Comeback America: The Nation’s Fiscal Challenge and A Way Forward

Spring SeminarJoint New England Audit Forum with Boston AGA

Cambridge, MAApril 26, 2011

David M. WalkerFounder and CEO

The Comeback America Initiativeand

Former Comptroller General of the United States

Growth of Government

2

Federal Spending & the Political Party in Power

3

19

45

19

47

19

49

19

51

19

53

19

55

19

57

19

59

19

61

19

63

19

65

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500Democratic Controlled Congress Republican Controlled Congress

Split Congress Republican President

Democratic President

Fiscal Years

Bill

ions

of

Con

stan

t 20

05 D

olla

rs

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

Social Security Act of 1965(Medicare)

Medicare Prescription Drug, Improvement, and Modernization Actof 2003and the Invasion of Iraq

America Recovery and Reinvestment Act of 2009

Patient Protection and Affordable Care Act of 2010

Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act of 1985

Budget EnforcementAct of 1990

Deficit Reduction Act of 1993

2001 Invasion of Afghanistan

Vietnam Conflict1960-75

Korean Conflict1950-53

End of WWII

End of Statutory Budget Controls

End of Statutory Budget Controls

20%

19%

23%

20%

12%

6%

23%

24%

8%

20%

16%

9%

Defense Other Discretionary Medicare and Medicaid Social Security Other MandatoryNet Interest

2010Source: CBO, Budget and Economic Outlook: Fiscal Years 2011 Through 2021, Historical Tables

Composition of Federal Spending(% of Total Outlays)

1980

More on Autopilot

5

Historical Deficit Levels

6

7

Historical Receipts & Outlays

19141917

19201923

19261929

19321935

19381941

19441947

19501953

19561959

19621965

19681971

19741977

19801983

19861989

19921995

19982001

20042007

2010$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Receipts per capita Outlays per Capita

Rea

l 201

0 D

olla

rs

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.

Historical Debt Burdens

8

9

1915

1918

1921

1924

1927

1930

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

Democrat Controlled Congress Republican Controlled Congress Split Congress

Rea

l 20

10 D

olla

rs

As of 12/31/2010 $45,426

Party of the President

Federal Debt Per Capita & The Political Party In Power

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.

End of WW2 $ 22,183

Federal Debt Per Capita & The Political Party In Power

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.

Comparative Debt Burdens

10

Growing Foreign Dependency

11

                  

Rank Country

                  

Rank Country

                  

1 Australia 18 Mexico

2 New Zealand 19 Israel

3 Estonia 20 Slovenia

4 Sweden 21 Austria

5 China 22 Finland

6 Luxembourg 23 France

7 Chile 24 Spain

8 Denmark 25 Germany

9 United Kingdom 26 Belgium

10 Brazil 27 Italy

11 Canada 28 United States

12 India 29 Hungary

13 Poland 30 Ireland

14 Netherlands 31 Japan*

15 Norway 32 Iceland**

16 Slovak Republic 33 Portugal

17 Korea 34 Greece

Fiscal Fitness Index: Overall Results

Source: Sovereign Fiscal Responsibility Index. Note: *Japan’s debt was downgraded by Moody’s 1/29/11. ** Iceland has already defaulted and its Sustainable Fiscal path reflects reforms made since default occurred

12

                  

Rank Country

                  

Rank Country

                  

1 Australia 18 Slovak Republic

2 New Zealand 19 Korea

3 Estonia 20 Mexico

4 Sweden 21 Austria

5 China 22 Slovenia

6 Luxembourg 23 Finland

7 Chile 24 France

8 US under NFRRC plan 25 Spain

9 Denmark 26 Germany

10 Brazil 27 Belgium

11 United Kingdom 28 Italy

12 India 29 Hungary

13 Canada 30 Ireland

14 Netherlands 31 Japan*

15 Poland 32 Iceland**

16 Norway 33 Portugal

17 Israel 34 Greece

Fiscal Fitness Index: Overall Results with U.S. Under NFRRC Plan

Source: Sovereign Fiscal Responsibility Index. Note: *Japan’s debt was downgraded by Moody’s 1/29/11. ** Iceland has already defaulted and its Sustainable Fiscal path reflects reforms made since default occurred

13

Our Fiscal Future

14

CBO’s Public Debt Projections

15

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

Actual

Projection: Alternative Fiscal Scenario

Projection: Extended-Baseline Scenario

As

a P

erce

nta

ge o

f G

DP

106%

SOURCE: CBO, Supplemental Data for the Congressional Budget Office's Long-Term Budget Outlook (June 2010), Figure 1-2. Compiled by TCAII.

79%

Impact of Health Reform

16

Federal Revenues & the Political Party in Power

17

19451947

19491951

19531955

19571959

19611963

19651967

19691971

19731975

19771979

19811983

19851987

19891991

19931995

19971999

20012003

20052007

2009

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000Democratic Controlled Congress Republican Controlled congress

Split Congress Democratic President

Republican President

Fiscal Years

Bill

ions

of

Con

stan

t 20

05 D

olla

rs

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

Revenue Act of 1964

End of WWII

Economic RecoveryTax Act of 1981

Tax Reform Act of 1986

Economic Growth and TaxRelief Reconciliation Act of 2001&Invasion of Afghanistan

Jobs and Growth Tax Relief Reconciliation Act of 2003&Invasion of Iraq

Omnibus Budget Reconciliation Act of 1993

Korean Conflict1950-53

Vietnam Conflict1960-75

Federal Revenue Composition

18

Progressive Tax System

19

Effective Tax Rates

20

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.

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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

A Way Forward

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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)

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$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000Recessions

Bill

ion

s o

f 2

010

Dol

lars

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.

Statutory Debt Ceiling

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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?

The Debt Ceiling Debate

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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.

The Debt Ceiling Debate - Continued

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• Calendar 2011

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)

• 2011 – 2013

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)

A Phased Approach

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• 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

A Three Pronged Test for Policy Creation

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Comeback America Initiative (CAI)Bridgeport, CTwww.TCAII.org

No LabelsWashington, DCwww.nolabels.org

New Players on the Fiscal Responsibility Field

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