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Looking Backward and Forward at the U.S. Fiscal Trajectory
Jason FurmanSenior Fellow, PIIE
Peterson Institute for International Economics | 1750 Massachusetts Ave., NW | Washington, DC 20036
The Concord Coalition Washington, DC
June 29, 2017
Outline
1. How Has Our Fiscal Situation Changed Since the Concord Coalition Was Formed in 1992?
2. How Has Our Fiscal Situation Changed Since Bowles-Simpson in 2010?
3. What Are Our Fiscal Challenges Going Forward?
4. What is a Feasible Path Forward on Our Fiscal Imbalances?
Outline
1. How Has Our Fiscal Situation Changed Since the Concord Coalition Was Formed in 1992?
2. How Has Our Fiscal Situation Changed Since Bowles-Simpson in 2010?
3. What Are Our Fiscal Challenges Going Forward?
4. What is a Feasible Path Forward on Our Fiscal Imbalances?
The Deficit is Smaller
Note: Outlay components may not sum to total outlays due to rounding. Deficit may not equal the difference between revenues and outlays due to rounding. Source: Office of Management and Budget; author’s calculations.
1992 2016
Defense Discretionary 4.7 3.2Nondefense Discretionary 3.6 3.3Social Security 4.4 4.9Medicare & Medicaid 2.9 5.2Other Non-interest 2.8 3.1Net Interest 3.1 1.3
Total Outlays 21.5 20.9
Total Revenues 17.0 17.8
Deficit 4.5 3.2
Revenues, Outlays, and Deficits, 1992 and 2016(% of GDP)
Largely Because Defense & Net Interest Have Fallen
Note: Outlay components may not sum to total outlays due to rounding. Deficit may not equal the difference between revenues and outlays due to rounding. Source: Office of Management and Budget; author’s calculations.
1992 2016
Defense Discretionary 4.7 3.2Nondefense Discretionary 3.6 3.3Social Security 4.4 4.9Medicare & Medicaid 2.9 5.2Other Non-interest 2.8 3.1Net Interest 3.1 1.3
Total Outlays 21.5 20.9
Total Revenues 17.0 17.8
Deficit 4.5 3.2
Revenues, Outlays, and Deficits, 1992 and 2016(% of GDP)
While Health Spending Has Risen
Note: Outlay components may not sum to total outlays due to rounding. Deficit may not equal the difference between revenues and outlays due to rounding. Source: Office of Management and Budget; author’s calculations.
1992 2016
Defense Discretionary 4.7 3.2Nondefense Discretionary 3.6 3.3Social Security 4.4 4.9Medicare & Medicaid 2.9 5.2Other Non-interest 2.8 3.1Net Interest 3.1 1.3
Total Outlays 21.5 20.9
Total Revenues 17.0 17.8
Deficit 4.5 3.2
Revenues, Outlays, and Deficits, 1992 and 2016(% of GDP)
The Debt is Substantially Larger Than It Was in 1992…
Source: Congressional Budget Office.
0
20
40
60
80
100
120
140
1992 1997 2002 2007 2012 2017
Federal Debt: Actual vs. ProjectedPercent of GDP
Actual
2016
But the Debt is Still Well Below the Forecasts Made in 1992…
Note: Projections are adjusted to account for changes in the definition of nominal GDP since projections were released. GAO estimates were converted from percent of GNP. Source: Congressional Budget Office; Government Accountability Office; Bureau of Economic Analysis; author’s calculations.
0
20
40
60
80
100
120
140
1992 1997 2002 2007 2012 2017
Federal Debt: Actual vs. ProjectedPercent of GDP
Actual
GAO (1992)
2016
Deficits Have Generally Fallen Below Earlier Forecasts
Note: Projections are adjusted to account for changes in the definition of nominal GDP since projections were released. GAO estimates were converted from percent of GNP. Dashed line indicates most recent projection.Source: Congressional Budget Office; Bipartisan Commission on Entitlement and Tax Reform; Government Accountability Office; Bureau of Economic Analysis; Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds; author’s calculations.
CBO (1996)
2025
Kerrey-Danforth (1994)
GAO (1992)
-5
0
5
10
15
20
1990 1995 2000 2005 2010 2015 2020 2025
Federal Deficit:Actual vs. ProjectedPercent of GDP
Actual
Revenue Has Generally Been Slightly Below What Was Expected…
Note: Projections are adjusted to account for changes in the definition of nominal GDP since projections were released. GAO estimates were converted from percent of GNP. Dashed line indicates most recent projection.Source: Congressional Budget Office; Bipartisan Commission on Entitlement and Tax Reform; Government Accountability Office; Bureau of Economic Analysis; Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds; author’s calculations.
CBO (1996)
2025
Kerrey-Danforth (1994)
GAO (1992)
5
10
15
20
25
30
1990 1995 2000 2005 2010 2015 2020 2025
Revenue: Actual vs. ProjectedPercent of GDP
Actual
…But Spending Has Fallen Even Further Below Expectations
Note: Projections are adjusted to account for changes in the definition of nominal GDP since projections were released. GAO estimates were converted from percent of GNP. Dashed line indicates most recent projection.Source: Congressional Budget Office; Bipartisan Commission on Entitlement and Tax Reform; Government Accountability Office; Bureau of Economic Analysis; Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds; author’s calculations.
CBO (1996)
2025
Kerrey-Danforth (1994)
GAO (1992)
15
20
25
30
35
40
1990 1995 2000 2005 2010 2015 2020 2025
Spending: Actual vs. ProjectedPercent of GDP
Actual
Discretionary Spending Has Roughly Tracked Expectations
Note: Projections are adjusted to account for changes in the definition of nominal GDP since projections were released. Dashed line indicates most recent projection.Source: Congressional Budget Office; Bipartisan Commission on Entitlement and Tax Reform; Bureau of Economic Analysis; Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds; author’s calculations.
Kerrey-Danforth (1994)
0
2
4
6
8
10
12
14
1990 1995 2000 2005 2010 2015 2020 2025
Discretionary Spending: Actual vs. ProjectedPercent of GDP
Actual
2025
Social Security Spending Has Also Tracked Expectations
Note: Projections are adjusted to account for changes to nominal GDP since projections were released. Dashed line indicates most recent projection.Source: Congressional Budget Office; Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds; Bureau of Economic Analysis; Council of Economic Advisers; author’s calculations.
Actual
Trustees (1992)
0
2
4
6
8
10
12
14
1990 1995 2000 2005 2010 2015 2020 2025
Old-Age, Survivors, and Disability Insurance Costs: Actual vs. Projected
Percent of GDP
2025
CBO (1996)
But Health Spending is Well Below Previous Forecasts
Note: Projections are adjusted to account for changes in the definition of nominal GDP since projections were released. Dashed line indicates most recent projection.Source: Office of Management and Budget; Congressional Budget Office; Bipartisan Commission on Entitlement and Tax Reform; Bureau of Economic Analysis; Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds; author’s calculations.
Actual (Medicare, Medicaid, CHIP,
and ACA)
CBO (1996)
Kerrey-Danforth (1994)
0
2
4
6
8
10
12
14
1990 1995 2000 2005 2010 2015 2020 2025
Health Care Spending:Actual vs. ProjectedPercent of GDP
2025
Including Medicare, Which Has Also Been Well Below Expectations
Note: Projections are adjusted to account for changes to nominal GDP since projections were released. Dashed line indicates most recent projection.Source: Congressional Budget Office; Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds; Board of Trustees, Federal Supplementary Medical Insurance Trust Fund; Bureau of Economic Analysis; Council of Economic Advisers; author’s calculations.
Actual
Trustees (1992)
0
2
4
6
8
10
12
14
1990 1995 2000 2005 2010 2015 2020 2025
Hospital Insurance and Supplementary Medical Insurance Costs: Actual vs. Projected
Percent of GDP
2025
CBO (1996)
Net Interest Payments Have Fallen Relative to GDP—Contrary to the Projected Rise
Note: Projections are adjusted to account for changes in the definition of nominal GDP since projections were released. GAO estimates were converted from percent of GNP. Dashed line indicates most recent projection.Source: Congressional Budget Office; Bipartisan Commission on Entitlement and Tax Reform; Government Accountability Office; Bureau of Economic Analysis; Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds; author’s calculations.
CBO (1996)
Kerrey-Danforth (1994)
0
2
4
6
8
10
12
14
1990 1995 2000 2005 2010 2015 2020 2025
Net Interest Payments: Actual vs. ProjectedPercent of GDP
Actual
2025
GAO (1992)
Growth Rates Well Above Previous Forecasts, But Interest Rates Well Below
Source: Congressional Budget Office; Government Accountability Office; Bipartisan Commission on Entitlement and Tax Reform.
Real GDP GrowthNominal Interest Rate on Government Debt
GAO (1992) * 7.8Kerrey-Danforth (1994) 1.5 6.3CBO (1996) 1.3 6.2Actual 2.6 1.7Note: *Approximately zero.
Projected and Actual Economic Growth and Interest Rates, Calendar Year 2015 (Percent)
Outline
1. How Has Our Fiscal Situation Changed Since the Concord Coalition Was Formed in 1992?
2. How Has Our Fiscal Situation Changed Since Bowles-Simpson in 2010?
3. What Are Our Fiscal Challenges Going Forward?
4. What is a Feasible Path Forward on Our Fiscal Imbalances?
The Debt is Projected to Rise, But Some Progress Since 2010 (Caveat: Methodology Not Constant)
Source: Congressional Budget Office.
June 2010 Alternative
Fiscal Scenario
308%
March 2017 Extended Baseline
2047
0
50
100
150
200
250
300
350
2010 2015 2020 2025 2030 2035 2040 2045
Long-Term Federal Debt OutlookPercent of GDP
150%
At the Time of Bowles-Simpson the Deficit Was Never Projected to Fall Below 4 Percent of GDP
Note: GDP estimates from Bowles-Simpson were adjusted to reflect revisions to the calculation of nominal GDP since 2010.Source: National Commission on Fiscal Responsibility and Reform; Congressional Budget Office; author’s calculations.
Bowles-Simpson Baseline
2020
0
1
2
3
4
5
6
7
8
9
10
2010 2012 2014 2016 2018 2020
Deficit under Bowles-Simpson Percent of GDP
Bowles-Simpson Proposed to Cut the Deficit to 1 Percent of GDP
Note: GDP estimates from Bowles-Simpson were adjusted to reflect revisions to the calculation of nominal GDP since 2010.Source: National Commission on Fiscal Responsibility and Reform; Congressional Budget Office; author’s calculations.
Bowles-Simpson Baseline
2020
Bowles-Simpson Proposed
0
1
2
3
4
5
6
7
8
9
10
2010 2012 2014 2016 2018 2020
Deficit under Bowles-Simpson Percent of GDP
The Deficit Has Fallen But Not As Much As Bowles-Simpson Proposed
Note: GDP estimates from Bowles-Simpson were adjusted to reflect revisions to the calculation of nominal GDP since 2010. Dashed line indicates latest CBO projection.Source: National Commission on Fiscal Responsibility and Reform; Congressional Budget Office; author’s calculations.
Bowles-Simpson Baseline
2020
Bowles-Simpson Proposed
Actual
0
1
2
3
4
5
6
7
8
9
10
2010 2012 2014 2016 2018 2020
Deficit under Bowles-Simpson Percent of GDP
The Main Source of Higher Deficits is Because Revenue is Below the Bowles-Simpson Proposal
Note: Percentage points denoted p.p.Source: National Commission on Fiscal Responsibility and Reform; Congressional Budget Office; author’s calculations.
Assuming Bowles-Simpson Was Targetting
Nominal Dollars
Assuming Bowles-Simpson Was Targetting
Percent of GDPRevenue -$673B -2.2 p.p.
Mandatory Outlays -$142B 0.1 p.p.Discretionary Outlays $14B 0.5 p.p.Net Interest -$358B -1.7 p.p.
Deficit -$187B -1.1 p.p.
Difference Between Actual Spending and Bowles-Simpson Proposal, 2017
What Would Bowles-Simpson Look Like Going Forward?
Policy Changes Needed for the Current 10-Year Budget (2018-27) to Get Back to the Original Bowles-Simpson Proposed Levels
Taxes: $6 to $11 trillion increase
Discretionary spending: $300 billion to $1.3 trillion cut
Mandatory spending: $1 trillion cut to $2 trillion increase
Note: numbers vary depending on whether Bowles-Simpson targets are interpreted as nominal dollars or percent of GDP
Outline
1. How Has Our Fiscal Situation Changed Since the Concord Coalition Was Formed in 1992?
2. How Has Our Fiscal Situation Changed Since Bowles-Simpson in 2010?
3. What Are Our Fiscal Challenges Going Forward?
4. What is a Feasible Path Forward on Our Fiscal Imbalances?
1. The Way We Collect Taxes—E.g. A High Statutory Rate for Corporations
20.0
26.8 30.0 30.2 31.334.4
38.9G-7 Weighted Average (Excluding United States): 29.0
0
5
10
15
20
25
30
35
40
45
United Kingdom
Canada Japan Germany Italy France United States
Statutory Corporate Income Tax Rates in the G-7, 2016Percent
21.6 23.1 23.6
27.7 27.9 29.1
38.8
G-7 Weighted Average (Excluding United
States): 29.2
0
5
10
15
20
25
30
35
40
45
Canada France United Kingdom
United States
Germany Italy Japan
Average Effective Tax Rates in the G-7, 2006-2009Percent
Note: Combined central and sub-central (statutory) corporate income tax rate given by the central government rate (less deductions for sub-national taxes) plus the sub-central rate. G-7 average is calculated using gross domestic product (in current U.S. dollars) as weights.Source: Organisation for Economic Co-operation and Development; national sources via Haver Analytics; author’s calculations; Council of Economic Advisers (2015).
2. The Composition of Spending—E.g. Too Little Investment
Source: Organisation for Economic Co-operation and Development; CBO (2015); Bureau of Economic Analysis, National Income and Product Accounts; author’s calculations.
Active Labor Market Policies
Infrastructure
Research and Development
2016
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1950 1960 1970 1980 1990 2000 2010
Selected U.S. Public Expenditures, 1950-2016Percent of GDP
3. The Level of Spending—United States is Low in Comparative Perspective
0
10
20
30
40
50
60
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Est
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Can
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Japa
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Net
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Nor
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Sw
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Ital
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iaB
elgi
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ark
Gre
ece
Fran
ceFi
nlan
d
General Government Expenditures as Share of GDP, 2015Percent
Source: Organisation for Economic Co-operation and Development.
3. The Level of Taxes—United States is Low in Comparative Perspective
0
10
20
30
40
50
60
Irela
ndUn
ited
Stat
esKo
rea
Aust
ralia
Switz
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ndLa
tvia
Japa
nIs
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Unite
d Ki
ngdo
mSp
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New
Zeal
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Cana
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toni
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Repu
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Icel
and
Slov
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Neth
erla
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Luxe
mbo
urg
Portu
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Ger
man
ySl
oven
iaIta
lyG
reec
eSw
eden
Aust
riaBe
lgiu
mDe
nmar
kFr
ance
Finl
and
Norw
ay
General Government Revenues as Share of GDP, 2015Percent
Source: Organisation for Economic Co-operation and Development.
4. Countercylical Policy: The Difference Between Taxes and Spending in Recessions
Application to the United States: The United States Has Weak Automatic Stabilizers
24
AUSAUT
BEL
CANCHE
DEU
DNKESP FIN
FRAGBR
GRCIRL
ITA
JPN
KOR
LUX NLD
NOR
NZL
PRT
SWE
USA
0.0
0.1
0.2
0.3
0.4
0.5
0.6
20 30 40 50 60
Government Size and the Cyclical Semi-Elasticity of Automatic Stabilizers
Elasticity (Automatic Stabilizers)
Government Size (Spending to GDP Ratio)
Source: Fatás and Mihov (2012).Source: Fatás and Mihov (2012).
4. The “New View” is that Fiscal Policy is More Important Today Given Less Scope for
Conventional Monetary Policy
2016
-2
0
2
4
6
8
10
1985 1990 1995 2000 2005 2010 2015
Canada FranceGermany ItalyUnited Kingdom JapanUnited States
Real Ten-Year Benchmark RatePercent
Note: Inflation measured by one-year changes in the core consumer price index.Source: National sources via Haver Analytics; author’s calculations.
5. The Difference Between Taxes and Spending in the Medium and Long Run
Source: Congressional Budget Office.
Deficit
Revenue
Non-interest Outlays
Outlays
0
5
10
15
20
25
30
2017 2022 2027 2032 2037 2042 2047
Long-Term Budget OutlookPercent of GDP
17.8
23.2
29.4
20.7
19.3
2.9
9.8
19.6
Outline
1. How Has Our Fiscal Situation Changed Since the Concord Coalition Was Formed in 1992?
2. How Has Our Fiscal Situation Changed Since Bowles-Simpson in 2010?
3. What Are Our Fiscal Challenges Going Forward?
4. What is a Feasible Path Forward on Our Fiscal Imbalances?
Fiscal Approach: Do No Harm (i.e., PAYGO) & Ensure Solvency for Social Security and
Medicare Hospital Insurance
Source: Auerbach and Gale (2017); Trustees (2016).
4.2 -2.2
-1.7
-1.0 -0.3 -1.0-2
0
2
4
6
8
FiscalGap
AssumingFuture
Tax Cutsand
SpendingIncreases
Pay forFuture
SpendingIncreases
Pay forFuture
Tax Cuts
SocialSecuritySolvency
MedicareSolvency
FiscalGap
Fiscal Gap: Trustees' AssumptionsPercent of GDP
PAYGO Solvency
Do No Harm & Maintain Solvency Assuming the More Pessimistic CBO Assumptions
Source: Auerbach and Gale (2017); Congressional Budget Office (2017).
6.2 -2.2
-1.7-1.5
-1.2? -0.4?-2
0
2
4
6
8
FiscalGap
AssumingFuture
Tax Cutsand
SpendingIncreases
Pay forFuture
SpendingIncreases
Pay forFuture
Tax Cuts
SocialSecuritySolvency
MedicareSolvency
FiscalGap
Fiscal Gap: CBO's AssumptionsPercent of GDP
PAYGO Solvency
Advantages of This Approach
1. Grounded in broad existing agreement. Everyone from Sam Johnson to Bernie Sanders, for example, agrees on Social Security solvency.
2. Feasible but meaningful line to draw and defend. Feasible to pay for departures from the CBO baseline since the big issues are resolved.
3. Agnostic on debates over the size/role of government.Treats taxes/spending symmetrically both in PAYGO and for solvency.
4. Allows solution to be reached in stages. E.g. could continue to address Medicare solvency through periodic legislation drawing on new lessons.
5. Automatically adjusts as uncertainty is resolved. Solvency projections are updated annually, so more/less adjustment if the problem is more/less severe.
Looking Backward and Forward at the U.S. Fiscal Trajectory
Jason FurmanSenior Fellow, PIIE
Peterson Institute for International Economics | 1750 Massachusetts Ave., NW | Washington, DC 20036
The Concord Coalition Washington, DC
June 29, 2017