Four Observations About the Federal Budget CBO Presentation March 7, 2011 to National Association...

8/7/2019 Four Observations About the Federal Budget CBO Presentation March 7, 2011 to National Association for Business Economics

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Congressional Budget Office

Presentation to the

National Association for Business Economics

Four Observations about the

Federal BudgetMarch 7, 2011

Douglas W. Elmendorf

Director


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1. The gap between spending and revenues is likely to remainvery large even after we return to normal economic conditions.

2. Fiscal policy cannot be put on a sustainable path just byeliminating waste and inefficiency; the policy changes that areneeded will significantly affect popular programs or peoples

tax payments or both.

3. Policymakers face difficult tradeoffs in deciding how quickly toimplement policy changes that would reduce future budgetdeficits.

4. There is more focus in Washington on federal budgetproblems today than there has been since the late 1990s, andthat focus has led to a range of proposals for tackling the

problems.

Four Observations about the Federal Budget


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The gap between spending and revenuesis likely to remain very large even afterwe return to normal economic conditions.

Observation #1


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Deficits Under CBOs Baseline or with a Continuation ofCertain Policies, Compared with Past Deficits and

Surpluses

Percentage of GDP

1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021

- 12

- 10

- 8

- 6

- 4

- 2

0

2

4

- 12

- 10

- 8

- 6

- 4

- 2

0

2

4

Actual Projected

Baseline

Continuation of

Certain Policies


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Federal Debt Held by the Public Under CBOs Baseline orwith a Continuation of Certain Policies, Compared with

Past Debt

Percentage of GDP

1940 1949 1958 1967 1976 1985 1994 2003 2012 2021

0

20

40

60

80

100

120

0

20

40

60

80

100

120

Actual Projected

Baseline

Continuation of

Certain Policies


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Debt Burden Across Countries in 2009

Source: For the United States, debt held by the public net of financial assets. For other countries, general government debtnet of financial liabilities as reported by the Organisation for Economic Co-operation and Development.

Switzerland

Slovak Republic

Poland

Canada

Ireland

Netherlands

Spain

Austria

Iceland

United KingdomUNITED STATES

Germany

France

Portugal

Hungary

BelgiumGreece

Italy

Japan

0 20 40 60 80 100 120

2021 CBO

Baseline

With

Continuation of

Certain Policies

Percentage of GDP


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Fiscal policy cannot be put on a sustainablepath just by eliminating waste andinefficiency; the policy changes that are

needed will significantly affect popularprograms or peoples tax payments or both.

Observation #2


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Shares of Federal Spending in 2010

Percent

Transfer payments to people in the United States 47

Grants to state and local governments 14

Purchases of goods and services for defense 19

Purchases of goods and services for nondefense 9

Interest 8

Other (includes transfers to people outside the U.S.) 4

Source: National Income and Product Accounts.


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Outlays for Some Major Federal Programs Compared

with Total Federal Revenues

Percentage of GDP

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

0

14

16

18

20

22

Revenues withContinuation of

Certain Policies

Outlays for Social Securi ty,

Medicare, Medicaid,Other Health Programs,

Defense, and Net Interest

Actual Projected


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Projected Federal Revenues and Spending in 2021

with a Continuation of Certain Policies


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Components of the Federal Budget

1970 20072021

JanuaryBaseline

Percentage of GDPRevenues 19.0 18.5 20.8

Outlays 19.3 19.6 24.0

Social Security, Medicare, Medicaid,health insurance subsidies, andother health programs

3.8 8.2 12.0

Defense 8.1 3.9 3.6

Other mandatory spendingand nondefense discretionaryspending

6.0 5.8 5.0

Net interest 1.4 1.7 3.3

Deficit 0.3 1.2 3.2Note: Figures are shown net of offsetting receipts where relevant.


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Observation #3

Policymakers face difficult tradeoffs indeciding how quickly to implement policychanges that would reduce future budget

deficits.


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Disadvantages of Reducing Deficits Gradually Rather

than Quickly

Reduces the amount of U.S. savings devoted

to productive capital investment.

Requires greater federal spending on interest

payments.

Gives policymakers less flexibility to respondto unexpected problems.

Increases the likelihood of a fiscal crisis.


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Advantages of Implementing Major Budgetary

Changes Gradually

Possibly helps older generations.

Minimizes the drag of spending cuts or taxincreases on the economic expansion.

Gives families, business, and state and localgovernments time to plan and adjust.


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Making Decisions Soon About How to Put Fiscal

Policy on a Sustainable Path Would Be Beneficial

Enacting policy changes soon:

Would allow for gradual implementation whilestill limiting further increases in federal debt; and

Would probably provide some boost to economicactivity by reducing uncertainty and holdingdown interest rates.


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Observation #4

There is more focus in Washington onfederal budget problems today than therehas been since the late 1990s, and that

focus has led to a range of proposals fortackling the problems.


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Plans to Narrow the Budget Gap

The plans are diverse: They reflect widely varying

priorities, with some emphasizing spending cutsand others emphasizing tax increases.

Yet, they are similarin some significant ways.The plans propose policy changes that:

Are large in magnitude;

Are fairly well-specified; andWould fundamentally alter the tax code and someof the activities of government.

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Four Observations About the Federal Budget CBO Presentation March 7, 2011 to National Association...

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