Debt, Debt to the Penny; CBO, Long-Term Budget Outlook (June 2011); OMB, Historical Tables, Table 1.2.
In Trillions of Dollars 2000 2010
Explicit Liabilities $ 6.9 $16.4
•Publicly Held Debt 3.4 9.1
•Military & Civilian Pensions & Retiree Health 2.8 5.7
•Other Major Fiscal Exposures 0.7 1.6
Commitments & Contingencies 0.5 2.1 E.g. Pension Benefit Guaranty Corporation, Undelivered Orders
Trustees’ Estimates
Actuary's Alternative
Scenario Social Insurance Promises 13.0 30.8 43.1
•Future Social Security Benefits 3.8 8.0 8.0
•Future Medicare Benefits 9.2 22.8 35.1
Future Medicare Part A Benefits 2.7 2.7 7.3
Future Medicare Part B Benefits 6.5 12.9 20.6
Future Medicare Part D Benefits - 7.2 7.2
Total $20.4 $49.3 $61.6 SOURCE: Data from the Department of Treasury, 2010 Financial Report of the United States Government. NOTE: Numbers may not add due to rounding. Trustees’ Estimates for Medicare and Social Security benefits are from the Social Security and Medicare Trustees reports, which are as of January 1, 2010 and show social insurance promises for the next 75 years. Estimates for the Actuary’s Alternative Scenario are found in note 26 of the 2010 Financial Report of the United States. Future liabilities are discounted to present value based on a real interest rate of 2.9% and CPI growth of 2.8%. The totals do not include liabilities on the balance sheets of Fannie Mae, Freddie Mac, and the Federal Reserve. Assets of the U.S. government not included.
Federal Financial Hole (For Fiscal 2000 and 2010)
7
Fiscal Gap 2011
$225
$2,108
$1,375
$2,228
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
Outlays Revenues
Bill
ions
of 2
010
Dol
lars
SOURCE: CBO, The Budget and Economic Outlook: Fiscal Years 2011 to 2021, Projections Data, Table 1-4. Compiled by TCAII.
Discretionary Spending
Even if we cut all of discretionary spending in 2011 the Federal Government would still be operating a $105 billion deficit.
8
9
Historical Receipts & Outlays
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
1914 1918 1922 1926 1930 1934 1938 1942 1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
Rea
l 201
0 D
olla
rs
Receipts per capita Outlays per Capita
SOURCES: OMB Historical Tables, Table 1.3 - Summary Receipts, Outlays, and Surpluses or Deficits (-) in Current Dollars; Bureau of Labor Statistics, and U.S. Census Bureau. Compiled by TCAII.
Projected Surplus?
10
11
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
$50,000
1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Rea
l 20
10 D
olla
rs
Democrat Controlled Congress Republican Controlled Congress Split Congress
As of 12/31/2010 $45,426
Party of the President
Total Federal Debt Per Capita & The Political Party In Power
SOURCES: U.S. Census Bureau, U.S. Department of Treasury, U.S. Bureau of Labor Statistics, U.S. House, and U.S. Senate. Compiled by TCAII NOTE: All amounts are adjusted for inflation and in 2010 Dollars. Federal Debt is the total public debt outstanding and intragovernmental holdings.
End of WW2 $ 22,183
SOURCES: U.S. Census Bureau, U.S. Department of Treasury, U.S. Bureau of Labor Statistics, U.S. House, and U.S. Senate. Compiled by TCAII NOTE: All amounts are adjusted for inflation and in 2010 Dollars. Federal Debt is the total public debt outstanding and intragovernmental holdings.
Comparative Debt Burdens
12
0%
20%
40%
60%
80%
100%
120%
140%
160%
Greece Italy Portugal Ireland Spain United Kingdom United States
Gro
ss T
otal
Deb
t As a
Per
cent
age
of G
DP
2011 2016
SOURCE: International Monetary Fund, World Economic Outlook Database. Compiled by TCAII. Note: Data for 2011 and 2016 are estimates. Gross debt consists of all liabilities that require payment or payments of interest and/or principal by the debtor to the creditor at a date or dates in the future. This includes debt liabilities in the form of SDRs, currency and deposits, debt securities, loans, insurance, pensions and standardized guarantee schemes, and other accounts payable. Thus, all liabilities in the GFSM 2001 system are debt, except for equity and investment fund shares and financial derivatives and employee stock options. Debt can be valued at current market, nominal, or face values (GFSM 2001, paragraph 7.110).
Growing Foreign Dependency
13
Rank Country
Rank Country
1 Australia 18 Mexico 2 New Zealand 19 Israel 3 Estonia 20 Slovenia 4 Sweden 21 Austria 5 China 22 Finland 6 Luxembourg 23 France 7 Chile 24 Spain 8 Denmark 25 Germany 9 United Kingdom 26 Belgium 10 Brazil 27 Italy 11 Canada 28 United States 12 India 29 Hungary 13 Poland 30 Ireland 14 Netherlands 31 Japan* 15 Norway 32 Iceland** 16 Slovakia 33 Portugal 17 Korea 34 Greece
Fiscal Fitness Index: Overall Results
Source: Sovereign Fiscal Responsibility Index. Note: *Japan’s debt was downgraded by Moody’s 1/29/11. ** Iceland’s Sustainable Fiscal Path reflects reforms enacted after an IMF bailout and there is a legal case pending in regard to foreign losses incurred due to the failure of Landsbanki.
14
CBO’s Public Debt Projections
15
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%20
0020
0120
0220
0320
0420
0520
0620
0720
0820
0920
1020
1120
1220
1320
1420
1520
1620
1720
1820
1920
2020
2120
2220
2320
2420
2520
2620
2720
2820
2920
3020
3120
3220
3320
3420
35
Actual
Projection: Alternative Fiscal Scenario
Projection: Extended-Baseline Scenario 187%
84%
SOURCE: CBO, Supplemental Data for Congressional Budget Office's Long-Term Budget Outlook (June 2011), Figure 1-2. Compiled by TCAII.
Impact of Health Reform
16
17
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Rea
l 200
5 D
olla
rs
Part D Part B HI
Source: CMS, 2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, Table V. B1;
Medicare Costs Per Beneficiary
Comparative Health Costs
18
$3,361
$4,363 $3,978
$4,218
$2,983
$3,722 $3,487
$7,960
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
OECD Average Canada France Germany New Zealand Sweden United Kingdom United States
Per
Cap
ita H
ealth
Car
e C
osts
U
.S. D
olla
rs
Source: Organization for Economic Cooperation and Development, OECD Health Data 2011. Compiled by TCAII. Note: Per capita health expenditures for 2009 uses purchasing power parity for all dollar amounts.
The United States spends more than double the OECD average with below average health care results.
Relative Defense Spending
19
U.S.A
China
United Kingdom
France
Russia
Japan
Saudi Arabia
Germany
India
Italy
Brazil South Korea
Australia Canada Turkey
0
100
200
300
400
500
600
700
In B
illio
ns o
f Con
stan
t 200
9 D
olla
rs
$698 Billion
$646 Billion
SOURCE: Stockholm International Peace Research Institute, SIPRI Military Expenditure Database 2011. Compiled by TCAII.
The United States spent more on defense in 2010 than the other 14 highest defense budgets combined. The Majority of which are our allies
Federal Revenues & the Political Party in Power
20
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,00019
4519
4619
4719
4819
4919
5019
5119
5219
5319
5419
5519
5619
5719
5819
5919
6019
6119
6219
6319
6419
6519
6619
6719
6819
6919
7019
7119
7219
7319
7419
7519
7619
7719
7819
7919
8019
8119
8219
8319
8419
8519
8619
8719
8819
8919
9019
9119
9219
9319
9419
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
0520
0620
0720
0820
0920
10
Bill
ions
of C
onst
ant 2
005
Dol
lars
Fiscal Years
Democratic Controlled Congress Republican Controlled congress
Split Congress Democratic President
Republican President
Source: OMB, Budget, Historical Tables, Table 1.3—Summary of Receipts, Outlays, and Surpluses or Deficits (−) in Current Dollars, Constant (FY 2005) Dollars, and as Percentages of GDP: 1940–2016
Revenue Act of 1964
End of WWII
Economic Recovery Tax Act of 1981
Tax Reform Act of 1986
Economic Growth and Tax Relief Reconciliation Act of 2001 & Invasion of Afghanistan
Jobs and Growth Tax Relief Reconciliation Act of 2003 & Invasion of Iraq
Omnibus Budget Reconciliation Act of 1993
Korean Conflict 1950-53
Vietnam Conflict 1960-75
Progressive Tax System
21
Effective Tax Rates
22
23
0%
5%
10%
15%
20%
25%
30%
35%
Ireland Australia United Kingdom Germany Italy Canada France Mexico United States Japan
Eff
ectiv
e Cor
pora
te T
ax R
ate
SOURCE: American Enterprise Institute, "Report Card on Effective Corporate Tax Rates: United States Gets an F". Note: The effective corporate tax rate takes into account tax offsets, the present value of depreciations, and other deductions that narrow the tax base. Average includes countries not included in the table.
Average Effective Tax Rate 20.9%
Effective Corporate Tax Rate
24
State Pension and Health Costs
12.1% 11.8%
9.5%
4.2%
6.6% 5.7%
4.3% 3.5%
16.4%
14.5% 16.0%
5.0%
0.6% 0.6%
1.4%
0.3%
0%
5%
10%
15%
20%
25%
30%
New Jersey Alabama Hawaii Texas Iowa Minnesota Wisconsin North Dakota
Act
uari
ally
Req
uire
d C
ontr
ibut
ion
as
Perc
ent S
hare
of S
tate
Rev
enue
Retiree Health Obligations Retiree Pension Obligations
NOTE: The actuarially required contribution is the annual contribution to the retiree pension and health funds required for future assets to be in line with future liabilities within 30 years. It has two components: a normal contribution to keep up with new benefit obligations accrued, and a catch-up payment to make up for the current gap between pension assets and liabilities. The data for both revenues and unfunded obligations are for fiscal year 2008. Most states end their fiscal year in June of 2008, and therefore these numbers do not include losses in the stock market that led to losses in most pension funds.
State Rankings by Taxpayer’s Burden Best to Worst (Thousands of Dollars)
25
1. Wyoming 2. North Dakota 3. Nebraska 4. Utah 5. South Dakota 6. Iowa 7. Montana 8. Arkansas 9. Tennessee 10. Alaska 11. Minnesota 12. Indiana 13. Florida 14. Oregon 15. Arizona 16. Colorado 17. Idaho
18. Nevada 19. Missouri 20. Ohio 21. Virginia 22. Wisconsin 23. Texas 24. Kansas 25. Washington 26. Pennsylvania 27. Georgia 28. New Mexico 29. South Carolina 30. Oklahoma 31. North Carolina 32. New Hampshire 33. Vermont 34. Alabama
35. New York 36. Maine 37. Mississippi 38. Rhode Island 39. Michigan 40. California 41. Delaware 42. Maryland 43. Louisiana 44. West Virginia 45. Massachusetts 46. Kentucky 47. Hawaii 48. Illinois 49. New Jersey
50. Connecticut
Source: 2009, Institute for Truth in Accounting Numbers in red denote burden per taxpayer, Numbers in black denote a surplus per taxpayer
$15.1 $ 6.4 $ 2.5 $ 2.2 $ 0.3 $ 0.4 $ 0.7
$ 0.7 $ 1.2 $ 1.4 $ 1.9 $ 2.3 $ 2.5 $ 2.6 $ 2.6
$ 2.8 $ 2.9
$ 4.2 $ 4.6 $ 4.7 $ 4.8 $ 5.1 $ 5.7 $ 5.8 $ 6.5 $ 8.2 $ 8.9 $ 9.0 $ 9.7
$ 10.0 $ 11.2 $ 11.6 $ 12.5
$ 12.9
$ 13.7 $ 14.3 $ 14.3 $ 14.3 $ 14.7 $ 15.1 $ 15.9 $ 16.5 $ 16.8 $ 18.9 $ 20.1 $ 23.8 $ 25.0 $ 26.8 $ 34.6
$ 41.2
Key Systemic Challenges
• Expansion of government at all levels
• Health Care Costs
• Retirement Income Costs
• Disability and Welfare Related Costs
• Critical Infrastructure Needs
• Education Costs
• Corrections Costs
• Outdated and Inadequate Revenue Systems
• Myopia, Tunnel Vision, Special Interests and Self-Interest.
26
Federal: • Implement statutory budget controls that address discretionary and mandatory
spending as well as tax preferences in order to stabilize our debt/ GDP at a reasonable level
• Achieve Social Security reform that makes the program solvent, sustainable, secure and more savings oriented
• Reduce the rate of increase in health care costs and more effectively target related taxpayer subsidies and tax preferences
• Ensure that all future health care reforms adequately consider coverage, cost quality and personal responsibility
• Pursue comprehensive tax reform that makes the system more streamlined, understandable, equitable and competitive while also generating adequate revenues
A Way Forward
27
A Way Forward - Continued
• Review, re-prioritize and re-engineer the base of the federal government, including national security strategies, to focus on the future, eliminate waste, generate real results and ensure sustainability
• Ensure that we have process that will enable us to achieve the above objectives within a reasonable period of time
State and Local: • Reform pension and health systems to make them reasonable, affordable and
sustainable
• Review, re-prioritize and re-engineer the base of government.
• Pursue comprehensive tax reform in coordination with the federal government.
• Consider an exchange of primary roles, functions and revenue sources as part of a new federalism or devolution effort (e.g., health care, education, infrastructure)
28
Feasibility Test
29
Fiscal Reforms Must Meet a Feasibility Test:
1) Do they make economic sense? 2) Are they socially equitable? 3) Are they culturally acceptable? 4) Do they pass a math test? 5) Are they politically feasible? 6) Can they achieve significant bipartisan support?
• Budget Controls & Process Reforms – PAYGO rules on spending and taxes. – Spending caps that only exempt interest and Social Security. – Debt/GDP targets with automatic enforcement mechanisms.
• Social Security
– Focus most changes on people under age 55. – Increase early and full retirement age. – Modify cost-of-living index formula. – Make benefit formula more progressive. – Consider a taxable wage base increase.
• Healthcare
– Repeal the CLASS Act provisions of the ACA. – Subject federal health expenditures to an annual budget. – Transform federal payment system to an evidence-based and outcome-oriented approach. – Rationalize healthcare promises. – Reduce taxpayer subsidies to higher income beneficiaries.
Preemptive (Prudent) Framework Examples
30
• Defense – Reduce U.S. forces in Iraq and Afghanistan to no more than 45K by Dec. 31, 2014. – Require DoD planning to consider current and expected resource levels. – Require the DoD to implement the systemic acquisition and contracting reforms recommended by
the GAO. – Reduce DoD overhead by at least 25%.
• Other Spending – Switch all relevant federal benefits programs to chain-linked CPI. – Reduce discretionary spending to 2008 levels adjusted for inflation. – Reform federal insurance programs and tax payer subsidies. – Make $500 billion in additional during fiscal 2012-2013.
• Revenues – Do not allow federal revenues to exceed 21.5% of GDP. – Move to enact comprehensive income tax reform that eliminates and targets tax expenditures
while reducing the top marginal tax rate for individuals and corporations to no more than 25%. – Allow corporations to deduct dividends paid. – Consider a consumption tax of up to 5% if necessary.
Preemptive (Prudent) Framework Cont. Examples
31
Reactive Framework Differences (This framework is in case Washington fails to properly manage the debt and interest rates rise.)
• Social Security – Reforms will impact everyone under the age of 60. – Increase retirement eligibility ages one additional year. – Taxable wage base would increase in 2014.
• Healthcare
– Repeal Affordable Care Act and Medicare Modernization Act – Accelerate the increase in the eligibility age for Medicare. – Accelerate changes in reducing health care subsidies for higher income individuals. – Delay move towards universal healthcare.
32
Reactive (Crisis) Framework Examples
• Defense – Accelerate all actions in making the Pentagon and military forces more efficient. – Accelerate troop withdrawals in Iraq & Afghanistan to 2012.
• Other Spending – Accelerate changes and lower spending caps. – Eliminate additional investments in fiscal 2012-2013.
• Revenues – Repeal the Middle Class Tax Relief Act of 2010. – Impose temporary deficit surcharge of 0.7% for 2013-2014.
33
Reactive (Crisis) Framework Cont. Examples
Baseline EPI CAI Preemptive Framework
2021 2035 2021 2035 2021 2035
Receipts 20.8% 23.3% 21.6% 24.1% 20.8% 21.5%
Outlays 24.0% 28.3% 24.5% 27.8% 21.8% 23.1%
Deficit* 3.2% 5.0% 2.9% 3.7% 1.0% 1.5%
Debt 76.7% 91.5% 76.5% 81.7% 62.9% 51.4.%
CAI Reactive Framework Heritage Fiscal Commission
2021 2035 2021 2035 2021 2035
Receipts 20.8% 21.5% 18.3% 18.5% 20.3% 21.0%
Outlays 20.1% 21.8% 18.1% 17.7% 21.8% 21.0%
Deficit* -0.7% 0.3% -0.2% -0.8% 1.6% 0.0%
Debt 50.9% 28.2% 58.2% 30.0% 68.5% 40.0%
Comparison
Note: Fiscal Commission data for 2021 is from the Commission for a Responsible Federal Budget re-estimate of the Fiscal Plan and data for 2035 is taken from the assumptions found within the Fiscal Commission report “The Moment or Truth”. Deficit*: Negative numbers represent surpluses.
34
Results
-2%
0%
2%
4%
6%
8%
10%
12%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
Deficits Current Law Baseline Preemptive Framework Reactive Framework
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
Public Debt Current Law Baseline Preemptive Framework Reactive Framework
35
• When & why was it created?
• Have conditions changed, and have we adapted?
• How are we measuring success, and are we achieving desired outcomes? • Are there multiple programs, and if so are they working in an integrated
manner?
• Are we using the experience of others (e.g., countries, states) to replicate success and avoid mistakes?
• Can we afford and sustain it in its present form?
Transforming Government (Basic questions for Policies & Programs)
36
Comeback America Initiative (CAI) Bridgeport, CT www.TCAII.org No Labels Washington, DC www.nolabels.org
New Players on the Fiscal Responsibility Field
37
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