cullinan why deficits matter

The Problem  FY 2007 Deficit: $162 B 1.2% of GDP  Projected with plausible policies 2018: $700 B 3.1% of GDP  Such deficits reduce national savings and jeopardize future living stan

Why Deficits Matter

Paul R Cullinan, Research Director for Budgeting

for National Priorities Project, Brookings Institution, April 2008

The Problem

 FY 2007 Deficit: $162 B (1.2% of GDP)

 Projected with plausible policies (2018): $700 B

(3.1% of GDP)

 Such deficits reduce national savings and

jeopardize future living standards

 Current fiscal policy is unsustainable over the long run because of rising costs of entitlements,

primarily the health care programs

Federal Revenue and

Outlays

Source: BEA, NIPA Table 1.1.5; FY 2008 Budget of the United States Government,

Historical Table 1.1; Author’s calculations from Brookings-Urban Tax Policy Center,

Budget Outlook Tables, March 2008, Appendix 3a.

Dealing with an Aging

Population

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

50 19 55 19 60 19 65 19 70 19 75 19 80 19 85 19 90 19 95 20 00 20 05 20 10 20

15 20

20 20 25 20 30 20 35 20 40 20 45

Ratio of Population Aged 65+

to Working Age Population (20-64), 1950-2045

Source: Concord Coalition

Why Deficits Matter

 Reduce national savings

 Increase dependence on foreign lenders

 Increase burden on future generations:

– Through rising debt service costs;

– By reducing productivity-enhancing

investments

 Weakened ability to meet contingencies

or new challenges

Budget Deficits Reduce

Saving

($ billions in FY 2007)

Source: BEA, NIPA Table 5.1 Components may not sum to totals because of rounding.

National Savings and

Investment by Historical

Standards

Source: Author’s calculations from BEA, NIPA Tables 1.1.5 and 5.1

Dependence on Foreign

Lenders

Source: U.S Treasury Department (through September 2007) and U.S Bureau of Public Debt

(through September 2007)

Rapidly Rising Interest

Costs

Source: Author’s calculations from data from Congressional Budget Office, Budget

and Economic Outlook: Fiscal Years 2008 to 2018, March 2008

Other Costs of Deficits

 Deficits raise uncertainty about future

policies

 Deficits reduce the government’s

flexibility for dealing future contingencies and crises

 Deficits undermine budget discipline

Social Security Income and

Outlays

Source: Author’s calculations based on Social Security Administration’s Office of

Chief Actuary data from 2008.

Effects of Various Proposals

on Social Security

Imbalance

Source: Author’s calculations based on Social Security Administration’s Office of Chief

Actuary data from 2005.

The Relative Importance of Social Security, 2005

Source: SSA, Fast Facts & Figures About Social Security, 2007.

OECD Health Spending

and Outcomes, 2005

Source: OECD, Health at a Glance: OECD Indicators 2007

Spending on Health Care as

1 Assuming excess cost growth continues at historical averages

Source: CBO, The Long-Term Outlook for Health Care Spending, retrieved from Peter

Orszag’s presentation for AEI, November 27, 2007.

Variations Among Academic Medical Centers

Source: Elliot Fisher, Dartmouth Medical School, retrieved from Peter Orszag’s presentation

for AEI, November 27, 2007.

Reform Options for Federal Health Programs

 Improve Price Setting

 Develop Information

 Improve Health Care Delivery

 Promote Consumerism and Competition

 Budget for Health Care Spending

Why We Should Address the

Future Deficits Now

 Changes now improve national savings

and enhance future living standards

 Burden of government commitments

would be spread over more taxpayers and

beneficiaries

 Exposure to an international crisis would

be reduced

17

What Needs To Happen

 First and foremost, public recognition that deficits are a problem

 Public willingness to accept tax increases (relative

to current levels) and spending cutbacks (relative

to current promises)

 The sooner this is done, the less costly it will be

 Bipartisanship to make the tough choices

 Rules to help politicians stay fiscally responsible

www.brookings.edu/budget