Defense

Federal FinancesKey Statistics

March 2010

David M. WalkerPresident and CEO

The Peter G. Peterson Foundationand

Former Comptroller General of the United States

The Federal Government Has Grown Far Beyond the Intent of Our Nation's Founders• In 1789, federal government represented less

than 2 percent of the economy it now represents over 25 percent.

• Federal government will grow even larger based on our current programs and present path absent transformational reforms

• Less than 40 percent of the annual federal budget relates to the express and enumerated federal responsibilities envisioned by our nation's founders. This percent is on the decline due the automatic growth of entitlement programs.

Spending as a Percentage of GDP

Historical Projected

Source: Compiled by PGPF using data from the Office of Management and Budget Historical Tables, Congressional Budget office Long-term Outlook, and Historical Statistics of the United States, Millennial Edition On Line, Cambridge 2006.

Composition of Federal Spending (% of Total Spending)

43%34%

61%

5%

Source: Data from the Office of Management and Budget FY 2011 Budget. Compiled by PGPF.

Total Spending 1970: $900 Billion (Constant 2009 Dollars)

Total Spending 2010 (estimated): $3.7 Trillion (Constant 2009 Dollars)

Federal Spending is Out of Control

• Total federal spending, net of inflation, has grown by about 300 percent in the past 40 years.

• George W. Bush was the biggest spending president in recent history, but Barack Obama is currently on track to beat his record. In addition, George W. Bush was the first president since LBJ to significantly expand entitlement programs.

Federal Spending (in Constant 2009 $)

Presidential Spending

Source: The Office of Management and Budget’s Historical Tables, and the Congressional Budget Office’s FY 2011 Budget Outlook. Compiled by PGPF.

Federal Revenues Are at Lowest Levels in 40 Years

• Current revenue levels are below 40-year historical average of 18.3 percent of GDP

• If current 2001 and 2003 tax cuts are extended, CBO estimates the lower revenue levels will add $116 billion to the deficit in 2011 and more than $3 trillion over the next 10 years.

• By 2028, projected revenues of 18.9 percent of GDP will not even cover net interest, Social Security, Medicare and Medicaid.

Source: Data from the Congressional Budget Office’s Long-Term Budget Outlook, June 2009. Compiled by PGPF.

Spending

Spending and Revenues

Potential Fiscal Outcomes Under Alternative Simulation

Source: Data from the Government Accountability Office, Fall 2009 Alternative Simulation. Compiled by PGPF.

The Federal Government's Financial Condition Has Deteriorated Significantly Over the Past 10 years

– The federal government has gone from a $236 billion surplus in fiscal 2000 to an estimated $1.56 trillion deficit (per OMB) in fiscal 2010. By the the end of the decade, under the President’s budget, we face trillion dollar plus deficits.

– Total federal debt has more than doubled during the past 10 years. It now stands at over $12.4 trillion and it is likely to double again in the next 10 years unless we change course

– The federal financial hole (i.e., total liabilities, unfunded social insurance obligations and commitments/contingencies) have more than tripled in the past 10 years. They now exceed $62 trillion and are growing by an average of $5 trillion a year on autopilot (see Fiscal Exposures slide).

– Our nation's dependency on foreign lenders has increased to approximately half of all debt held by the public. This will increase further if we do not raise our nation's overall savings rate.

Federal Budget Surplus(-)/Deficit(+)

Current Law Extended

Sources: Data from the Office of Management and Budget FY11 President’s Budget and Congressional Budget Office The Budget and Economic Outlook: Fiscal Years 2010 to 2020. Compiled by PGPF.

U.S. Debt Held by Public

Great Depression

WWI

Note: Projected gross federal debt is higher than public debt. For example, at the end of 2010 projected public debt is roughly 60 percent of GDP compared to projected gross federal debt of roughly 90 percent of GDP. Sources: Data from Office of Management and Budget, Government Accountability Office. Compiled by PGPF.

Major Fiscal Exposures($ trillions)

2000 2009

Explicit liabilities $6.9 $14.5 Publicly held debt* Military & civilian pensions & retiree health Other Major Fiscal Exposures

($ trillions)

Commitments & contingencies 0.5 2.0 E.g., PBGC, undelivered orders

Implicit exposures 13.0 45.8 Future Social Security benefits 3.8 7.7

Future Medicare Part A benefits 2.7 13.8

Future Medicare Part B benefits 6.5 17.2

Future Medicare Part D benefits -- 7.2

Total $20.4 $62.3

*As of February 26, 2010Note: Estimates for Medicare and Social Security liabilities are from the Social Security and Medicare Trustees reports which are as of January 1, 2009 and show unfunded liabilities for the next 75 years. Future liabilities are discounted to present value based on a real interest rate of 2.9% and CPI growth of 2.8%. The totals above do not include liabilities on the balance sheets of Fannie Mae, Freddie Mac, and the Federal Reserve. Assets of the U.S. government not included. May not add due to rounding.

Increasing Foreign Holdings of U.S. Debt

2009

Source: Data from the Office of Management and Budget, FY 2011 Budget, Analytical Perspectives. Compiled by PGPF.

45%

1990

Why We Can’t Delay

• If we waited until 2020 to reach and maintain a sustainable debt level on the spending side only, we would need to cut spending by 44 percent. On the flipside, if we focused on just revenues, we would need to raise taxes by 52 percent.

• Waiting until 2040, require a 57 percent spending cut by 57 percent or tax increase of 80 percent.

• Main point: We should not wait and it is unrealistic to assume that we can address the problem on the spending or revenue side alone

Delay Leads to Deeper Spending Cuts To Close the Fiscal Gap

Source: Congressional Budget Office, Long-Term Budget Outlook, June 2009. Compiled by PGPF.

Delay Leads to Bigger Tax IncreasesTo Close the Fiscal Gap

Source: Congressional Budget Office, Long-Term Budget Outlook, June 2009. Calculated by PGPF.