Congressional Budget Office

Presentation at the Federal Reserve Bank of New York

Federal Budget Math: We Cant Repeat the Past

June 16, 2011
Douglas W. Elmendorf Director

Total Federal Deficits and Surpluses

4 2 0 -2 -4 -6 -8 -10 -12

Percentage of GDP
Actual Projected

4 2 0

Baseline

-2 -4 -6

Continuation of Certain Policies

-8 -10 -12

1971

1976

1981

1986

1991

1996

2001

2006

2011

2016

2021

Federal Debt Held by the Public

120

Percentage of GDP
Actual Projected Continuation of Certain Policies

120

100

100

80

80

Baseline
60 60

40

40

20

20

0 1940 1949 1958 1967 1976 1985 1994 2003 2012

0 2021

Key Aspects of Federal Budget Policy during the Past 40 Years

Revenues have averaged about 18 percent of GDP, with substantial variation around that level but no trend. Older Americans have received:
Cash payments that have risen with average wages (through Social Security), Health insurance with a significant defined-benefit subsidy (through Medicare), and Additional subsidies for health insurance and subsidized longterm care (through Medicaid) for many of those with very high medical costs or little income and assets.

Defense spending has trended down relative to GDP. Outlays for all other federal programs have shown substantial variation relative to GDP and a slight downward trend. 4

Total Federal Revenues

Percentage of GDP
24

Actual

Baseline Projection

24

22

22

20

20

18

18

16

Average Revenues, 1971 to 2010

16

14

14

0 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016

0 2021

Average Federal Tax Rates by Quintile

Percent
30

Highest Quintile
25

20

Fourth Quintile

Middle Quintile
15

Second Quintile
10

Lowest Quintile

0 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Outlays for Social Security and Major Health Care Programs

6

Percentage of GDP
Actual Baseline Projection

Social Security

Medicare

Medicaid, CHIP, and Exchange Subsidies

0 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021

Other Components of Federal Spending

Percentage of GDP
Actual Baseline Projection

Defense Discretionary

5 Non-Defense Discretionary

Mandatory Spending Other Than Social Security, Medicare, Medicaid, CHIP, and Exchange Subsidies

0 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021

Federal Employees
Millions
8

Percent
12

7 10 6

Number of Federal Employees (left axis)

Federal Employees as a Share of the Total Workforce (right axis)

2 1

0 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

0 2010

Shares of Federal Spending in 2010

Percent

Transfer payments to people in the United States Grants to state and local governments Purchases of goods and services for defense Purchases of goods and services for nondefense Interest Other (includes transfers to people outside the U.S.)

47 14 19 9 8 4

Source: National Income and Product Accounts.

10

Trends in Federal Spending during the Past 40 Years

The costs of Social Security, Medicare, Medicaid, and the Childrens Health Insurance Program have risen substantially relative to GDP, from 4.3 percent in 1971 to 8.7 percent in 2007 (before the recession). Defense spending has fallen substantially relative to GDP, from 7.3 percent in 1971 to 3.9 percent in 2007.

11

We Cannot Repeat the Past in the Federal Budget

Given the aging of the population and the rising cost of health care, the United States cannot achieve all of the following objectives in the future: Keep federal revenues at their average share of GDP during the past 40 years. Provide the same sorts of benefits for older Americans that we have provided in the past 40 years. Operate the rest of the federal government in line with its role in the economy and society during the past 40 years.
12

Components of the Federal Budget (percentage of GDP)

1971-2010 Average 2021 March Baseline Projection 2021 Presidents Budget Estimate 2022 Ryan Proposal Estimate

Revenues

18.0

20.8

19.3

18 1/2

Outlays

20.8

23.9

24.2

20 1/4

Noninterest outlays Interest

18.6 2.2

20.5 3.4

20.3 3.9

17 3 1/4

Deficit

2.8

3.1

4.9

2
13

Note: The Ryan proposal was estimated relative to an earlier baseline, so the figures are not precisely comparable to the latest baseline projection or estimates for the Presidents budget.

Noninterest Outlays (percentage of GDP)

2021 March Baseline Projection 2021 Presidents Budget Estimate 2022 Ryan Proposal Estimate

1971-2010 Average

Noninterest Outlays Social Security

18.6 4.3 2.9 4.8 6.7

20.5 5.3 6.9 3.6 4.6

20.3 5.3 7.1 3.1 4.8

17 5 1/4 5 1/2

Major health programs Defense Other mandatory spending and nondefense discretionary spending

}6

Note: Major health programs include Medicare, Medicaid, the Childrens Health Insurance Program, and exchange subsidies. The Ryan proposal was estimated relative to an earlier baseline, so the figures are not precisely comparable to the latest baseline projection or estimates for the Presidents budget. 14

Outlays for Major Programs Compared with Total Revenues Under a Continuation of Certain Policies
22

Percentage of GDP

Actual

Projected Outlays for Social Security, Major Health Programs, Defense, and Net Interest

20

18

Total Revenues

16

14 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

15

The Choices Confronting Policymakers

The question is not whether to change current policies, but when and in what ways. There are trade-offs regarding the timing of implementing policy changes, but there are important benefits and few apparent costs to deciding about those changes soon. Fiscal policy cannot be put on a sustainable path just by eliminating waste and inefficiency; instead, changes will need to significantly affect popular programs, peoples tax payments, or both.

16