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A Look at Our National Debt and How It’s Affecting Fiscal Policy and Our Economy presented by presented by Robert L. Bixby, Executive Director Robert N. Campbell III Vice Chairman U.S. State Government Leader Deloitte LLP THE CONCORD COALITION www.concordcoalition.org www.concordcoalition.org www.deloitte.com Discussion Topics • Introductory Comments (Bob Campbell) • The Concord Coalition Perspective (Bob Bixby) – Where to start? – What’s new? • A Business Perspective (Bob Campbell) – Perspective on the U.S. and global government debt issue – Recommendations of the U.S. Bipartisan Policy Center Task Force on the federal debt – The potential impact on U.S. businesses • Questions & Answers www.concordcoalition.org 2 www.deloitte.com 2 U.S. Fiscal Policy: If it’s always darkest before the dawn, The sun should be coming up any minute. www.concordcoalition.org www.deloitte.com 3 Composition of FY 2011 Federal Government Revenues and Outlays (Deficit: $1.3 Trillion) Interest Domestic* Defense Other Entitlements $221 $650 Estate & Gift Taxes ($20 billion) $703 $197 $192 $547 $816 Medicare & Medicaid Social Security $750 $1,089 $726 Outlays: $3.6 trillion Other Taxes Corporate Taxes Social Insurance Taxes Individual Income Taxes Revenue: $2.3 trillion *Includes all appropriated domestic spending such as education, transportation, homeland security, housing assistance, and foreign aid. Source: Congressional Budget Office, August 2011. www.concordcoalition.org www.deloitte.com 4 Current Policy Trends Lead to Large Sustained Deficits Fiscal Years 2012-2021 $500 -$3.5 Trillion Deficit Billions of Dollars $0 -$500 -$1,000 -$10.4 Trillion Deficit -$1,500 -$2,000 -$2,500 Fiscal Year CBO August 2011 Baseline The Concord Coalition Plausible Baseline assumes that the $1.2 trillion “Super Committee” trigger does not go into effect, that discretionary spending grows at the rate of inflation, that war costs slow gradually, that Medicare physician payment cuts are postponed, and that all expiring tax provisions are extended with AMT relief, and that the payroll tax cuts and unemployment benefits are extended for 2012. Source: Congressional Budget Office, August 2011 and Concord Coalition analysis. www.concordcoalition.org www.deloitte.com 5 Concord Coalition Plausible Baseline Total Deficit Projected in CBO Baseline 2012-2021 (in billions) -3,487 Effect of Permanently Extending Tax Cuts -2,904 Effect of Permanently Fixing AMT* -1,743 Effect of Permanently Extending all Expiring Tax Provisions -920 Payroll Tax Cut -160 Subtotal-Total Revenues Changes -5,727 Disc. Spending Grows at Nom. GDP (no trigger) 2,118 War Costs Slow Gradually -1,371 Medicare Physician Payment Cuts are Postponed & Unemployment Benefits Extended Subtotal-Total Outlay Changes 430 1,177 Total Impact on CBO Baseline -6,904 Projected 2012-2021 Budget Deficit -10,391 Memorandum: Interest Costs, CBO Baseline in 2021: $663 billion Interest Costs, Concord Plausible Baseline in 2021: $945 billion All the figures above include the impact on debt service as a result of change in policy. *Includes larger revenue loss as a result of interaction and debt service that would otherwise result from yearly “patches.” Source: Congressional Budget Office and Concord Coalition analysis, August 2011. www.concordcoalition.org www.deloitte.com 6 Federal Spending vs. Revenues as a Percent of GDP (FY 1980-2021) CBO Baseline Compared to the Concord Coalition Plausible Baseline Actual Projected Percentage of GDP Average outlays: 21.0% Average revenues: 18.3% CBO August 2011 Baseline Concord Coalition Plausible Baseline Source: Congressional Budget Office, August 2011 and Concord Coalition Analysis. www.concordcoalition.org www.deloitte.com 7 Debt Held by the Public as a Percent of GDP 1940-2040 As a Percentage of GDP Actual World War II 109% Source: GAO Analysis, Feb 2011 and OMB Historical Tables 2011. www.concordcoalition.org www.deloitte.com Projected 2011 69% 8 Interest Costs Go Through The Roof $1,000 $900 Billions of Dollars $800 $700 $600 $500 $400 $300 $200 $100 $0 2011 2012 2013 2014 2015 CBO August 2011 Baseline Source: Congressional Budget Office, August 2011. www.concordcoalition.org www.deloitte.com 2016 2017 2018 2019 2020 2021 Concord Plausible Baseline 9 Percent of Debt Held by the Public Owned by Foreigners (1987-2011) Percentage of Ownership of Publicly-Held Debt 60% 50% 40% 30% 20% 10% 0% 1987 1989 1991 1993 1995 1997 1999 2001 Source: United States Treasury Department, Treasury Bulletin, Table OFS-2, March 2011. www.concordcoalition.org www.deloitte.com 2003 2005 2007 2009 2011 10 Mandatory spending is consuming a growing share of the budget 1971 35% 1991 2011* 40% 58% 28% 45% 7% Mandatory *Projected Source: Congressional Budget Office, January 2011. www.concordcoalition.org www.deloitte.com 2021* 37% 57% 58% 14% 15% 6% Net Interest Discretionary 11 Non-Defense Discretionary Spending as a Percentage of GDP 6 Projected As a Percentage of GDP 5 4 3 2 Source: Congressional Budget Office, August 2011. www.concordcoalition.org www.deloitte.com 12 Defense Discretionary Spending as a Percentage of GDP As a Percentage of GDP Projected Source: Congressional Budget Office, August 2011. www.concordcoalition.org www.deloitte.com 13 Social Security, Medicare, & Medicaid as a Percentage of the Federal Budget All other Federal Spending Social Security, Medicare and Medicaid $2.12 Trillion $1.48 Trillion 59% 41% Source: Congressional Budget Office, August 2011. www.concordcoalition.org www.deloitte.com 14 Social Security, Medicare, Medicaid and Interest Consume All Federal Revenues in Less Than 15 Years 125% Percentage of Revenues 100% 75% 50% 25% 0% 2015 2020 Year Social Security, Medicare and Medicaid Source: Government Accountability Office, Feb., 2011. www.concordcoalition.org www.deloitte.com 2025 Interest 15 We’re Not Getting Any Younger-America’s Aging Population Percentage of Population Aged 65 and Over Age 65 and Over 25% 20% 15% 10% 2011 2020 2030 2040 Year Source: Social Security and Medicare Trustees’ Report, 2011. www.concordcoalition.org www.deloitte.com 16 Health Care Costs are Rising Faster Than the Economy Percentage of GDP Historic Level of Federal Spending Historic Level of Federal Revenues Assumes that health care cost growth will not exceed GDP growth. Assumes that health care cost growth continues at the average rate for the past 40 years (2.5 percentage points greater than GDP growth.) Assumes that health care cost growth rate declines to 1.0 percentage point greater than GDP growth— consistent with the assumption used by the Medicare Trustees. Source: Congressional Budget Office, June 2009. www.concordcoalition.org www.deloitte.com 17 As a Percentage of GDP Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security Effect of Health Care Cost Growth Effect of Aging Spending Without Aging and Health Care Cost Growth Percent of Growth Attributed to: 2035 2080 Health Care Cost Growth 36% 56% Aging 64% 44% Source: Congressional Budget Office, June 2010 & 2011. www.concordcoalition.org www.deloitte.com 18 As a Percentage of GDP Sources of Growth in the Federal Budget Over the Next Two Decades Individual Income Taxes = 6.6% Current Defense Spending = 4.7% Source: Congressional Budget Office. June 2011. www.concordcoalition.org www.deloitte.com 19 Current Fiscal Policy is on an Unsustainable Path Federal Outlays as a Percentage of GDP Interest All Other Medicaid Historical tax revenue Medicare Social Security Source: Government Accountability Office, Feb. 2011. www.concordcoalition.org www.deloitte.com 20 What’s New? www.concordcoalition.org www.deloitte.com 21 Overview of the Budget Control Act of 2011 • • • • Increased the debt ceiling Ten year discretionary spending caps Guaranteed vote on Balanced Budget Amendment Creation of Joint Select Committee on Deficit Reduction—the Super Committee • Potential to reduce deficit by $2.4 trillion through 2021— $900 billion from caps and $1.5 from Super Committee www.concordcoalition.org www.deloitte.com 22 Budget Control Act of 2011 • • • • 10 years of caps to save $750 billion ($920 billion with interest) 55% of savings from non-security Enforced by sequestration Balanced Budget Amendment vote by Dec. 31 www.concordcoalition.org www.deloitte.com 23 Super Committee • 12 members tasked with identifying an additional $1.5 trillion in deficit reduction. • Must report by November 23rd. Fast-tracked amendment free vote in both chambers by December 23rd. • Failure to report comes with across the board spending cuts beginning on January 1, 2013. • Cuts split equally between defense and non-defense and would exempt Social Security and low-income programs and limit Medicare cuts to 2%. www.concordcoalition.org www.deloitte.com 24 The Scope of the Problem In our travels around the country with experts from diverse perspectives, we have found agreement on the following key points: • Current fiscal policy is unsustainable • There are no easy solutions, such as cutting waste fraud and abuse or growing our way out of the problem. • Finding solutions will require bipartisan cooperation and a willingness to discuss all options. • Public engagement and understanding is vital in finding solutions. • This is not about numbers. It is a moral issue. www.concordcoalition.org www.deloitte.com 25 A Business Perspective • Perspective on the U.S. and global government debt issue • Recommendations of the U.S. Bipartisan Policy Center Task Force on the federal debt • The potential impact on U.S. businesses www.concordcoalition.org 26 www.deloitte.com 26 The U.S. is on an unsustainable path 400 350 Percentage of GDP 300 250 200 200% of GDP in 2038 150 Debt reaches WWII historical high at 109% of GDP 100 100% of GDP in 2022 50 0 1970 www.concordcoalition.org 27 www.deloitte.com 1980 1990 2000 2010 2020 2030 2040 2050 27 U.S. debt drivers Cyclical • Economic Crisis lost revenue and increased spending from automatic stabilizers • Economic Response stimulus spending, tax breaks, financial crisis policies • Tax Cuts 2001, 2003 and 2010 • War Spending Structural • Growing Healthcare Cost causing Medicare and Medicaid costs to rise • Population Aging causing Social Security and Medicare costs to rise and revenue to fall • Growing Interest Cost debt accumulation • Insufficient Revenue to fund current government expenditures Iraq and Afghanistan www.concordcoalition.org 28 www.deloitte.com 28 States are also struggling … • FY12 $103B shortfall drivers: – Decreased revenues – Rising costs – End of ARRA funding • Potential long-term effects of the 2012 budget cuts: – Increased unemployment – Weaker schools – Reduced access to medical care – Decline in states’ economic competitiveness • Potential federal debt impact: – Likely funding reductions for states in Medicaid and education programs – Potential shifts in other costs from federal to the states – Potential for states’ credit rating to be downgraded making it difficult for states to raise money through bond issuance, etc. www.concordcoalition.org 29 www.deloitte.com 29 The U.S. is approaching a debt burden of other countries which have had significant visible recent issues Total government debt in the U.S. is higher than some of the most financially troubled countries in Europe Note: Both 2010 and 2015 figures are estimates. Total government debt (also referred to as general government gross debt) measures all liabilities that require payment or payments of interest and/or principal by the debtor to the creditor at a date in the future. This includes central, state and local government debt. Source: Peter G. Peterson Foundation; International Monetary Fund www.concordcoalition.org 30 www.deloitte.com 30 Growing global government debt is an increasing concern G20 Debt Rank Public Debt ($Billions) Per Capita Per Capita Debt Rank ($Thousands) Japan 1 12.2 1 96.2 United States 2 8.6 6 27.5 Germany 3 2.6 4 32.0 Italy 4 2.4 2 39.4 France 5 2.1 3 32.7 United Kingdom 6 1.7 5 27.6 Brazil 7 1.2 9 6.0 China 8 1.0 17 .75 Total deficit amounts for remaining G20 countries is equal to $3.29 Source: US Central Intelligence Agency World Factbook. (2010); https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html www.concordcoalition.org 31 www.deloitte.com 31 Public sector debt will further intensify the demand for future capital and generate volatility in capital markets • Between 2011 and 2015, the net government debt of the G7 is expected to reach 100% of GDP • Sovereign debt in the broader G20 is also expected to continue to grow, creating tremendous public sector demand for capital Source: Deloitte CFO Program, A Tale of Two Capital Markets, March 2011; IMF Long-Term Trends in Public Finances in the G-7 Economies, Sept. 2010 Report www.concordcoalition.org 32 www.deloitte.com 32 Refinancing of short term corporate debt exacerbates the situation and global competition for capital will intensify • Multi-national corporate concerns have gone short term to take advantage of recent low interest rates • Deloitte CFO Services estimates that $11.5 trillion in short term corporate debt will need to be financed over the next five years, with much of it concentrated in the financial services industry The Americas account for most of the maturing debt, $5.7 trillion out of $11.5 trillion globally. Within the Americas, the financial services industry accounts for $2.8 trillion. Source: Deloitte CFO Program, A Tale of Two Capital Markets, March 2011; IMF Long-Term Trends in Public Finances in the G-7 Economies, Sept. 2010 Report www.concordcoalition.org 33 www.deloitte.com 33 Failure to address federal debt has significant potential negative implications for U.S. businesses • Higher inflation as governments become more challenged in issuing debt • Higher interest rates • Corporate investment uncertainty • Excessive cost of doing business in countries with compromised national competitiveness • Explosion of job exportation • Potential debtor death spiral www.concordcoalition.org 34 www.deloitte.com 34 Briefing on the work of the U.S. Bipartisan Policy Center Task Force on the federal debt www.concordcoalition.org 35 www.deloitte.com 35 The Bipartisan Policy Center Commission • The Bipartisan Policy Center is a non-profit established in 2007 by former Senate Majority Leaders from both sides of the aisle: Bob Dole, Howard Baker, Tom Daschle and George Mitchell • Commissioned the Debt Reduction Task Force • Membership: 19 government and business leaders including 1 former senator, 2 former governors, 2 former cabinet secretaries, 2 big city mayors • Mission: Set aside politics, look for solutions, and develop a plan that the federal government could act on • A bi-partisan group with diverse backgrounds coming together to do what many thought wouldn’t be possible during these polarizing times Report Released November 17th, 2010 Our Goal: Develop a plan to stabilize the debt at 60% of GDP by 2020. * This was one of two national debt commissions working during 2010; the other being the White House Commission chaired by Senator Alan Simpson and Erskine Bowles 36 www.concordcoalition.org 36 www.deloitte.com Our mission: Set aside politics, look for solutions, and develop a plan that the Federal Government could act on Senator Pete V. Domenici Henry Cisneros Edward McElroy, Jr. Senior Fellow and Co-Chair, Debt Reduction Task Force; Former U.S. Senator from New Mexico; Former Chairman State Budget Committee Executive Chairman, CityView; Former Secretary of Housing and Urban Development; Former Mayor, San Antonio CEO, Union Labor Life Insurance Company; Former President, American Federation of Teachers; Former Vice President, AFL-CIO Dr. Alice Rivlin Carlos M. Gutierrez Joe Minarik Co-Chair, Debt Reduction Task Force; Senior Fellow Brooking Institution; Former Director Office of Management and Budget; Founding Director Congressional Budget Office; Former Vide Chair Federal Reserve Board Scholar, University of Miami Institute for Cuban and Cuban American Studies; Former Secretary of Commerce; Former President and CEO, Kellogg USA Senior VP and Director of Research, Committee for Economic Development; Former Associate Director for Economic Policy, Office of Management and Budget; Former Chief Economist, House Budget Committee Robert L. Bixby Executive Director, Concord Coalition G. William Hoagland Marc H. Morial Vice President of Public Policy, CIGNA; Former Staff Director, Senate Budget Committee; Former Director of Budget and Appropriations, Office of Senate Majority Leader Bill Frist President and CEO, National Urban League; Former Mayor, New Orleans James Blanchard Frank Keating William D. Novelli Partner, DLA Piper; Former U.S. Ambassador to Canada; Former Governor of Michigan; Former U.S. Representative from Michigan President and CEO, American Council of Life Insurers; Former Governor of Oklahoma Professor, McDonough School of Business at Georgetown University; Former CEO, AARP Shelia Burke Karen Kerrigan Anthony A. (Tony) Williams Adjunct Lecturer in Public Policy at the Kennedy School Government at Harvard University President and CEO, Small Business and Entrepreneurship Council; Founder, Women Entrepreneurs Inc. Executive Director of the Government Practice, Corporate Executive Board; Director of State and Municipal Practice, Arent Fox PLLC; Former Mayor, District of Columbia; Former President, National League of Cities Dr. Leonard E. Burman Maya Macguineas Daniel Patrick Moynihan Professor of Public Affairs, Maxwell School of Syracuse University; Former Treasury Deputy Assistant Secretary for Tax Analysis; Former Director, UrbanBrookings Tax Policy Center; Former Senior Analyst, Congressional Budget Office President, Committee for a Responsible Federal Budget Robert N. Campbell III Donald Marron Vice Chairman, Deloitte LLP Director, Urban-Brookings Tax Policy Center; Visiting Professor, Georgetown Public Policy Institute; Former Member, Council of Economic Advisors; Former Acting Director, Congressional Budget Office www.concordcoalition.org 37 www.deloitte.com A bi-partisan group with diverse backgrounds coming together to do what many thought wouldn’t be possible during these polarizing times The BPC Task Force Plan: A Summary of Recommendations • Freeze domestic discretionary spending – Freeze non-defense discretionary spending for 4 years and cap at GDP thereafter; freeze defense discretionary spending for 5 years and cap at GDP thereafter • Restrain rising healthcare costs – Transform Medicare and Medicaid, implement malpractice reforms and implement an anti-obesity tax on sweetened beverages • Strengthen Social Security – Gradually raise taxable wage to 90% of all wages over 38 years; change COLA to reflect inflation; slightly reduce benefits • Cut spending in other programs – Reduce farm program spending and reform the civilian and military retirement program • Revive the economy and create jobs – Implement an employer payroll tax holiday • Create a simple pro-growth tax system – Reduce corporate and income tax rates • Enforce the budget reform process – Enforce the freeze on discretionary; require policy makers to off-set new tax cuts or program expansions www.concordcoalition.org 38 www.deloitte.com 38 Examples of cumulative savings based on BPC recommendations Freeze domestic discretionary spending $16,000 $14,000 Restrain rising healthcare costs $25,000 $13,575 $21,244 $20,000 In $Billions In $Billions $12,000 $10,000 $8,000 $6,794 $4,169 $4,000 $5,000 $2,136 $2,000 $0 $10,000 $6,676 $6,000 $2,788 $514 2015 $0 2020 2025 2030 2040 Strengthen Social Security $3,000 $756 2020 2025 2030 2040 Cut spending in other programs $900 $2,500 $898 $800 $700 In $Billions $2,000 In $Billions $174 2015 $1,000 $2,768 $1,500 $1,000 $748 2020 $400 $0 2025 $352 $194 $100 $73 www.concordcoalition.org 39 www.deloitte.com $500 $200 $305 $6 2015 $600 $300 $500 $0 $15,000 2030 2040 $89 $23 2015 2020 2025 2030 39 2040 The BPC plan, if implemented, will dramatically bend the debt curve $ impact ≈ $28.8 trillion www.concordcoalition.org 40 www.deloitte.com 40 Implications for multinational corporations across industries if the BPC plan is adopted Communications Construction / Real Estate Financial Services Manufacturing High Tech Natural Resources Health Care • Reduction of corporate tax burden to attract more companies and maintain domestic presence (offset by the phase-out of employer health care benefits) • Increase in the number of employed Americans thereby expanding demand for goods • Hiring incentives through payroll tax reductions • Increased consumer confidence and stability in the stock market • Decreasing reliance on foreign lenders • Positive investment environment for companies to drive innovation and growth www.concordcoalition.org 41 www.deloitte.com 41 Questions & Answers www.concordcoalition.org www.deloitte.com 42