Download Posner

Federal Budgeting: A Long Term
Perspective on Costs and
Performance
April 19, 2004
Paul L. Posner
1
Surplus or Deficit as a Share of GDP
(Fiscal Years 1797-2003)
10
Percent of GNP/GDP
5
0
-5
-10
-15
-20
-25
-30
-35
1797
1820
1840
1860
1880
1900
1920
1940
1960
1980
2003
Fiscal Years
Note: Data until 1929 are shown as a percent of gross national product (GNP); data from 1930 to present are shown as a percent of GDP.
Source: Department of Commerce, Office of Management and Budget, and Congressional Budget Office.
Debt Held by the Public as a Share of GDP
(Fiscal Years 1797-2003)
120
Percent of GNP/GDP
100
80
60
40
20
0
1797
1820 1840 1860 1880 1900 1920 1940 1960 1980
2003
Fiscal year
Note: Data until 1929 are shown as a percent of gross national product (GNP); data from 1930 to present are shown as a percent of GDP.
Source: GAO analysis of data from the Department of Commerce, Office of Management and Budget, and Congressional Budget Office.
Composition of Federal Spending
1964
1984
27%
30%
33%
2004*
20%
33%
46%
21%
7%
13%
14%
21%
9%
Defense
Social Security
Net interest
All other spending
7%
19%
Medicare & Medicaid
*Current services estimate.
Source: Budget of the United States Government, FY 2005, Office of Management and Budget.
4
Federal Spending for Mandatory and
Discretionary Programs
1964
1984
7%
2004*
7%
13%
26%
42%
67%
Net Interest
Net interest
54%
39%
45%
Discretionary
Discretionary
Mandatory
Mandatory
*Current services estimate.
Source: Budget of the United States Government, FY 2005, Office of Management and Budget.
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Unified, On- and Off-Budget Surplus or Deficit
Assuming Discretionary Budget Authority Grows with
GDP
and Expiring Tax Provisions Are Extended
400
Billions of dollars
200
0
-200
-400
-600
-800
-1000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Off-budget
Fiscal year
On-budget
Unified surplus/deficit
Source: GAO analysis of data from the Congressional Budget Office (January 2004).
Outlays in FY2009
Assuming President’s FY ’05
Budget
Net Interest
10%
Defense
17%
Other
28%
Social Security
21%
Medicaid
9%
Source: Office of Management and Budget (February 2004).
Medicare
15%
Changes: Demographics
The Aging of the Population
100
Population in millions
80
60
40
20
0
1970
2000
65 and over
2050intermediate
2050-high cost
Under 20
Note: Projections based on intermediate assumptions of the 2002 Trustees’ reports.
Source: The 2002 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability
Insurance Trust Funds.
8
Baby Bust, Baby Boom, Baby Bust
4.0
Fertility Rate (Births per woman)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1920
1940
1960
1980
2000
2020
2040
2060
2080
Note: Projections based on intermediate assumptions of the 2002 Trustees’ reports.
Source: The 2002 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability
Insurance Trust Funds.
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Social Security Workers per
Beneficiary
6
Covered workers per OASDI beneficiary
5
4
3
2
1
0
1960
1980
2000
2020
2040
2060
2080
Note: Projections based on intermediate assumptions of the 2002 Trustees’ reports.
Source: The 2002 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability
Insurance Trust Funds.
10
Social Security and Medicare’s Hospital Insurance
Trust Funds Face Cash Deficits
250
Billions of 2004 dollars
Social Security
cash deficit
2018
0
Medicare HI
cash deficit
2004
-250
-500
-750
2000
2005
2010
2015
Medicare HI cash flow
2020
2025
2030
2035
2040
Social Security cash flow
Source: GAO analysis based on the intermediate assumptions of The 2004 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors
Insurance and the Federal Disability Insurance Trust Funds and The 2004 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and
Federal Supplementary Medical Insurance Trust Funds. The above excludes Medicare Part B and the newly enacted Medicare Part D benefit.
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Social Security, Medicare, and Medicaid
Spending as a Percent of GDP
30
Percent of GDP
25
20
15
Medicare
10
Medicaid
5
Social Security
0
2000
2010
2020
2030
2040
2050
2060
2070
2080
Note: Social Security and Medicare projections based on the intermediate assumptions of the 2004 Trustees’ Reports. Medicaid
projections based on CBO’s January 2004 short-term Medicaid estimates and CBO’s December 2003 long-term Medicaid
projections under mid-range assumptions.
Source: GAO analysis based on data from the Office of the Chief Actuary, Social Security Administration, Office of the Actuary,
Centers for Medicare and Medicaid Services, and the Congressional Budget Office.
12
Composition of Net National
Saving
(1960-2001)
15
Percent of GDP
10
5
0
-5
1960-1969 1970-1979 1980-1989 1990-1999
a
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01
Net personal saving
Federal surplus/deficit
b
State & local surplus/deficit
Net business saving
Net national saving
aAlthough
the NIPA federal surplus or deficit is roughly similar in magnitude to the federal unified budget surplus or deficit, there are some conceptual
differences.
bState and local surpluses in 1990 and 1993 and the deficits in 1992 are less than 0.1 percent of GDP.
Source: GAO analysis of NIPA data from the Bureau of Economic Analysis, Department of Commerce.
13
Composition of Spending as a Share of GDP
Under Baseline Extended
50
Percent of GDP
40
30
Revenue
20
10
0
2003
2015
2030
2040
Fiscal year
Net Interest
Medicare & Medicaid
Social Security
All other spending
Notes: In addition to the expiration of tax cuts, revenue as a share of GDP increases through 2014 due to (1) real bracket
creep, (2) more taxpayers becoming subject to the AMT, and (3) increased revenue from tax-deferred retirement accounts.
After 2014, revenue as a share of GDP is held constant.
Source: GAO’s March 2004 analysis.
14
Composition of Spending as a Share of GDP
Assuming Discretionary Spending Grows with GDP after 2004
and All Expiring Tax Provisions Are Extended
50
Percent of GDP
40
30
Revenue
20
10
0
2003
2015
2030
2040
Fiscal year
Net Interest
Social Security
Medicare & Medicaid
All other spending
Notes: Although expiring tax provisions are extended, revenue as a share of GDP increases through 2014 due to (1) real
bracket creep, (2) more taxpayers becoming subject to the AMT, and (3) increased revenue from tax-deferred retirement
accounts. After 2014, revenue as a share of GDP is held constant.
Source: GAO’s March 2004 analysis.
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Current Fiscal Policy Is Unsustainable
• The “Status Quo” is Not an Option
• We face large and growing structural deficits largely due to known
demographic trends and rising health care costs.
• GAO’s simulations show that balancing the budget in 2040 could require
actions as large as
• Cutting total federal spending by about 60 percent or
• Raising taxes to about 2.5 times today's level
• Faster Economic Growth Can Help, but It Cannot Solve the
Problem
• Closing the current long-term fiscal gap based on responsible
assumptions would require real average annual economic growth in the
double digit range every year for the next 75 years.
• During the 1990s, the economy grew at on average 3.2 percent per year.
• As a result, we cannot simply grow our way out of this problem. Tough
choices will be required.
• The Sooner We Get Started, the Better
• Less change would be needed, and there would be more time to make
adjustments.
• The miracle of compounding would work with us rather than against us.
• Our demographic changes will serve to make reform more difficult over
time.
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The Way Forward
• Implement new accounting and reporting approaches and
new budget control mechanisms for considering the
impact of spending and tax policies and decisions over
the long term
• Develop new metrics for measuring the impact of policies
and decisions over the long term (e.g., key national
indicators to measure our Nation’s position and progress
over time and in relation to other countries)
• Reexamine the base—question existing programs,
policies and activities
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Long-term Fiscal Challenges
Demand New Metrics, Mechanisms, &
Processes
• Accounting and reporting policies for trust funds, Social
Security, Medicare, Veterans benefits, among other
things, need to be reviewed and revised.
• The current budget time horizon [2-year, 5-year, 10-year]
does not capture many long-term costs—e.g. Social
Security, Medicare, pension insurance—and other major
tax and spending provisions
• Cash and obligations-based budgeting is misleading for
insurance and some benefit programs
• Budget controls have expired—and we need to go
beyond “holding the line” to “changing the base” in
spending and tax policies
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Approaches to Increasing Attention
to Long Term Costs
• Improve transparency and awareness of longer
term costs
• Prompt more deliberation in decisionmaking
• Use accrual based cost numbers in budget
accounts
19
Improved Metrics, Measures &
Processes: Some Ideas
• Improved transparency
• Provide information on long-term costs of major spending and tax
proposals before they are voted on, including showing long-term
costs even for proposals that sunset
• Establish an OMB annual report on fiscal exposures, including
appropriate measures and how to address them
• Prompt greater deliberation
• Consider fiscal targets, triggers, and points of order with focus on
limiting growth of long-term commitments
• Change budgetary accounting
• Move to accrual budgeting for employee pension, retiree health;
disclose “risk assumed” [missing premium] for insurance
• Reinstitute budget controls (caps & PAYGO)
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Selected Fiscal Exposures:
Sources and Examples
(End of 2003)a
Type
Example (dollars in billions)
Explicit liabilities
Publicly held debt ($3,913)
Military and civilian pension and post-retirement health ($2,857)
Veterans benefits payable ($955)
Environmental and disposal liabilities ($250)
Loan guarantees ($35)
Explicit financial
commitments
Undelivered orders ($596)
Long-term leases ($47)
Explicit financial
contingencies
Unadjudicated claims ($9)
Pension Benefit Guaranty Corporation ($86)
Other national insurance programs ($7)
Government corporations e.g., Ginnie Mae
Implicit exposures implied by
current policies or the
public's expectations about
the role of government
Debt held by government accounts ($2,859)b
Future Social Security benefit payments ($3,699)c
Future Medicare Part A benefit payments ($8,236)c
Future Medicare Part B benefit payments ($11,416)c
Future Medicare Part D benefit payments ($8,119) c
Life cycle cost including deferred and future maintenance and
operating costs (amount unknown)
Government Sponsored Enterprises e.g., Fannie Mae and Freddie Mac
a All
figures are for end of fiscal year 2003, except Social Security and Medicare estimates, which are end of calendar year 2003.
b This
amount includes $774 billion held by military and civilian pension funds that would offset the explicit liabilities reported by those funds.
c Figures
for Social Security and Medicare are net of debt held by the trust funds ($1,531 billion for Social Security, $256 billion for Medicare Part A, and $24 billion for Medicare Part B)
and represent net present value estimates over a 75-year period. Over an infinite horizon, the estimate for Social Security would be $10.4 trillion, $21.8 trillion for Medicare Part A,
$23.2 trillion for Medicare Part B, and $16.5 trillion for Medicare Part D.
Source: GAO analysis of data from the Department of the Treasury, the Office of the Chief Actuary, Social Security Administration, and the Office of the Actuary, Centers for Medicare
and Medicaid Services.
Updated 3/30/04.
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Reexamination of Existing Federal
Programs and Operations
• Restructure existing entitlement programs
• Reexamine the base of discretionary and
other spending
• Review and revise our tax policy and
enforcement programs
22
Illustrative Generic Re-examination
Questions
• Have there been significant changes in the
country or the world that relate to the reason for
initiating it?
• Would we enact it the same way if we were
starting over today?
• Is it well targeted to those with the greatest needs
and the least capacity to meet those needs?
• Is it affordable and financially sustainable over
the longer term, given known cost trends and
future fiscal imbalances?
• Does the program have measures and
evaluations that indicate how well it is meeting
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Performance Budgeting: An
Historical Perspective
50 Years of Efforts to Link Resources With Results
• The First Hoover Commission (1947) and the Budget and
Accountings Procedures Act (BAPA) of 1950
• Planning-Programming-Budgeting (PPBS)
• Management by Objectives (MBO), 1973-74.
• Zero-Base Budgeting (ZBB), 1977-81
• Government Performance and Results Act (GPRA)
• Program Assessment Rating Tool (PART)
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Historical Perspective
Focus:
1900……………….1930s
1960……………..
1940………………1950s
Budget and Accounting
Act of 1921
Budget and Accounting
Procedures Act of 1950
Dollars
People
Accounts
Outcomes
Transactions
Activities
Functions
GPRA 1993
Programs
Outputs
Impact
Resources
Purpose
Emphasis:
Work
25
Performance Budgeting
Challenges
Key Elements to “Successful” Performance
Budgeting
• Defining expectations clearly
• Addressing structural alignment between plans, budgets and total
costs
• Increasing the supply of credible outcomes, measures, and
information
• Promoting demand for information used by actors with different
needs
26
Defining Expectations
• Whether we deem performance budgeting a success or
failure largely depends on our expectations
• There are several models for what performance
budgeting might look like, including:
• Mechanical – funding levels directly tied to performance
• Managerial – consensus on broadly defined goals; little
oversight
• Incentives – marginal programmatic changes
reward/punish performance
• Agenda –
changes the decision-making process; not
necessarily the decisions themselves
27
Different Orientations
BUDGET
Agency
PERFORMANCE
STATEMENT OF NET
PLANNING
COSTS
General Goal
Budget Account
Strategic Objective
Program Activity
Performance Goal
Agency
Responsibility Segment
Segment Output
Source: GAO.
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Improving the Supply and
Demand
• Supply side agenda includes
• Consensus on strategic goals
• Developing logic models and agreement
among third parties
• Achieving consensus on measures
• Reliable data and evaluation studies
• Demand side prompts use in budgeting,
management oversight, personnel
evaluation, third party governance
29
Findings of GAO PART Review
30
PART Conclusions
PART raises the stakes for performance management
• Effort & involvement by senior OMB officials & staff signaled
PART’s importance to the PMA
• OMB should be credited with opening up for scrutiny—&
potential criticism—its review of key areas of federal program
performance
• PART increases expectations and invites reaction, but it also
presents institutional challenges for the Executive Branch and
Congress:
--Whose framework, interests & perspectives should drive the process
--How to get consensus or buy-in by stakeholders, especially Congress
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Challenges for the Executive Branch
Can OMB involve congressional stakeholders in considering
which programs to assess & ways to use the results?
Can OMB continue to make improvements in the PART
instrument & its application, including identifying
limitations?
Can OMB target program reviews so that they are crosscutting, broadly focused & more strategic?
Will the Executive Branch be able to increase evaluation
capacity, better target what is needed & improve quality?
Will OMB & agencies make progress in reconciling the
needs of strategic planning with that of the budget
process so that PART complements rather than competes
with GPRA?
32
Challenges for Congress
• Can Congress develop approaches to more
systematically use performance information in
decision-making and oversight?
• Can Congress use performance information to
reexamine the relative efficacy of related
programs in achieving common goals?
33
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
Comm.
Soc
Inc
Defens
Health
Medica
Nat
Educat
Million $
Relative Reliance on Policy Tool*
by Budget Function for Selected Budget Functions,
FY 2000
Regulation
Tax Expenditures
Guaranteed Loans
Direct Loans
Mandatory Outlays
Discretionary BA
Budget Function
* Regulatory Costs are the mid-point of a range estimate for annualized costs Direct Loans
are measured by loan disbursements, and guaranteed loans are the face value of the loan guarantee
34
Relative Reliance on
Policy Tools for
FY2003
Health
Care
22%
8%
70%
Tax Expenditures
Discretionary budget authority
Notes: Loan guarantees account for about $177 million or 0.03% of the approximately $597 billion in total
Mandatory
outlays
federal health care resources. Data
are current service
estimates.
Source: GAO analysis of data from the Office of Management and Budget.
35