Long-Term Fiscal Challenge: Context for Budget/Funding Debates Susan J Irving Transportation Research Board of the National Academies Executive Committee Policy Session June 10, 2011 1
Overview Near-term economy and deficit Longer-term challenge Creative approaches to financing: things to beware of 2
Today Deficits FY 2009 $1.41 trillion 10.0% GDP FY 2010 $1.29 trillion 8.9% GDP FY 2011 (est) $1.40 trillion 9.3% GDP Economy is weak 3
2011-2021 4
Federal Budget Surpluses and Deficits under Different Fiscal Policy Simulations Percentage of GDP 5 0 Baseline Extended -5-10 Alternative -15 2000 2005 2010 2015 2020 2025 Fiscal year Source: GAO. Note: Data are from GAO s January 2011 simulations based on the Trustees assumptions for Social Security and the Trustees and CMS Actuary s assumptions for Medicare. 5
Debt Held by the Public under Two Fiscal Policy Simulations Percentage of GDP 150 Alternative 125 100 Historical high = 109 percent in 1946 75 Baseline Extended 50 25 0 2000 2005 2010 2015 2020 2025 Fiscal year Source: GAO. Note: Data are from GAO s January 2011 simulations based on the Trustees assumptions for Social Security and the Trustees and CMS Actuary s alternative assumptions for Medicare. 6
Composition of Federal Spending 2010 2021 14% 6% 39% 14% 8% 28% 21% 20% 27% 23% Discretionary Net interest Social Security Other Mandatory Health Source: GAO analysis of Congressional Budget Office data. 7
The Long Term Isn t So Far Away: Rising Health Care Costs and an Aging Population Have Already Begun to Affect the Federal Budget 2008 Oldest members of the baby boom generation became eligible for early Social Security retirement benefits 2008 Medicare Hospital Insurance outlays exceeded cash income 2010 Social Security runs first cash deficit in more than a quarter century 2011 Oldest members of the baby boom generation become eligible for Medicare Source: GAO. 2021 Debt held by the public under GAO s Alternative simulation exceeds the historical high reached in the aftermath of World War II 8
Historic Events Affecting Federal Debt Held by the Public (1797-2010) 120 Percentage of GNP/GDP 100 80 60 40 20 0 1798 1807 The public debt of the United States can be traced back as far as the American Revolution in the late 1700 s. Debt continued to accrue in the early years to finance the expenses of wars, smaller skirmishes, and the Louisiana Purchase. Rapid increases in debt levels occurred for the first time in the early 1860 s as a result of the Civil War. The Congressional Research Service notes the Civil War marked a new era in government borrowing, as debt rose from $90.6 million in 1861 to nearly $2.7 billion by 1865. Debt as a share of GNP gradually diminished in the decades following the war. 1816 1825 1834 1843 1852 1861 1870 1879 1888 World War II resulted in unprecedented levels of debt. The federal government financed World War II with huge deficits to avoid even larger tax increases and economic distortions. It then took more than a decade for the debt-to-gdp ratio to return to its 1941 level. 1897 1906 Year Beginning in the late 1970 s, rising federal budget deficits fueled a corresponding increase in debt held by the public. This trend was temporarily interrupted by budget surpluses from 1998 through 2001. The surpluses led to a decline in debt held by the public. Weaknesses in the economy and financial markets and the government s response to them have contributed to recent increases in federal deficits and debt. 1915 1924 1933 1942 1951 1960 1969 1978 1987 1996 2005 9
Debt Held by the Public under Two Fiscal Policy Simulations Percentage of GDP 200 Alternative Baseline Extended 150 100 Historical high = 109 percent in 1946 50 0 2000 2010 2020 2030 2040 2050 2060 Fiscal year Source: GAO. Note: Data are from GAO s January 2011 simulations based on the Trustees assumptions for Social Security and the Trustees and CMS Actuary s alternative assumptions for Medicare. 10
Federal Budget Surpluses and Deficits under Different Fiscal Policy Simulations Percentage of GDP 5 0-5 -10-15 Alternative Baseline Extended -20 2000 2010 2020 2030 2040 2050 2060 Fiscal year Source: GAO. Note: Data are from GAO s January 2011 simulations based on the Trustees assumptions for Social Security and the Trustees and CMS Actuary s assumptions for Medicare. 11
Potential Fiscal Outcomes Revenues and Composition of Spending under Alternative Simulation Percentage of GDP 50 40 30 Revenue 20 10 0 2010 2020 2030 2040 Fiscal year Net interest Social Security Medicare and Medicaid All other spending a Source: GAO. Note: Data are from GAO s January 2011 simulations based on the Trustees assumptions for Social Security and CMS Actuary s alternative assumption for Medicare. a This also includes spending for insurance exchange subsidies and CHIP. 12
Federal Fiscal Gap (2011-2085) Baseline Extended Source: GAO. Trillions of present value 2011 dollars Fiscal gap Percentage of GDP Average percentage change required to close gap If action is taken today Solely through increases in revenue Solely through decreases in noninterest spending If action is delayed until 2021 Solely through increases in revenue Solely through decreases in noninterest spending 31.9 3.1 14.9 13.1 17.4 15.2 Alternative 99.4 9.6 53.5 35.2 62.9 40.2 Notes: Data are from GAO s January 2011 simulations based on the Trustees assumptions for Social Security and the Trustees and CMS Actuary s assumptions for Medicare. The fiscal gap is the amount of spending reductions or tax increases that would be needed for debt as a share of GDP to equal today s ratio at the end of the 75-year period. Our present value calculations take into the account the time value of money by discounting future revenue and spending to reflect the equivalent amount needed today in current dollars. These calculations are sensitive to changes in interest rates 13
Total Federal Revenue and Discretionary Spending: Historical Averages and GAO s Simulations after 2021 Percentage of GDP 20-year historical average 40-year historical average Baseline Extended Alternative Total Revenue 17.9 18.0 20.8 18.0 Discretionary spending 7.5 8.7 6.7 8.6 Sources: CBO and GAO. Note: Simulation values represent GAO s ultimate assumptions (beyond the 10th year). 14
Additional Information: Long-Term Fiscal Outlook GAO Website on Debt & Long-term Fiscal Outlook is http://www.gao.gov/special.pubs/longterm/ there are tabs at the top for various sections Background & details on the long-term simulations can be found at http://www.gao.gov/special.pubs/longterm/fed/ The Federal Government's Long-Term Fiscal Outlook: January 2011 Update (GAO-11-451SP, Mar. 17, 2011) GAO also does simulations of the state & local government sector. See State and Local Governments' Fiscal Outlook: April 2011 Update (GAO-11-495SP, Apr. 6, 2011) 15
Additional Reports of Interest Budget Issues: Alternative Approaches to Finance Federal Capital GAO-03-1011, (Aug 21, 2003) Capital Financing: Partnerships and Energy Savings Performance Contracts Raise Budgeting and Monitoring Concerns GAO-05-55, (Dec 16, 2004) Budget Issues: Agency Data Supporting Capital Project Funding Requests Could Be Improved GAO-01-770 (June 8, 2001) Executive Guide: Leading Practices in Capital Decision-Making AIMD-99-32 (December 01, 1998) Budget Issues: Budgeting for Capital (statement before the President s Commission to Study Capital Budgeting) T-AIMD-98-99, (March 06, 1998) 16
Budget Issues: Budgeting for Federal Insurance Programs, GAO/T-AIMD-98-147 (April 23, 1998). Budget Issues: Budgeting for Federal Insurance Programs, GAO/AIMD-97-16 (September 20, 1997). Federal Trust and Other Earmarked Funds: Answers to Frequently Asked Questions, GAO-01-199SP (January 2001). 17
GAO Transportation Reports of Interest (a selection) Highway Trust Fund: Improved Solvency Mechanisms and Communication Needed to Help Avoid Shortfalls in the Highway Account GAO-09-316 (February 2009) Surface Transportation: Principles Can Guide Efforts to Restructure and Fund Federal Programs GAO-08-744T (July 2008) Highway Public-Private Partnerships: More Rigorous Up-front Analysis Could Better Secure Potential Benefits and Protect the Public Interest GAO-08-44 (February 2008) Highway Trust Fund: Nearly All States Received More Funding Than They Contributed in Highway Taxes Since 2005 GAO 10-780 (June 2010) Transforming Transportation Policy for the 21st Century: Highlights of a Forum GAO-07-1210SP (September 2007) 18