Transcript The Upcoming Fiscal Cliff: What We Will Be Facing At The
The Near-Term Outlook for States: A Period Full of Downside Risks
Barry Anderson
Deputy Director National Governors Association [email protected] February 2013 1
Some Views on Our Fiscal Future
• • •
Near Term
– The next fiscal cliff, and what it means over the next few months.
Medium Term
– Next year, and the years right after that.
Long Term
– The major fiscal problem that the US faces is long term fiscal sustainability.
2
About Me—Experience
• • • • •
30+ Years in Federal Budgeting
– GAO – OMB: Senior Career Civil Servant – CBO: Acting & Deputy Director • FASAB
IMF in Washington OECD in Paris Independent Consultant National Governors Ass’n
3 3
About Me—Personal
Not an ‘R’ or a ‘D’, but an SOB!
A “Middle of the Roader” 4 4
• • • •
The Near Term Fiscal Future: The Next Fiscal Cliff
March 1: Sequester I (the Supercommittee sequester) – A lower nominal rate, but over 7 months instead of 9 • • Defense: was 9.4%; now 7.9% Non-defense: was 8.2%; now 5.3%
March 27: Continuing Resolution
–
TANF Reauthorization
– Sequester II (the BCA sequester)
April 15: House & Senate Budget Resolutions
– – Needed for Members to get paid Entitlement & Tax Reform (?)
May 19/Late Summer: Debt Limit
5
Impact of FY2013 Sequesters*
(Budget Authority, in billions of dollars)
BCA Caps Revised Caps Revised Caps w/ Adjustments CR March 27 Sequester CR After March 27 Sequester March 1 Sequester CR After Both Sequesters Security
686 684 803 810 -7 803 -51 751** -1 394
Non Security
361 359
Total
1,047 1,043 394 395 -21 389** 1,197 1,205 -8 1,197 -71 1,140**
Source: CBO Budget & Economic Outlook: FYs 2013-2023, February, 2013.
*Total appropriations for FY2012 were $1,180B, including $137B of adjustments for Overseas Contingency Operations, disasters, & program integrity.
**Includes additional CBO adjustments, mainly $20B in mandatory savings in the CR that were reclassified to mandatory accounts, and a re-estimate of an additional $4B in FHA receipts.
6
The Major Fiscal Issue Is Long-Term Sustainability: How Do We Cut the Debt & at What Level of Government?
7
What Level of Government?
(% of GDP, CBO Projections as of dates shown)
1987-2011 Average 2012 Actual 2022 2/13 2037 8/12 Spending
Medicare Medicaid Social Security Nondefense Defense Other Interest
Total Spending Revenues Deficits Debt
2.5
1.2
4.4
3.7
4.2
2.4
2.4
20.8
17.9
-2.9
44
3.5
1.6
5.0
4.1
4.2
3.0
1.4
22.8
15.8
-7.0
73
4.1
2.2
5.4
2.6
3.0
2.4
3.2
22.9
19.0
-3.9
76
6.7
3.7
6.2
} } 9.6
} 9.5
35.7
18.5
-17.2
199
8
We Can’t Grow Our Way Out
(Percentage change in real GDP ; year to year)
2012 Actual 2.3
2013 1.4
2014 2.6
2015 2018 3.7
2019 2023 2.3
2023 2037 2.5
Sources of projections: for 2012-2023, CBO’s Budget & Economic Outlook: FYs 2013 to 2023, February, 2013; for 2023-2037, CBO’s 2012 Long-Term Budget Outlook, June, 2012.
9
Debt Projections Before & After the January Fiscal Cliff Deal
(Percent of GDP) Source: CBO. The Alternative Fiscal Scenario assumes that the sequester is waived, “doc fixes” are enacted, & expiring tax breaks are extended.
10
How Much More Do We Need To Do To Stabilize the Debt?
• • • • President Obama: $1.5 Trillion Center for Budget Policy & Priorities: $1.4 Trillion Columnist Paul Krugman: “a problem that is already, to a large degree, solved.” Committee for A Responsible Federal Budget: at least $2.2 Trillion 11
Most of the deficit reductions so far have come from discretionary spending--& the sequester will only add to that
(Deficit reduction from FY2013-22, dollars in billions)
Total
Discretionary Spending Mandatory Spending, net Revenue, net Interest Total: $ Total: %/GDP
Appropriations 2011
615 - - 105 $720 .4%
Budget Control Act 2011
850 - - 135 $985 .5%
American Taxpayer Relief Act 2012*
25 -5 545 85 $650 .3%
Sequester March 1
790 169
Sources: CBO; Committee for A Responsible Federal Budget; The Economist. *Includes $75B in tax cuts & $30B in extended unemployment benefits that added to deficits.
- 169 $1,128 .6% 2,280 164 545 494 $3,483 1.7% 12
Public Debt Projections With and Without Prior Savings*
(Percent of GDP) Source: Committee for a Responsible Federal Budget *”Prior Savings” include those enacted in the Budget Control Act of 2011, the American Taxpayers Reduction Act of 2012, and in appropriations since CBO’s August 2010 baseline.
13
Reasons to Support Reducing the Debt Below 80%/GDP in 2023
• • • • Encourages higher economic growth as the economy moves towards full capacity Addresses sustainability beyond 10 years, especially given the certainty of higher boomer retirement costs Provides a margin for error in case of lower-than forecasted growth or higher interest rates Provides for fiscal flexibility for unknowns, such as natural disasters or national security threats 14
Health is by Far Our Biggest Problem!
Health Expenditures, 2010
(% GDP)
US
France Germany Denmark Switzerland United Kingdom Australia
OECD Average
Japan
Country Public 8.1
9.2
8.8
9.8
6.8
8.2
6.0
7.0
7.0
Total 17.4
11.8
11.6
11.5
11.4
9.8
8.7
8.6
8.5
Source: OECD Health Data 2012
15
CY
US National Health Expenditures
(% of GDP)
2010 Projection Before ACA 2011 Projection After ACA 2012 Projection After ACA
2007 2008 2009 2010 2011 2012 2013 2014 2019 2020 2021 15.9
16.2
17.3
17.3
- - - 17.4
19.3
- --
- 16.6
17.6
17.6
17.7
17.6
17.6
18.1
- 19.8
--
- - 17.9
17.9
17.9
17.9
17.8
18.2
- - 19.6
Source: Sean Keehan (CMS), et al., “National Health Expenditure Projections”, Health Affairs, 2010-2012
16
84
Life Expectancy & Health Expenditures
82 80 78 76 74 CHL KOR ISR JPN ITA ESP NZL GRC SWE BEL FRA NLD LUX DNK CHE NOR CZE MEX POL EST HUN SVK TUR USA 72 0 1 000 2 000 3 000 4 000 5 000 Total health spending per person (2008 USD PPP) 6 000 7 000 8 000 Source: OECD Government at a Glance, 2011.
17
Where Does the Money Go?
Higher Prices!
(Procedure prices as a % of US prices, 2009)
Procedure AUS CAN DEN FIN FRA
Appendectomy 63 63 37 47 57
SWE
62 Normal delivery Caesarean delivery Coronary angioplasty Coronary artery bypass Hip replacement Knee replacement 63 91 98 67 95 50 66 69 66 63 64 64 41 51 67 40 50 23 68 62 66 34 64 39 67 64 83 65 78 49 62 66 89 58 90 65
Source: OECD Health at a Glance, 2011
18
And Higher Spending on Every Category
Category of Health Spending, 2009 Percentage of OECD Average
Public Health & Administration 274 Physicians, Specialists, Dentists Hospitals & Nursing Homes Pharmaceuticals & Medical Goods
Source: OECD Health at a Glance, 2011
238 163 152 19
And We “Use” More Health Services
Procedure
MRI Units MRI Exams CT Scanners CT Exams Tonsillectomy Coronary Angioplasty Knee Replacements Caesarean Sections
Source: OECD Health at a Glance, 2011 US Use Relative to 30 OECD Countries
2 nd 2 nd 5 th 2 nd 2 nd 3 rd 1 st 8 th 20
Quality of US Health Care is Mixed
Measure
Breast cancer, 5-year survival rate
US
89.3
OECD Average
83.5
Colorectal cancer, 5-year survival rate Asthma hospital admission rates, age 15 & over Chronic obstructive pulmonary disease hospital admission rates, age 15 & over
Source: OECD Health at a Glance, 2011
68.0
120.6
230.0
59.9
51.8
198.0
21
• • • • • •
Factors to Lower Health Care Costs Eliminate fee-for-service (FFS); replace with systems of care (SoC)
– FFS creates incentives for providers to function as revenue centers & promote unneeded services – SoC can create incentives for outcomes & not reward either volume or stinting • Methods can involve partial capitation, episode pricing, shared savings, & high-cost reinsurance
Create larger provider systems
– More patients with comprehensive services permits better measurement of performance
Rely on competition to set prices
– Administratively-set prices, even if “right”, create lobbying pressures
Reform legal impediments
– Malpractice; product liability; corporate practice of medicine
Review administrative costs Address data availability, prevention, caps, & everything else
22
How Do We Fix Social Security? First, Its Fundamental Characteristics
Intergenerational
Pay as you go
Obligations defined
Not funded by invested taxes
Zaps higher income earners
23
Fundamental Characteristics - Restated
P ay as you go O bligations defined N ot funded by invested taxes Z aps higher income earners I ntergenerational 24
Three Ways To Look At Social Security
METHOD
Accounting
MEASURE
Trust Fund
GOAL
Solvency Budget Balance Sustainability Economic Growth Higher Standard of Living 25
Spending on the Elderly 1 as a Percentage of GDP
1 Social Security + all health. Source CBO Long-Term Budget Outlook, June 2012 26
Spending on the Elderly 1 as a Percentage of GDP
1 Social Security + all health. Source CBO Long-Term Budget Outlook, June 2012 27
SOCIAL SECURITY SOLUTIONS*
• Increase Net National Savings – Run surpluses!
• Cut benefits – Increase retirement age – Index to prices, not wages • Cut everything else • Increase SS taxes • Convert to private accounts – DB to DC: uncertainty of returns, of longevity, of annuity – Administrative costs: you get what you pay for • Borrow • Swap Treasury debt for equities – Government ownership of means of production * See http://www.esquire.com/blogs/politics/federal-budget-statistics-1110 28
2013 Marginal Tax Rates for Selected Provisions
(Married filing jointly; employee only 1 . Rate changes bolded.)
Income 2 Federal Income Social Security Medicare Base Medicare Investment 3 Pease 4 Total
0-$17,850 5 10.0
6.2
1.45
0 0
17.65
$17,850-72,500 $72,500-113,700 $113,700-146,400 $146,400-223,050 $223,050-250,000 $250,000-300,000 15.0
25.0
25.0
28.0
33.0
33.0
6.2
6.2
0 0 0 0 1.45
1.45
1.45
1.45
1.45
2.35
0 0 0 0 0
3.8
0 0 0 0 0 0
22.65
32.65
26.45
29.45
34.45
39.15
$300,000-398,350 $398,350-450,000 33.0
35.0
0 0
2.35
2.35
3.8
3.8
.99
1.05
40.34
42.20
$450,000+
39.6
0
2.35
3.8
1.19
46.94
1 Employers don’t pay the additional .9% Medicare Base or 3.8% Medicare Investment taxes.
2 Taxable income for Federal Income; earned income for Social Security & Medicare Base; AGI for Medicare Investment & Pease.
3 This rate applies to the lessor of net investment income or the excess of Modified AGI over $250,000.
4 5 Pease reduces itemized deductions (except medical, investment interest, & casualty & theft) by 3% of the amount by which AGI exceeds $300,000, but not more than 80% of the value of itemized deductions. PEP (Personal Exemption Phaseout) is not included; it reduces the $3,900/person exemptions by 2% for the first dollar of each $2,500 increment in exemptions for AGI over $300,000.
Does not include Earned Income Credit and various other credits for low income filers.
Tax Expenditures: How Do We Limit Them?
(2013, in billions of dollars)
3 4 5 6 7 8 9 10 Rank 1 2 Tax Expenditure
Exclusion of employer payments for health insurance Provisions that benefit states Deductibility of state & local income, sales & property taxes Exclusion of interest on public purpose state & local bonds Deductibility of mortgage interest on owner occupied homes Tax treatments of 401(k)-type retirement plans Treatment of capital gains Tax treatment of employer pension plans Exclusion of imputed rental income Deductibility of charitable contributions Deferral of income from controlled foreign corporations Accelerated depreciation of machinery & equipment
Cost
181 105 (69) (36) 101 73 62 52 51 49 42 33 30
Percentage of households paying income or payroll taxes where payroll—including employer’s share— is bigger 2009
Lowest 2 nd Middle 4 th Highest
Income Quintile
Top 1% All Quintiles
Source: CBO
99 96 86 78 49 2 80 31
Average Social Insurance Tax Rates By Quintiles 1979 2009
Lowest 2 nd Middle 4 th Highest Top 1% All
Source: CBO
4.9
7.6
8.5
8.5
5.5
1.0
6.8
8.3
7.9
8.4
9.1
7.2
2.5
8.0
32
Marginal Federal Income Tax Rates
Highest
2000 2001 2002 2003-12 2013
Next Highest
36.0
35.5
35.0
33.0
35.0
39.6
39.1
38.6
35.0
39.6
33
Average Tax Rates & Shares by Quintiles, 2009
Income
Quintile Lowest 2 nd Middle 4 th Highest Top 1% All
Rates
Total 1.0
6.8
11.1
15.1
23.2
28.9
17.4
Rates
Income -9.3
-2.6
1.3
4.6
13.4
21.0
7.2
Shares
Total 0.3
3.8
9.4
18.3
67.9
22.3
100.0
Shares
Income -6.6
-3.5
2.7
13.4
94.1
38.7
100.0
Source: CBO
34
Average Incomes & Shares by Quintiles, 2009 ($ in thousands)
Income
Quintile Lowest 2 nd
Average Incomes
Pre-Tax After-Tax $23.5
44.4
$23.3
40.5
Shares
Pre-Tax 5.1
9.8
Shares
After-Tax 6.2
11.1
Middle 4 th Highest Top 1% All
Source: CBO
64.3
93.8
223.5
1,219.7
88.4
57.1
79.6
171.6
866.7
73.1
14.7
21.1
50.8
13.4
100.0
15.8
21.6
47.2
11.5
100.0
35
The Laffer Curve
36
The Neo-Laffer Curve
37 37
Category
Revenues Spending Entitlements Health Social Security Chained CPI UI, Farm, & other Total Entitlements Discretionary, net Total Spending Interest Total
Can Another Deal Be Made?
Recent Deals and Offers
(10-Year Savings; $ in Billions)
July 2011 Almost Deal Dec 14 2012 GOP Offer Dec 17 2012 WH Offer
800 1,000 1,200 400 75 75 250 800 1,300 2,100 300 3,200 - - (150) - - - 1,000 300 2,300 400 0 125 200 725 25 850 300 2,250
Jan 1 2013 Deal
545 25 - - -30 -5 25 20 85 650 38