Four Observations about the Federal Budget March 7, 2011 Douglas - - PowerPoint PPT Presentation

Congressional Budget Office Presentation to the National Association for Business Economics

Four Observations about the Federal Budget

March 7, 2011 Douglas W. Elmendorf Director

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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.

Four Observations about the Federal Budget

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

Observation #1

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Deficits Under CBO’s Baseline or with a Continuation of Certain Policies, Compared with Past Deficits and Surpluses

Percentage of GDP

1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021

• 12
• 10
• 8
• 6
• 4
• 2

2 4

• 12
• 10
• 8
• 6
• 4
• 2

2 4

Actual Projected Baseline Continuation of Certain Policies

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Federal Debt Held by the Public Under CBO’s Baseline or with a Continuation of Certain Policies, Compared with Past Debt

Percentage of GDP

1940 1949 1958 1967 1976 1985 1994 2003 2012 2021 20 40 60 80 100 120 20 40 60 80 100 120

Actual Projected Baseline Continuation of Certain Policies

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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.

Switzerland Slovak Republic Poland Canada Ireland Netherlands Spain Austria Iceland United Kingdom UNITED STATES Germany France Portugal Hungary Belgium Greece Italy Japan 20 40 60 80 100 120

2021 CBO Baseline With Continuation of Certain Policies

Percentage of GDP

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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.

Observation #2

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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.

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Outlays for Some Major Federal Programs Compared with Total Federal Revenues

Percentage of GDP

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 14 16 18 20 22

Revenues with Continuation of Certain Policies Outlays for Social Security, Medicare, Medicaid, Other Health Programs, Defense, and Net Interest Actual Projected

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Projected Federal Revenues and Spending in 2021 with a Continuation of Certain Policies

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Components of the Federal Budget

1970 2007 2021 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

• ther health programs

3.8 8.2 12.0 Defense 8.1 3.9 3.6 Other mandatory spending and nondefense discretionary spending 6.0 5.8 5.0 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.

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Observation #3

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

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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 policymakers less flexibility to respond

to unexpected problems.

• Increases the likelihood of a fiscal crisis.

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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.

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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.

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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.

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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

• f the activities of government.