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Comeback America: The Nation’s Fiscal Challenge and A Way Forward Dallas CPA Society Member Conference Dallas CPA Society Dallas, TX May 26, 2011 Hon. David M. Walker Founder and CEO The Comeback America Initiative and Former Comptroller General of the United States Growth of Government 2 Federal Spending & the Political Party in Power $3,500 Republican Controlled Congress Split Congress Republican President Patient Protection and Affordable Care Act of 2010 America Recovery and Reinvestment Act of 2009 Democratic President $3,000 Billions of Constant 2005 Dollars Democratic Controlled Congress End of Statutory Budget Controls 2002 $2,500 Deficit Reduction Act of 1993 2001 Invasion of Afghanistan Budget Enforcement Act of 1990 $2,000 Medicare Prescription Drug, Improvement, and Modernization Act of 2003and the Invasion of Iraq Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act of 1985 $1,500 End of WWII Social Security Act of 1965 (Medicare) $1,000 Korean Conflict 1950-53 Vietnam Conflict 1960-75 2009 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 1977 1975 1973 1971 1969 1967 1965 1963 1961 1959 1957 1955 1953 1951 1949 1947 $0 1945 $500 Fiscal Years Source: OMB, Budget, Historical Tables, Table 1.3—Summary of Receipts, Outlays, and Surpluses or Deficits (−) in Current Dollars, Constant (FY 2005) Dollars, and as Percentages of GDP: 1940–2016 3 Composition of Federal Spending (% of Total Outlays) Defense Social Security Other Discretionary Other Mandatory 7% Medicare and Medicaid Net Interest 6% 20% 12% 12% 42% 15% 20% 19% 4% 20% 23% 1970 2010 Source: CBO, Budget and Economic Outlook: Fiscal Years 2011 Through 2021, Historical Tables 4 More on Autopilot 5 Fiscal Gap 2011 $4,000 Even if we cut all of discretionary spending in 2011 the Federal Government would still be operating a $105 billion deficit. $3,500 Billions of 2010 Dollars $3,000 Discretionary Spending $1,375 $2,500 $2,000 $1,500 $2,108 $2,228 $1,000 $500 $225 $0 Outlays Revenues SOURCE: CBO, The Budget and Economic Outlook: Fiscal Years 2011 to 2021, Projections Data, Table 1-4. Compiled by TCAII. 6 Historical Receipts & Outlays $12,000 $10,000 Receipts per capita Outlays per Capita Real 2010 Dollars $8,000 $6,000 $4,000 $2,000 $0 1914 1918 1922 1926 1930 1934 1938 1942 1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 SOURCES: OMB Historical Tables, Table 1.3 - Summary Receipts, Outlays, and Surpluses or Deficits (-) in Current Dollars; Bureau of Labor Statistics, and U.S. Census Bureau. Compiled by TCAII. 7 Projected Surplus? 8 Historical Debt Burdens 9 Federal Debt Per Capita & The Political Party In Power $50,000 Democrat Controlled Congress Republican Controlled Congress Split Congress $45,000 As of 12/31/2010 $45,426 $40,000 Real 2010 Dollars $35,000 $30,000 $25,000 End of WW2 $ 22,183 $20,000 $15,000 $10,000 $5,000 $0 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Party of the President SOURCES: U.S. Census Bureau, U.S. Department of Treasury, U.S. Bureau of Labor Statistics, U.S. House, and U.S. Senate. Compiled by TCAII NOTE: All amounts are adjusted for inflation and in 2010 Dollars. Federal Debt is the total public debt outstanding and intragovernmental holdings. 2005 2010 10 Growing Foreign Dependency 11 Comparative Debt Burdens 12 Fiscal Fitness Index: Overall Results Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Country Australia New Zealand Estonia Sweden China Luxembourg Chile Denmark United Kingdom Brazil Canada India Poland Netherlands Norway Slovakia Korea Rank 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 Country Mexico Israel Slovenia Austria Finland France Spain Germany Belgium Italy United States Hungary Ireland Japan* Iceland** Portugal Greece Source: Sovereign Fiscal Responsibility Index. Note: *Japan’s debt was downgraded by Moody’s 1/29/11. 13 ** Iceland’s Sustainable Fiscal Path reflects reforms enacted after an IMF bailout and there is a legal case pending in regard to foreign losses incurred due to the failure of Landsbanki. Fiscal Fitness Index: Overall Results with U.S. Under NFRRC Plan Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Country Australia New Zealand Estonia Sweden China Luxembourg Chile US under NFRRC plan Denmark Brazil United Kingdom India Canada Netherlands Poland Norway Israel Rank 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 Country Slovakia Korea Mexico Austria Slovenia Finland France Spain Germany Belgium Italy Hungary Ireland Japan* Iceland** Portugal Greece Source: Sovereign Fiscal Responsibility Index. Note: *Japan’s debt was downgraded by Moody’s 1/29/11. 14 ** Iceland’s Sustainable Fiscal Path reflects reforms enacted after an IMF bailout and there is a legal case pending in regard to foreign losses incurred due to the failure of Landsbanki. Our Fiscal Future 15 CBO’s Public Debt Projections 200% As a Percentage of GDP 180% 160% Actual 140% Projection: Alternative Fiscal Scenario 120% 106% Projection: Extended-Baseline Scenario 100% 80% 60% 79% 40% 20% 2035 2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 0% SOURCE: CBO, Supplemental Data for the Congressional Budget Office's Long-Term Budget Outlook (June 2010), Figure 1-2. Compiled by TCAII. 16 Impact of Health Reform 17 Federal Revenues & the Political Party in Power $3,000 Democratic Controlled Congress Republican Controlled congress Split Congress Democratic President Republican President Billions of Constant 2005 Dollars $2,500 Economic Growth and Tax Relief Reconciliation Act of 2001 & Invasion of Afghanistan Jobs and Growth Tax Relief Reconciliation Act of 2003 & Invasion of Iraq $2,000 Omnibus Budget Reconciliation Act Tax Reform Act of 1986 of 1993 Economic Recovery Tax Act of 1981 $1,500 Revenue Act of 1964 $1,000 End of WWII Vietnam Conflict 1960-75 Korean Conflict 1950-53 $0 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 $500 Fiscal Years Source: OMB, Budget, Historical Tables, Table 1.3—Summary of Receipts, Outlays, and Surpluses or Deficits (−) in Current Dollars, Constant (FY 2005) Dollars, and as Percentages of GDP: 1940–2016 18 Federal Revenue Composition 19 Tax Burden United States United Kingdom Turkey Spain Mexico Korea Italy Germany France Canada 0% 5% 10% 15% 20% 25% 30% Total Tax Revenues as a Percentage of GDP 35% 40% 45% Source: OECD (2010), Revenue Statistics: Comparative Tables, OECD Tax Statistics (Database). Compiled by TCAII. Note: Total Tax Revenues are net and include sub-national government (State & Local). 20 Progressive Tax System 21 Individual Tax Expenditures 22 Effective Tax Rates 23 Corporate Tax Expenditures 24 Statutory Corporate Tax Rates 40% The United States holds one of the highest rates of corporate tax within the OECD at 39% Total Corporate Tax Rates 35% 30% OECD Average: 26% 25% 20% 15% 10% 5% 0% SOURCE: OECD Tax Database, Corporate and Capital Income Taxes, 2009. Compiled by TCAII. 25 Key Systemic Challenges • Expansion of government at all levels • Health Care Costs • Retirement Income Costs • Disability and Welfare Related Costs • Critical Infrastructure Needs • Education Costs • Corrections Costs • Outdated and Inadequate Revenue Systems • Myopia, Tunnel Vision, Special Interests and Self-Interest. 26 A Way Forward Federal: • Implement statutory budget controls that address discretionary and mandatory spending as well as tax preferences in order to stabilize our debt/ GDP at a reasonable level • Achieve Social Security reform that makes the program solvent, sustainable, secure and more savings oriented • Reduce the rate of increase in health care costs and more effectively target related taxpayer subsidies and tax preferences • Ensure that all future health care reforms adequately consider coverage, cost quality and personal responsibility • Pursue comprehensive tax reform that makes the system more streamlined, understandable, equitable and competitive while also generating adequate revenues 27 A Way Forward - Continued • Review, re-prioritize and re-engineer the base of the federal government, including national security strategies, to focus on the future, eliminate waste, generate real results and ensure sustainability • Ensure that we have process that will enable us to achieve the above objectives within a reasonable period of time State and Local: • Reform pension and health systems to make them reasonable, affordable and sustainable • Review, re-prioritize and re-engineer the base of government. • Pursue comprehensive tax reform in coordination with the federal government. • Consider an exchange of primary roles, functions and revenue sources as part of a new federalism or devolution effort (e.g., health care, education, infrastructure) 28 Statutory Debt Ceiling Recessions $14,000 Billions of 2010 Dollars $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 SOURCE: OMB, The Budget, Historical Tables, Table 7.3 - Statutory Limits on Federal Debt; Bureau of Labor Statistics, Inflation Calculator; NBER, US Business Cycle Expansions and Contractions. 29 The Debt Ceiling Debate We must raise the debt ceiling. The Real Questions are: • How much it should be raised?, and • What conditions should be attached to any increase in the debt ceiling limit? 30 The Debt Ceiling Debate - Continued Given the deteriorating financial condition of the federal government and rising concern regarding spending , deficits and debt, the following conditions are illustrative of the types of conditions that should be considered: • Short-term Spending: Agreeing to cut discretionary spending, excluding war costs, to fiscal 2008 levels adjusted for population growth over 2-3 years. • Structural Deficits: Enacting tough but realistic statutory budget controls that could include: meaningful PAYGO rules on the spending and tax side; tough but realistic discretionary spending caps, and; specific debt/GDP targets that begin in 2013-2014 with automatic enforcement mechanisms (e.g., spending cuts and temporary tax surcharges or preference reduction). Authorize and fund a major citizen education and engagement effort that will occur during late 2011 and 2012 to prepare the way for tough choices beginning in 2013. 31 A Phased Approach • Calendar 2011 • 2011 – 2013 • Tough 2011 and 2012 Budgets (Short-Term) Earmarks Moratorium (Short-Term) Selected Pay and Hiring Freezes (Short-Term) Leading By Example (Short-Term) Statutory Budget Controls (Structural) Transformation and Accountability Task Force (Structural) Congressional Hearings Citizen Education/Engagement 2013 -? Comprehensive Social Security Reform (Structural) Role and Size of Government (Structural) Health Care Coverage Reform and Cost Controls (Structural) Comprehensive Tax Reform (Structural) 32 A Three Pronged Test for Policy Creation • The policy should make economic sense, be socially equitable and culturally acceptable • The math behind the policy must work • The policy must be politically feasible 33 New Players on the Fiscal Responsibility Field Comeback America Initiative (CAI) Bridgeport, CT www.TCAII.org No Labels Washington, DC www.nolabels.org 34