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Fiscal Austerity and the Federal System Paul L. Posner George Mason University Outline: Autonomy and Interdependence in American federalism Basic architecture: fend -for-yourself- federalism Substantial State and local fiscal

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Fiscal Austerity and the Federal System

Paul L. Posner George Mason University

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Outline: Autonomy and Interdependence in American federalism

 Basic architecture: “fend-for-yourself-

federalism”

 Substantial State and local fiscal autonomy  Budget, tax and debt constraints mainly at the

state and local levels

 Increased fiscal interdependence over time

 More federal transfers and mandates

 Erosion of cooperative institutions

 Paradox of more interdependence and less

intergovernmental cooperation

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THE RISE OF FISCAL INTERDEPENDENCE

 Growth of Federal Intergovernmental Aid  953 separate federal grants in 2009  Totaled $607 billion in FY 2014  23.2% of State/Local expenditures in 2013  16.6% of total Federal expenditures in 2013  Growth of “federally induced costs” for state

and local governments: mandates and preemptions

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Vertical Equalization: The Obama Stimulus

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Rise of Federal Mandates

T

G

N

C AC R T R A

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Current U.S. federal fiscal system is unsustainable

 Major shifts in social and economic forces

generating revenue and spending pressures

 Globalization  Advancing technologies  Knowledge based economy  Aging of population  Rise in health care costs

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BABY BUST, BABY BOOM, BABY BUST

Fertility Rate (Births per woman)

Note: Projections based on intermediate assumptions of the 2002 Trustees’ reports. Source: The 2002 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.

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LABOR FORCE GROWTH

Percent change (5-year moving average)

Note: Projections based on intermediate assumptions of the 2002 Trustees’ reports. Source: The 2002 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.

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Medicare Beneficiaries

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GAO Long Term Budget Outlook

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Future Federal Aid at Risk: Long term Budget Trends

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Exhaustion of social security and medicare trust funds

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Future Federal Aid at Risk: Federal Budget “Sequester”

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State and Local Fiscal Gap

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Composition of State and Local Spending

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State sales tax bases have been eroding

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State and Local Funded Ratios with Liabilities Discounted by Riskless Rate

Alicia Munnell, Jeanne-Pierre Aubrey and Mark Caferelli, The Funding of State and Local Pensions, 2013-2017 (Boston,

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Centralizing Effects of Deficit Commission Proposals

 Reduced discretionary budgets will prompt cuts

in federal grants

 Tax expenditures reexamined

 State and local deduction  Tax exempt bonds

 Cost shifts and mandates

 Extend social security coverage

 Revenue nationalization - VAT  Cap and consolidate

 Medicaid long term care  Homeland security grants

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Federalism in an Age of Austerity

 Go it alone federalism

 Partial and ineffective solutions  Public confusion

 Cost shifting

 Unfunded mandates  Fiscal substitution

 Fiscal coordination

 Win-win strategies  VAT  Sorting out responsibilities

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The Case for Fiscal Collaboration

 Health care costs and coverage  Economic growth in an aging society  National infrastructure investments  Revenue productivity

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A Federalism reform agenda?

Tax policy

Tax expenditure reform

Consumption taxation

Tax base sharing

Grants

Sorting out

Consolidation/performance grants

Targeting

Regulatory

Unfunded mandates act

Performance outcomes

Variable speed federalism

Institutions

National/federal for engagement

Fiscal impacts

State capacity for engagement

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Future Prospects for Reform: Intergovernmental Institutions:

 1980

 ACIR  OMB  GAO  Congressional IGR subcommittees  Academy for State and Local Government

 2013

 CBO cost estimation  GAO

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  • G. William Hoagland
  • Sr. Vice President

Bipartisan Policy Center

August 4, 2015

Federalism in Uncertain Economic Times

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Economic Environment: Economic Forecasts

Calendar Years 2014 - 2016

2014 Forecast 2015 Forecast 2016

Real GDP Growth

– CBO – Blue Chip

– Administration

+2.2 +2.4 +2.2 +2.8% +2.4%

+3.1%

+3.0% +2.8% +3.0%

Inflation (CPI)

– CBO

– Blue Chip

– Administration

+1.6* + 2.0%

+ 1.7%

+1.4% +2.1% + 2.2% +1.9% Unemployment Rate

–CBO – Blue Chip – Administration

6.2%* 5.5% 5.3% 5.4% 5.4% 4.9% 5.1% 10 Year Note

–CBO –Blue Chip – Administration

2.5%* 2.8% 2.3% 2.8% 3.3% 3.0% 3.3%

Sources: Congressional Budget Office, January 2015; Blue Chip Economics Forecasts, July 10, 2015; President’s FY 2016 Budget February 2015. * = Actual WWW.BIPARTISANPOLICY.ORG

+0.3%

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Recession as announced by National Bureau

  • f Economic

Research

Surplus Deficit Trend Actual

Source: An Update of The Budget and Economic Outlook: Fiscal Years 2014 to 2025, and Analysis of the President’s 2016 Budget. Congressional Budget Office; January 2015, March 2015. CBO March 2015 Baseline. Concurrent Resolution on the Budget for Fiscal Year 2016, S.Con.Res. 11, April 29, 2015.

  • 2000
  • 1800
  • 1600
  • 1400
  • 1200
  • 1000
  • 800
  • 600
  • 400
  • 200

200 400 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 23 25

Dollars in Billions

Year

Total Budget Surplus/Deficit

S.Con.Res.11

Total Budget Surplus/Deficit

FY 1971-2025

Projections

WWW.BIPARTISANPOLICY.ORG

FY 2016 Budget Resolution

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Budget Outlook

FY 2012 – 2025

(In Billions of Dollars – % of GDP)

2012 Actual 2013 Actual 2014 Actual 2015 Proj 2016 2017 2018 …2025 % ∆ annual 2014- 2025

Receipts

2,450 2,774 3,021 3,191 3,470 3,601 3,728 5,030 + 4.7%

Spending

3,537 3,455 3,506 3,677 3,925 4,056 4,217 6,069 + 5.3%

Deficits % of GDP

1,087 6.8% 680 4.1% 485 2.8% 486 2.7% 455 2.4% 455 2.3% 489 2.4% 1,038 3.8% +8.8% NA

Public Debt % GDP Debt Subject Limit % GDP

11,281

73%

16,027

100% 11,983 72%

16,699

101%

12,780

74%

17,781

103%

13,366

74%

18,473

103%

13,897

74%

19,144

102%

14,428

73%

19,794

100%

14,983

73%

20,502

100%

21,182

77%

26,926 98%

+ 4.4% +4.0%

Source: Congressional Budget Office, The Budget and Economic Outlook 2015-2025. Updated Projections. March 2015.

CBO estimate of nominal GDP growth increase 4.3% annually 2015-2025. WWW.BIPARTISANPOLICY.ORG

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Source: CBO The 2014 Long-Term Budget Outlook, July 2014; The Budget & Economic Outlook: 2015 to 2025, January 2015.

The Accumulation of Public Debt

Debt Held by the Public -- Exceeds 100% of Economy 2038

WWW.BIPARTISANPOLICY.ORG

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Federal Spending Projected for 2025

“Other Health Programs” includes: Health insurance subsidies, exchanges, and related spending; Department of Defense Medicare- Eligible Retiree Health Care Fund (including TRICARE for Life); Children’s Health Insurance Program, and other programs.

Medicare

(16%)

Defense

(12%)

Medicaid

(10%)

Social Security

(26%)

Other Mandatory Spending (10%) Domestic Discretionary (11%) Agriculture (0.3%)

Net Interest

(14%)

Other Health Programs

(2%)

Source: The Congressional Budget Office. The Budget and Economic Outlook: Fiscal Years 2014 to 2025, January 2015.

WWW.BIPARTISANPOLICY.ORG

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10.8 10.0 17.7 19.8 7.3 4.7

  • 0.8
  • 3.8
  • 3.8

1.3 19.7 6.0 3.3 9.4 13.5 4.1 2.1

  • 2.4
  • 6.0
  • 6.2
  • 1.1

17.3

  • 8
  • 4

4 8 12 16 20

1965-70 1970-75 1975-80 1980-85 1985-90 1990-95 1995-00 2000-05 2005-10 2010-15 2015-20

Source: “The Budget and Economic Outlook Fiscal Years 2013 to 2023: Congressional Budget Office, February 2013” plus historical data.

Nominal Growth Real Growth in 2005 $ % Growth

Growth in Net Interest

Average Annual Growth, 5-year periods (1965 – 2020)

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Projected Growth in Major Budget Categories

WWW.BIPARTISANPOLICY.ORG

2012-2025 (% GDP)

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44

0% 50% 100% 150% 200% 250% 300% 350% 400% 450%

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040

Social Security Trust Fund Ratios

Assets as Percent of Annual Cost Trustees Report Intermediate Projections

OASDI 2014TR OASI 2014TR DI 2014TR OASDI 2013TR OASI 2013TR DI 2013TR

Historical

Tax Rate Reallocation

DI OASDI OASI

Social Security and Disability Trust Funds’ Exhaustion

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Limits on Discretionary Budget Authority

FY 2015 to 2021

(Billions of dollars)

Category

2015 est. 2016 2017 2018 2019 2020 2021

Annual Rate of Increase 2015-2021 Defense

Cap

S.Con.Res. 11

POTUS

521 521 521 523 523 561 536 536 573 549 549 584 562 562 592 576 576 598 590 590 610 2.1% 2.1% 2.6% Global War on Terrorism -- OCO

S.Con.Res.11

POTUS

64 64 94 58 65 27 63 27 58 27 50 27 48 27

  • 4.6%
  • 13.4%

Total Defense

S.Con.Res. 11 POTUS 585 585 617 619 601 600 612 611 620 619 626 625 638 637 1.5% 1.5%

Nondefense

Cap S.Con.Res. 11 POTUS 534 534 534 493 493 530 504 477 541 516 478 551 530 487 560 543 495 565 555 503 575 0.6%

  • 1.0%

1.2%

Total

w/OCO

Cap S.Con.Res.11 POTUS 1,119 1,119 1,119 1,016 1,016 1,091 1,040 1,013 1,114 1,065 1,027 1,135 1,092 1,049 1,152 1,119 1,071 1,163 1,146 1,093 1,185 0.4%

  • 0.4%

1.0%

Source: Fiscal Sequestration Report for FY 2014; Congressional Budget Office, January 2015.

WWW.BIPARTISANPOLICY.ORG

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FY 2016 S.Con.Res. 11 President’s Budget Unified Deficit Estimate $6,721* $6,781** Policy Changes: Discretionary Mandatory Interest Revenues

  • 326
  • 4,190
  • 773
  • 38a

+ 769a

  • 153

+1,780 Total Policy Changes

  • 5,289
  • 1,202

Resulting Unified Deficit $1,432 $5,579

Debt Held by Public to GDP 2025

55.6% 73.1% Economic Growth Benefit $124 NA

Sources: * S.Con.Res. 11. Concurrent Resolution on the Budget for FY 2016, April 30; ** CBO Analysis of President’s 2016 Budget. March 2015 baseline adjusted to be closely consistent with S.Con.Res assumptions.

  • a. Adjusted for not reclassifying surface transportation spending as mandatory. Consistent with congressional
  • scoring. ***=CBO March Baseline with extrapolation of OCO, Program Integrity and Emergency Spending in

baseline.

Comparison House/Senate/ President FY 2016 Budget

$ Billions, FY 2016-25

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Impending “Fiscal Speed Bumps”

2015-2016

Source: The Committee for a Responsible Federal Budget

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114th Congress & Races 2014, 2016, 2018

Party Affiliation 113th Congress Seats that were up in 2014 114th Congress Seats Up in 2016 Seats Up in 2018 U.S. Senate Democrats 54 21 46 10 24 Republicans 45 15 54 24 8 U.S. House Democrats 201 201 188 188 NA Republicans 234 234 246

(1 Vacant)

246 NA 24 21

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Alice Rivlin

Senior fellow, Brookings Institution Former director, White House Office of Management and Budget

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