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The Federal Debt, the Fiscal Cliff, and the Federal Debt Limit STEVE BELL SENIOR DIRECTOR, ECONOMIC POLICY PROJECT BIPARTISAN POLICY CENTER FY 2012 Budget Medicare + Medicaid 21% 2 Social Security 21% Other Mandatory 15% Non-Defense Discretionary 17% Defense Discretionary 19% Interest 7% Absent reforms, debt is set to skyrocket in the coming decades 3 250% 200% % of GDP 150% Debt breaches 100% of GDP in 2027 100% 50% 0% 1972 1982 1992 2002 2012 2022 2032 Note: Unlike current law, the Bipartisan Policy Center’s Plausible Baseline assumes that the 2001, 2003, and 2010 tax cuts are extended, the AMT is indexed to inflation, Medicare’s physician payment rates are maintained at their current rate (the “doc fix”), the looming sequester from the Budget Control Act of 2011 is lifted, and troops stationed overseas decline to 45,000 by 2015 Sources: Congressional Budget Office (January 2012) and Bipartisan Policy Center extrapolations 2042 2052 Health care costs are the primary driver of the debt 4 14% 12% Health Care Spending % of GDP 10% 8% Social Security 6% Discretionary Spending (Defense and Non-Defense) 4% Other Mandatory Programs 2% 0% 2012 2022 2032 2042 Sources: Congressional Budget Office’s Alternative Fiscal Scenario (January 2012), additionally assuming that troops overseas decline to 45,000 by 2015; Bipartisan Policy Center extrapolations 2052 Fantasy 1: We can save enough in the rest of the budget to pay for the projected growth in entitlements. Entitlements and Discretionary Spending, as a Percent of GDP, If the Projected Growth in Entitlement Spending Is Paid for Entirely by Cutting Discretionary Spending, 2012-2050 20% 18% 16% Major Entitlement Programs* Discretionary Spending 14% 12% 10% 8% 6% 4% 2% 0% 2012 2020 2030 *Social Security, Medicare, Medicaid, CHIP, and exchange subsidies Source: CBO Alternative Fiscal Scenario (CBO, 2012) and CSIS calculations 5 2040 2050 Fantasy 2: We can raise taxes enough to pay for the projected growth in entitlements. Required Percentage Increase in the Income Tax Burden for Different Groups of Taxpayers If the Projected Growth in Entitlements from 2010 to 2030 is Paid for Entirely by Raising Income Taxes 180% 169% 160% 140% 120% 102% 100% 80% 65% 60% 40% 20% 0% Increase If Taxes Are Raised for Everyone Increase for the Top 5 Percent of Taxpayers If Taxes Are Only Raised for the Top 5 Percent Source: CBO Alternative Fiscal Scenario (2012) and CSIS calculations 6 Increase for the Top 1 Percent of Taxpayers If Taxes Are Only Raised for the Top 1 Percent How did we get here? 7 • Debt Ceiling • Budget Control Act (BCA) • Super committee failure • Sequester Massive Fiscal Contraction is scheduled to occur in 2013 Upcoming Current Law Changes: • • • • • • • • Bush Tax Cuts + AMT Payroll Tax Cut Unemployment Insurance Tax Extenders & Business Depreciation The Sequester Affordable Care Act Taxes Doc Fix The Debt Ceiling TOTAL: $235 b $90 b $25 b $80 b $60 b $25 b $10 b !?!?!? $525 b 8 What is a sequester? • Automatic reduction to federal government spending for a given fiscal year • Gramm-Rudman-Hollings – Balanced Budget and Emergency Deficit Control Act of 1985 • Phil Gramm: “It was never the objective of [GRH] to trigger the sequester; the objective of [GRH] was to have the threat of the sequester force compromise and action.” • ‘80s and ‘90s sequesters were rarely carried out, but pushed Congress to achieve fiscal goals in ‘90s 9 FY 2013 Sequester Cuts Fall on The Smallest Pieces of the Budget Tax Expenditures $1,343B Mandatory $2,160B Defense Discretionary* $729B Domestic Discretionary* $504B Cuts $16B 10 Cuts Cuts $39B – 35% of Sequester Non-Defense – 50% $55B – 50% of Sequester Defense – 50% * These amounts include all discretionary budgetary resources for the duration of FY 2013, not solely the non-exempt monies that are subject to sequester. Additionally, the figures assume that a continuing resolution at FY 2012 levels is enacted for FY 2013, that war funding (Overseas Contingency Operations funds) is provided at the level requested by the president. Defense discretionary funds include unobligated balances from prior years, which are subject to sequester. Sources: Congressional Budget Office, Donald Marron and Tax Policy Center using data from the Office of Management and Budget and Treasury Sequester delays Federal debt reaching 100% of GDP by only 2 years 11 Debt Held by the Public as % of GDP 250% 200% BPC January 2012 Plausible Baseline 150% Debt post-BCA Sequester 100% 50% 0% 2012 2022 2032 2042 Fiscal Years Note: The Bipartisan Policy Center’s (BPC) January 2012 Plausible Baseline assumes that the 2001, 2003, and 2010 tax cuts are extended permanently, Medicare physician payments are frozen (the “doc fix”), the AMT is indexed to inflation, and overseas combat operations wind down. Sources: Congressional Budget Office; Bipartisan Policy Center projections 2052 10 Largest Individual Tax Expenditures, Cost in Fiscal Year 2014 Provision Amount (billions of $) Exclusion of Employer Health Insurance 164 Exclusion of Employer Pensions 163 Mortgage Interest Deduction 100 Exclusion of Medicare 76 Capital Gains Rates 71 Earned Income Credit 58 Deduction of State & Local Income Taxes 54 Gains: Exclusion at Death/Gift Carryover 52 Deduction of Charitable Contributions 52 Employer Benefits under Cafeteria Plans 44 Source: Congressional Research Service calculations based on Joint Committee on Taxation revenue estimates 12 Domenici-Rivlin: An Overview 13 The consensus, bipartisan plan will: • Create a simple, pro-growth tax system that broadens the base, reduces rates, makes America more competitive, and raises revenue to reduce the debt – while making the tax system more progressive. • Reduce the unsustainable rate of growth in health care costs. • Strengthen Social Security to ensure that it will pay benefits for 75 years and beyond, while protecting the most vulnerable elderly and maintaining the current retirement age. • Freeze domestic and defense discretionary spending (already achieved by means of the Budget Control Act). • Cut other spending, including farm and government retirement programs. Debt Drops Dramatically Under Bipartisan Plan 14 180% BPC Plausible Baseline Debt Held by the Public 150% % of GDP 120% 90% Bipartisan Plan Debt Held by the Public 60% 30% 0% 2012 2017 2022 2027 2032 2037 2042 Note: Unlike current law, the Bipartisan Policy Center’s Plausible Baseline assumes that the 2001, 2003, and 2010 tax cuts are extended, the AMT is indexed to inflation, Medicare’s physician payment rates are maintained at 2011 levels (the “doc fix”), the looming sequester from the Budget Control Act of 2011 is lifted, and troops stationed overseas decline to 45,000 by 2015 Sources: Congressional Budget Office (January 2012) and Bipartisan Policy Center extrapolations Debt Limit: Key Questions 1. When will the federal government next reach its statutory borrowing limit? 2. At that point, what legal actions does Treasury have at its disposal for continued funding of government operations? 3. What is the date after which Treasury will not have sufficient cash to pay ALL of its bills (the “X Date”)? 15 Reaching the debt limit – What it means 16 Layers of Defense Against Default The Treasury Department has multiple means that can be used to pay the nation’s bills. If the debt limit is reached and Congress does not act in time, however, all of these layers of defense will be breached and the nation will default on its obligations. ISSUE NEW DEBT TO THE PUBLIC IN TRADITIONAL MANNER Debt Limit Reached EXTRAORDINARY MEASURES EM Exhausted DAILY REVENUE AND CASH ON HAND The X Date DEFAULT ON FINANCIAL OBLIGATIONS Reaching the debt limit 17 • BPC estimates that the debt limit will be reached and Extraordinary Measures will begin in the last week of December • Substantial interest on intra-governmental debt (including the Social Security and Medicare trust funds) is due on 12/31/2012 Extraordinary measures 18 EXTRAORDINARY MEASURES AVAILABLE BPC ESTIMATE Do not reinvest the Federal Employees’ Retirement System GFund $154 billion Do not reinvest the Exchange Stabilization Fund $23 billion Do not reinvest interest payments and cash receipts to Civil Service Fund and Postal Fund $21 billion Do not reinvest maturing securities in the Civil Service Fund and Postal Fund Not Applicable in Dec. 2012 Total $197 billion Note: The totals indicate available measures. Treasury may not employ all available measures. Treasury also has measures available (not listed) that assist with cash flow and debt management, but do not extend the date after which Treasury would default on federal obligations absent an increase in the debt limit (the “X Date”). Column does not add due to rounding. Sources: Government Accountability Office, Congressional Research Service Extraordinary measures Won’t Last As Long 19 • In 2011, Extraordinary Measures lasted from May 16 until August 1 • They won’t buy as much time as they did last summer • February is a “bad” month for the federal government’s finances • Fewer measures available The “X Date” • BPC defines the “X Date” as the date after which Extraordinary Measures have been exhausted and cash on hand is insufficient to pay all of the federal government’s bills in full and on time • • 20 In other words, without an increase in the debt limit, the federal government will begin defaulting on some of its financial obligations on the day after the X Date BPC estimates that the X Date will occur in February 2013 What happens once we reach the “X Date”? Treasury Cash Flow: February 2012 Monthly Inflows $202 Billion in revenues 21 Monthly Cash Deficit: $261 b Monthly Outflows $464 Billion in spending: • $112b IRS Tax Refunds • $62b Medicare and Medicaid • $55b Social Security Benefits • $33b Interest on Debt • $27b Defense Vendor Payments • $26b Education Programs • $14b Federal Salaries •$125b Other Spending Note: This past February’s cash flows provide a rough estimate of the challenge of meeting the federal government’s obligations in February 2013 without the ability to issue net new debt to the public. Numbers may not add due to rounding. Source: Daily Treasury Statements “Wild cards” Fiscal Cliff • Income tax withholding • Expiration of Alternative Minimum Tax “patch” • Delayed filing season Additional Deficit Spending? • Disaster relief funds • “Growth measures” in fiscal cliff deal Economic Uncertainty • Strengthening/weakening economy • Monthly fluctuations in spending and revenues 22 Size of the DEBT LIMIT Increase 23 How much would the debt limit need to be increased to get through 2013 or 2014? $2,500 Billions $2,000 $1,500 High Estimate = $2,200 B $1,000 $500 Low Estimate = $730 B High Estimate = $1,250 B Low Estimate = $1,300 B $0 End of 2013 End of 2014 Note: All estimates are based on Congressional Budget Office data. The “low estimate” reflects current law except for freezing physician payments at 2012 levels (“Doc Fix”), indexing the AMT to inflation, and applying the scheduled decline in overseas combat operations (OCO) spending. The “high estimate” assumes that the 2001, 2003, 2009, and 2010 tax cuts are extended along with most of the usual tax extenders, the “Doc Fix” and AMT “patch” are applied, OCO spending declines as scheduled, the sequester does not take effect, and the payroll tax holiday and extended unemployment insurance benefits are continued.