Diane Lim Rogers The Brookings Institution May 2006 How Did We Get Back to Big Deficits? (and What...
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![Page 1: Diane Lim Rogers The Brookings Institution May 2006 How Did We Get Back to Big Deficits? (and What Can We Do About It?) drogers@brookings.edu.](https://reader036.fdocuments.net/reader036/viewer/2022081512/56649e875503460f94b8b21a/html5/thumbnails/1.jpg)
Diane Lim RogersThe Brookings
InstitutionMay 2006
How Did We Get Back to Big Deficits?
(and What Can We Do About It?)
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Federal Revenue and Outlays
(as a Percentage of GDP, 1965-2016)
Source: FY 2007 Budget of the United States Government, Historical Tables, 1.2; Brookings-Urban Tax Policy Center, Budget Outlook Tables, January 2006, Appendix 3
Revenues
Outlays
Average Revenues, (1965-2005)
Average Outlays, (1965-2005)
15
16
17
18
19
20
21
22
23
24
25
19651967196919711973197519771979198119831985198719891991199319951997199920012003200520072009201120132015
Per
cent
age
of G
DP
PredictedActual
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Source: Brookings-Urban Tax Policy Center, Budget Outlook Tables, January 2006, Appendix Tables 2, 4
The Recent Tax Cuts Have Been Costly
Budgetary Impact of 2001-2004 Tax Cut Legislation
-800.0
-700.0
-600.0
-500.0
-400.0
-300.0
-200.0
-100.0
0.0
2001 2003 2005 2007 2009 2011 2013 2015
(bill
ions
of c
urre
nt d
olla
rs)
Revenue Losses From Current Law Revenue Losses From ExtensionAdditional Debt Service
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Yet Tax Cuts Have Not Held Down Growth of Spending
Real Annualized Growth Rates in Total Federal Spending
5.7%
3.0%
2.6%
4.1%
1.9%
1.5%
4.9%
2.6%
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
Lyndon Johnson
Richard Nixon
Gerald Ford
James Carter
Ronald Reagan
George H.W. Bush
William Clinton
George W. Bush
Source: Authors’ calculations from Budget of the United States Government, FY 2007, Table 8.2
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Much of Spending Growth Has Occurred in Defense
Real Annualized Growth Rates in Defense Spending
4.9%
-2.5%
3.0%
-3.8%
-1.7%
8.1%
-6.6%
4.4%
-8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
Lyndon Johnson
Richard Nixon
Gerald Ford
James Carter
Ronald Reagan
George H.W. Bush
William Clinton
George W. Bush
Source: Authors’ calculations from Budget of the United States Government, FY 2007, Table 8.2
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Although Other Spending Not Exactly “Austere”
Growth in Non-Defense, Non-Homeland Security Spending
3.8%
2.2%
3.7%
2.0%
4.4%4.4%
6.6%
9.2%
0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%
10.0%
LyndonJohnson
RichardNixon
GeraldFord
JamesCarter
RonaldReagan
GeorgeH.W.Bush
WilliamClinton
GeorgeW. Bush
Source: Authors’ calculations from Budget of the United States Government, FY 2007, Tables 1.3, 4.1, 8.2
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7%
1%
9%
20%
49%
0%
10%
20%
30%
40%
50%
60%
LowestQuintile
SecondQuintile
MiddleQuintile
FourthQuintile
HighestQuintile
Income Inequality Has IncreasedIncreases in Pretax Income by Quintile (1979-2003)
Sources: Congressional Budget Office, “Historical Effective Tax Rates, 1979-2003,” Brookings-Urban Tax Policy Center, “Table T05-0062,” February 2005
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0.3%
2.0%
2.3% 2.4%
3.7%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
LowestQuintile
SecondQuintile
MiddleQuintile
FourthQuintile
TopQuintile
and the Recent Tax Cuts Have Exacerbated the Trend
Increases in After-tax Income (2005) From 2001-2004 Tax Cuts
Sources: Congressional Budget Office, “Historical Effective Tax Rates, 1979-2003,” Brookings-Urban Tax Policy Center, “Table T05-0062,” February 2005
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• Lower long-term growth through lower national saving
• Unfair burden on future generations• Greater dependence on the rest of
the world OR
• Higher interest costs
Why Deficits Matter
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Americans Are Not Saving for the Future
Personal Saving as a Percentage of Disposable Income, 1947 - 2005
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
1947-I 1949-I 1951-I 1953-I 1955-I 1957-I 1959-I 1961-I 1963-I 1965-I 1967-I 1969-I 1971-I 1973-I 1975-I 1977-I 1979-I 1981-I 1983-I 1985-I 1987-I 1989-I 1991-I 1993-I 1995-I 1997-I 1999-I 2001-I 2003-I 2005-I
Starting in the second quarter of 2005, the personal saving rate fell below zero for the first time since the Great Depression.
Source: Bureau of Economic Analysis, National Income and Product Accounts, Table 2.1, Personal Income and Its Disposition
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Public Saving As a Public GoodNet Public, Net Private, and Net National Saving as
Share of GDP
-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%
10.0% 199
0-I
199
1-I
199
2-I
199
3-I
199
4-I
199
5-I
199
6-I
199
7-I
199
8-I
199
9-I
200
0-I
200
1-I
200
2-I
200
3-I
200
4-I
200
5-I Sa
ving
as a
Per
cent
age
of G
DP
(Total) Net National Saving (%GDP)Net Private Saving (%GDP)Net Government (Public) Saving (%GDP)
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But Interest Rates Have Stayed Low Through Foreign Financing of
Our DebtForeign Holdings as a Share of Marketable U.S.
Public Debt
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
55.00%
3/ 31/ 2000 3/ 31/ 2001 3/ 31/ 2002 3/ 31/ 2003 3/ 31/ 2004 3/ 31/ 2005
Date
Percentage of Public Debt That Is Foreign-Held
May 2005: Foreign holdings exceed 50% threshold for first time.
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• First and foremost, public recognition that deficits are unwise and unfair:– Deficits financed by foreign borrowing
are direct threat to our “competitiveness”
– Unfair burden on our children and grandchildren who will have to pay it back
• Public willingness to forgo tax cuts or accept spending cutbacks
What Can Be Done?
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• Politicians responding to constituents’ demands for fiscally-responsible policies
• Bipartisanship required to make the tough choices
• Higher standards for tax cuts and spending programs from an economic “bang per buck” perspective
• Rules to help politicians stay fiscally responsible—and on both sides of the budget (taxes and spending)
What Can Be Done, continued
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Status Quo Won’t DoSavings from Deficit Reduction Act of 2005
Compared with Plausible Baseline of Projected Deficits
-100
0
100
200
300
400
500
600
700
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
(bill
ions
of d
olla
rs)
Deficit Reduction Act of 2005 (scored by CBO, 1/ 27/ 2006, Senate version, S.1932)Projected Deficit (Brookings-Urban Tax Policy Center, 2006)
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Longer-Term Revenue Effects of IRA Conversion Provision
in 2006 Tax Reconciliation Agreement(This Is Called Paying for the Tax Cuts?)
(6,000)
(4,000)
(2,000)
-
2,000
4,000
6,000
2006
2009
2012
2015
2018
2021
2024
2027
2030
2033
2036
2039
2042
2045
2048
Fiscal Year
Rev
enue
Cha
nge
($m
illio
ns)
Source: Brookings-Urban Tax Policy Center
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Improving the Budget Process
• Caps on discretionary spending for ten years
• PAYGO rules on both tax cuts and spending
• No sunsets of tax or entitlement changes to avoid out-year costs
• Stricter definition of emergency spending
• Some accounting for long-term costs
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Conclusions• Current deficits threaten economic well-being
—they are unwise and unfair.• Huge commitments to long-term entitlements
and tax cuts make the most recent attempts at deficit reduction look puny.
• Fiscal imbalances present an opportunity to rethink what government does and how we pay for it.
• Eventually, taxes must be raised and spending cut.
• The sooner this is done, the less costly and painful it will be.
• Presidential leadership and bipartisanship compromise will be required, and the public must demand it.