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CBO Says Fiscal Health Requires Tax Hikes, Cuts to Popular Programs, or Both

MAR. 7, 2011

CBO Says Fiscal Health Requires Tax Hikes, Cuts to Popular Programs, or Both

DATED MAR. 7, 2011
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Congressional Budget Office

 

 

Presentation to the

 

National Association for Business Economics

 

 

March 7, 2011

 

 

Douglas W. Elmendorf

 

Director

 

 

Four Observations about the Federal Budget

 

1. The gap between spending and revenues is likely to remain very large even after we return to normal economic conditions.

2. Fiscal policy cannot be put on a sustainable path just by eliminating waste and inefficiency; the policy changes that are needed will significantly affect popular programs or people's tax payments or both.

3. Policymakers face difficult tradeoffs in deciding how quickly to implement policy changes that would reduce future budget deficits.

4. There is more focus in Washington on federal budget problems today than there has been since the late 1990s, and that focus has led to a range of proposals for tackling the problems.

Observation #1

 

 

The gap between spending and revenues is likely to remain very large even after we return to normal economic conditions.

 

Deficits Under CBO's Baseline or with a Continuation of Certain

 

Policies, Compared with Past Deficits and Surpluses

 

 

 

 

Federal Debt Held by the Public Under CBO's Baseline or with a

 

Continuation of Certain Policies, Compared with Past Debt

 

 

 

 

Debt Burden Across Countries in 2009

 

 

 

 

Source: For the United States, debt held by the public net of financial assets. For other countries, general government debt net of financial liabilities as reported by the Organisation for Economic Co-operation and Development.

 

Observation #2

 

 

Fiscal policy cannot be put on a sustainable path just by eliminating waste and inefficiency; the policy changes that are needed will significantly affect popular programs or people's tax payments or both.

                   Shares of Federal Spending in 2010

 

 _____________________________________________________________________________

 

 

                                                                 Percent

 

 _____________________________________________________________________________

 

 

 Transfer payments to people in the United States                    47

 

 

 Grants to state and local governments                               14

 

 

 Purchases of goods and services for defense                         19

 

 

 Purchases of goods and services for nondefense                       9

 

 

 Interest                                                             8

 

 

 Other (includes transfers to people outside the U.S.)                4

 

 _____________________________________________________________________________

 

 

 Source: National Income and Product Accounts.

 

Outlays for Some Major Federal Programs Compared with Total

 

Federal Revenues

 

 

 

 

Projected Federal Revenues and Spending in 2021 with a

 

Continuation of Certain Policies

 

 

 

 

                    Components of the Federal Budget

 

 _____________________________________________________________________________

 

 

                                                                    2021

 

                                           1970         2007       January

 

                                                                   Baseline

 

 

                                                 Percentage of GDP

 

 _____________________________________________________________________________

 

 

 Revenues                                  19.0         18.5        20.8

 

 

 Outlays                                   19.3         19.6        24.0

 

 

    Social Security, Medicare, Medicaid,

 

 

    health insurance subsidies, and        3.8          8.2         12.0

 

    other health programs

 

 

    Defense                                8.1          3.9          3.6

 

 

    Other mandatory spending

 

    and nondefense discretionary           6.0          5.8          5.0

 

    spending

 

    Net interest                           1.4          1.7          3.3

 

 

 Deficit                                    0.3         1.2         3.2

 

 _____________________________________________________________________________

 

 

 Note: Figures are shown net of offsetting receipts where relevant.

 

Observation #3

 

 

Policymakers face difficult tradeoffs in deciding how quickly to implement policy changes that would reduce future budget deficits.

Disadvantages of Reducing Deficits Gradually Rather than Quickly

  • Reduces the amount of U.S. savings devoted to productive capital investment.

  • Requires greater federal spending on interest payments.

  • Gives policy makers less flexibility to respond to unexpected problems.

  • Increases the likelihood of a fiscal crisis.

 

Advantages of Implementing Major Budgetary Changes Gradually

  • Possibly helps older generations.

  • Minimizes the drag of spending cuts or tax increases on the economic expansion.

  • Gives families,business, and state and local governments time to plan and adjust.

 

Making Decisions Soon About How to Put Fiscal Policy on a Sustainable Path Would Be Beneficial

  • Enacting policy changes soon:

    • Would allow for gradual implementation while still limiting further increases in federal debt; and

    • Would probably provide some boost to economic activity by reducing uncertainty and holding down interest rates.

Observation #4

 

 

There is more focus in Washington on federal budget problems today than there has been since the late 1990s, and that focus has led to a range of proposals for tackling the problems.

Plans to Narrow the Budget Gap

  • The plans are diverse: They reflect widely varying priorities, with some emphasizing spending cuts and others emphasizing tax increases.

  • Yet, they are similar in some significant ways. The plans propose policy changes that:

    • Are large in magnitude;

    • Are fairly well-specified; and

    • Would fundamentally alter the tax code and some of the activities of government.

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