cullinan why deficits matter

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): $700 B (3.1% of GDP) Such deficits reduce national savings and jeopardize future living standards Current fiscal policy is unsustainable over the long run because of rising costs of entitlements, primarily the health care programs Federal Revenue and Outlays Source: BEA, NIPA Table 1.1.5; FY 2008 Budget of the United States Government, Historical Table 1.1; Author’s calculations from Brookings-Urban Tax Policy Center, Budget Outlook Tables, March 2008, Appendix 3a Dealing with an Aging Population Ratio of Population Aged 65+ to Working Age Population (20-64), 1950-2045 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 2045 2040 2035 2030 2025 2020 2015 2010 2005 2000 1995 1990 1985 1980 1975 1970 1965 1960 1955 1950 Source: Concord Coalition Why Deficits Matter Reduce national savings  Increase dependence on foreign lenders  Increase burden on future generations:  – Through rising debt service costs; – By reducing productivity-enhancing investments  Weakened ability to meet contingencies or new challenges Budget Deficits Reduce Saving ($ billions in FY 2007) Personal saving: 53 Business saving: 373 State and local govt saving: Non-federal saving: 427 Federal govt saving: -209 Net national saving: 218 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  10 Social Security Income and Outlays Source: Author’s calculations based on Social Security Administration’s Office of Chief Actuary data from 2008 11 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 12 The Relative Importance of Social Security, 2005 Source: SSA, Fast Facts & Figures About Social Security, 2007 13 OECD Health Spending and Outcomes, 2005 Source: OECD, Health at a Glance: OECD Indicators 2007 14 Spending on Health Care as a Percentage of GDP 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 15 Variations Among Academic Medical Centers Source: Elliot Fisher, Dartmouth Medical School, retrieved from Peter Orszag’s presentation for AEI, November 27, 2007 16 Reform Options for Federal Health Programs Improve Price Setting  Develop Information  Improve Health Care Delivery  Promote Consumerism and Competition  Budget for Health Care Spending  17 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  1817 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 19 www.brookings.edu/budget 20