Presentation: Looking Backward and Forward at the US ... · Source: Congressional Budget Office;...

Looking Backward and Forward at the U.S. Fiscal Trajectory

Jason FurmanSenior Fellow, PIIE

Peterson Institute for International Economics | 1750 Massachusetts Ave., NW | Washington, DC 20036

The Concord Coalition Washington, DC

June 29, 2017

Outline

1. How Has Our Fiscal Situation Changed Since the Concord Coalition Was Formed in 1992?

2. How Has Our Fiscal Situation Changed Since Bowles-Simpson in 2010?

3. What Are Our Fiscal Challenges Going Forward?

4. What is a Feasible Path Forward on Our Fiscal Imbalances?

The Deficit is Smaller

Note: Outlay components may not sum to total outlays due to rounding. Deficit may not equal the difference between revenues and outlays due to rounding. Source: Office of Management and Budget; author’s calculations.

1992 2016

Defense Discretionary 4.7 3.2Nondefense Discretionary 3.6 3.3Social Security 4.4 4.9Medicare & Medicaid 2.9 5.2Other Non-interest 2.8 3.1Net Interest 3.1 1.3

Total Outlays 21.5 20.9

Total Revenues 17.0 17.8

Deficit 4.5 3.2

Revenues, Outlays, and Deficits, 1992 and 2016(% of GDP)

Largely Because Defense & Net Interest Have Fallen


1992 2016




Deficit 4.5 3.2


While Health Spending Has Risen


1992 2016




Deficit 4.5 3.2


The Debt is Substantially Larger Than It Was in 1992…

Source: Congressional Budget Office.

0

20

40

60

80

100

120

140

1992 1997 2002 2007 2012 2017

Federal Debt: Actual vs. ProjectedPercent of GDP

Actual

2016

But the Debt is Still Well Below the Forecasts Made in 1992…

Note: Projections are adjusted to account for changes in the definition of nominal GDP since projections were released. GAO estimates were converted from percent of GNP. Source: Congressional Budget Office; Government Accountability Office; Bureau of Economic Analysis; author’s calculations.

0

20

40

60

80

100

120

140

1992 1997 2002 2007 2012 2017

Federal Debt: Actual vs. ProjectedPercent of GDP

Actual

GAO (1992)

2016

Deficits Have Generally Fallen Below Earlier Forecasts

Note: Projections are adjusted to account for changes in the definition of nominal GDP since projections were released. GAO estimates were converted from percent of GNP. Dashed line indicates most recent projection.Source: Congressional Budget Office; Bipartisan Commission on Entitlement and Tax Reform; Government Accountability Office; Bureau of Economic Analysis; Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds; author’s calculations.

CBO (1996)

2025

Kerrey-Danforth (1994)

GAO (1992)

-5

0

5

10

15

20

1990 1995 2000 2005 2010 2015 2020 2025

Federal Deficit:Actual vs. ProjectedPercent of GDP

Actual

Revenue Has Generally Been Slightly Below What Was Expected…


CBO (1996)

2025


GAO (1992)

5

10

15

20

25

30

1990 1995 2000 2005 2010 2015 2020 2025

Revenue: Actual vs. ProjectedPercent of GDP

Actual

…But Spending Has Fallen Even Further Below Expectations


CBO (1996)

2025


GAO (1992)

15

20

25

30

35

40

1990 1995 2000 2005 2010 2015 2020 2025

Spending: Actual vs. ProjectedPercent of GDP

Actual

Discretionary Spending Has Roughly Tracked Expectations

Note: Projections are adjusted to account for changes in the definition of nominal GDP since projections were released. Dashed line indicates most recent projection.Source: Congressional Budget Office; Bipartisan Commission on Entitlement and Tax Reform; Bureau of Economic Analysis; Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds; author’s calculations.


0

2

4

6

8

10

12

14

1990 1995 2000 2005 2010 2015 2020 2025

Discretionary Spending: Actual vs. ProjectedPercent of GDP

Actual

2025

Social Security Spending Has Also Tracked Expectations

Note: Projections are adjusted to account for changes to nominal GDP since projections were released. Dashed line indicates most recent projection.Source: Congressional Budget Office; Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds; Bureau of Economic Analysis; Council of Economic Advisers; author’s calculations.

Actual

Trustees (1992)

0

2

4

6

8

10

12

14

1990 1995 2000 2005 2010 2015 2020 2025

Old-Age, Survivors, and Disability Insurance Costs: Actual vs. Projected

Percent of GDP

2025

CBO (1996)

But Health Spending is Well Below Previous Forecasts

Note: Projections are adjusted to account for changes in the definition of nominal GDP since projections were released. Dashed line indicates most recent projection.Source: Office of Management and Budget; Congressional Budget Office; Bipartisan Commission on Entitlement and Tax Reform; Bureau of Economic Analysis; Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds; author’s calculations.

Actual (Medicare, Medicaid, CHIP,

and ACA)

CBO (1996)


0

2

4

6

8

10

12

14

1990 1995 2000 2005 2010 2015 2020 2025

Health Care Spending:Actual vs. ProjectedPercent of GDP

2025

Including Medicare, Which Has Also Been Well Below Expectations

Note: Projections are adjusted to account for changes to nominal GDP since projections were released. Dashed line indicates most recent projection.Source: Congressional Budget Office; Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds; Board of Trustees, Federal Supplementary Medical Insurance Trust Fund; Bureau of Economic Analysis; Council of Economic Advisers; author’s calculations.

Actual

Trustees (1992)

0

2

4

6

8

10

12

14

1990 1995 2000 2005 2010 2015 2020 2025

Hospital Insurance and Supplementary Medical Insurance Costs: Actual vs. Projected

Percent of GDP

2025

CBO (1996)

Net Interest Payments Have Fallen Relative to GDP—Contrary to the Projected Rise


CBO (1996)


0

2

4

6

8

10

12

14

1990 1995 2000 2005 2010 2015 2020 2025

Net Interest Payments: Actual vs. ProjectedPercent of GDP

Actual

2025

GAO (1992)

Growth Rates Well Above Previous Forecasts, But Interest Rates Well Below

Source: Congressional Budget Office; Government Accountability Office; Bipartisan Commission on Entitlement and Tax Reform.

Real GDP GrowthNominal Interest Rate on Government Debt

GAO (1992) * 7.8Kerrey-Danforth (1994) 1.5 6.3CBO (1996) 1.3 6.2Actual 2.6 1.7Note: *Approximately zero.

Projected and Actual Economic Growth and Interest Rates, Calendar Year 2015 (Percent)

Outline





The Debt is Projected to Rise, But Some Progress Since 2010 (Caveat: Methodology Not Constant)


June 2010 Alternative

Fiscal Scenario

308%

March 2017 Extended Baseline

2047

0

50

100

150

200

250

300

350

2010 2015 2020 2025 2030 2035 2040 2045

Long-Term Federal Debt OutlookPercent of GDP

150%

At the Time of Bowles-Simpson the Deficit Was Never Projected to Fall Below 4 Percent of GDP

Note: GDP estimates from Bowles-Simpson were adjusted to reflect revisions to the calculation of nominal GDP since 2010.Source: National Commission on Fiscal Responsibility and Reform; Congressional Budget Office; author’s calculations.

Bowles-Simpson Baseline

2020

0

1

2

3

4

5

6

7

8

9

10

2010 2012 2014 2016 2018 2020

Deficit under Bowles-Simpson Percent of GDP

Bowles-Simpson Proposed to Cut the Deficit to 1 Percent of GDP

Note: GDP estimates from Bowles-Simpson were adjusted to reflect revisions to the calculation of nominal GDP since 2010.Source: National Commission on Fiscal Responsibility and Reform; Congressional Budget Office; author’s calculations.


2020

Bowles-Simpson Proposed

0

1

2

3

4

5

6

7

8

9

10

2010 2012 2014 2016 2018 2020


The Deficit Has Fallen But Not As Much As Bowles-Simpson Proposed

Note: GDP estimates from Bowles-Simpson were adjusted to reflect revisions to the calculation of nominal GDP since 2010. Dashed line indicates latest CBO projection.Source: National Commission on Fiscal Responsibility and Reform; Congressional Budget Office; author’s calculations.


2020

Bowles-Simpson Proposed

Actual

0

1

2

3

4

5

6

7

8

9

10

2010 2012 2014 2016 2018 2020


The Main Source of Higher Deficits is Because Revenue is Below the Bowles-Simpson Proposal

Note: Percentage points denoted p.p.Source: National Commission on Fiscal Responsibility and Reform; Congressional Budget Office; author’s calculations.

Assuming Bowles-Simpson Was Targetting

Nominal Dollars

Assuming Bowles-Simpson Was Targetting

Percent of GDPRevenue -$673B -2.2 p.p.

Mandatory Outlays -$142B 0.1 p.p.Discretionary Outlays $14B 0.5 p.p.Net Interest -$358B -1.7 p.p.

Deficit -$187B -1.1 p.p.

Difference Between Actual Spending and Bowles-Simpson Proposal, 2017

What Would Bowles-Simpson Look Like Going Forward?

Policy Changes Needed for the Current 10-Year Budget (2018-27) to Get Back to the Original Bowles-Simpson Proposed Levels

Taxes: $6 to $11 trillion increase

Discretionary spending: $300 billion to $1.3 trillion cut

Mandatory spending: $1 trillion cut to $2 trillion increase

Note: numbers vary depending on whether Bowles-Simpson targets are interpreted as nominal dollars or percent of GDP

Outline





1. The Way We Collect Taxes—E.g. A High Statutory Rate for Corporations

20.0

26.8 30.0 30.2 31.334.4

38.9G-7 Weighted Average (Excluding United States): 29.0

0

5

10

15

20

25

30

35

40

45

United Kingdom

Canada Japan Germany Italy France United States

Statutory Corporate Income Tax Rates in the G-7, 2016Percent

21.6 23.1 23.6

27.7 27.9 29.1

38.8

G-7 Weighted Average (Excluding United

States): 29.2

0

5

10

15

20

25

30

35

40

45

Canada France United Kingdom

United States

Germany Italy Japan

Average Effective Tax Rates in the G-7, 2006-2009Percent

Note: Combined central and sub-central (statutory) corporate income tax rate given by the central government rate (less deductions for sub-national taxes) plus the sub-central rate. G-7 average is calculated using gross domestic product (in current U.S. dollars) as weights.Source: Organisation for Economic Co-operation and Development; national sources via Haver Analytics; author’s calculations; Council of Economic Advisers (2015).

2. The Composition of Spending—E.g. Too Little Investment

Source: Organisation for Economic Co-operation and Development; CBO (2015); Bureau of Economic Analysis, National Income and Product Accounts; author’s calculations.

Active Labor Market Policies

Infrastructure

Research and Development

2016

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1950 1960 1970 1980 1990 2000 2010

Selected U.S. Public Expenditures, 1950-2016Percent of GDP

3. The Level of Spending—United States is Low in Comparative Perspective

0

10

20

30

40

50

60

Irel

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Kor

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Aus

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New

Zea

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Est

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Can

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Japa

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zech

Rep

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Luxe

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Uni

ted

Kin

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Icel

and

Spa

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Net

herla

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Slo

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Slo

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Nor

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Sw

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Ital

yA

ustr

iaB

elgi

umD

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ark

Gre

ece

Fran

ceFi

nlan

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General Government Expenditures as Share of GDP, 2015Percent

Source: Organisation for Economic Co-operation and Development.

3. The Level of Taxes—United States is Low in Comparative Perspective

0

10

20

30

40

50

60

Irela

ndUn

ited

Stat

esKo

rea

Aust

ralia

Switz

erla

ndLa

tvia

Japa

nIs

rael

Unite

d Ki

ngdo

mSp

ain

New

Zeal

and

Cana

daEs

toni

aCz

ech

Repu

blic

Icel

and

Slov

ak …

Neth

erla

nds

Luxe

mbo

urg

Portu

gal

Ger

man

ySl

oven

iaIta

lyG

reec

eSw

eden

Aust

riaBe

lgiu

mDe

nmar

kFr

ance

Finl

and

Norw

ay

General Government Revenues as Share of GDP, 2015Percent

Source: Organisation for Economic Co-operation and Development.

4. Countercylical Policy: The Difference Between Taxes and Spending in Recessions

Application to the United States: The United States Has Weak Automatic Stabilizers

24

AUSAUT

BEL

CANCHE

DEU

DNKESP FIN

FRAGBR

GRCIRL

ITA

JPN

KOR

LUX NLD

NOR

NZL

PRT

SWE

USA

0.0

0.1

0.2

0.3

0.4

0.5

0.6

20 30 40 50 60

Government Size and the Cyclical Semi-Elasticity of Automatic Stabilizers

Elasticity (Automatic Stabilizers)

Government Size (Spending to GDP Ratio)

Source: Fatás and Mihov (2012).Source: Fatás and Mihov (2012).

4. The “New View” is that Fiscal Policy is More Important Today Given Less Scope for

Conventional Monetary Policy

2016

-2

0

2

4

6

8

10

1985 1990 1995 2000 2005 2010 2015

Canada FranceGermany ItalyUnited Kingdom JapanUnited States

Real Ten-Year Benchmark RatePercent

Note: Inflation measured by one-year changes in the core consumer price index.Source: National sources via Haver Analytics; author’s calculations.

5. The Difference Between Taxes and Spending in the Medium and Long Run


Deficit

Revenue

Non-interest Outlays

Outlays

0

5

10

15

20

25

30

2017 2022 2027 2032 2037 2042 2047

Long-Term Budget OutlookPercent of GDP

17.8

23.2

29.4

20.7

19.3

2.9

9.8

19.6

Outline





Fiscal Approach: Do No Harm (i.e., PAYGO) & Ensure Solvency for Social Security and

Medicare Hospital Insurance

Source: Auerbach and Gale (2017); Trustees (2016).

4.2 -2.2

-1.7

-1.0 -0.3 -1.0-2

0

2

4

6

8

FiscalGap

AssumingFuture

Tax Cutsand

SpendingIncreases

Pay forFuture

SpendingIncreases

Pay forFuture

Tax Cuts

SocialSecuritySolvency

MedicareSolvency

FiscalGap

Fiscal Gap: Trustees' AssumptionsPercent of GDP

PAYGO Solvency

Do No Harm & Maintain Solvency Assuming the More Pessimistic CBO Assumptions

Source: Auerbach and Gale (2017); Congressional Budget Office (2017).

6.2 -2.2

-1.7-1.5

-1.2? -0.4?-2

0

2

4

6

8

FiscalGap

AssumingFuture

Tax Cutsand

SpendingIncreases

Pay forFuture

SpendingIncreases

Pay forFuture

Tax Cuts

SocialSecuritySolvency

MedicareSolvency

FiscalGap

Fiscal Gap: CBO's AssumptionsPercent of GDP

PAYGO Solvency

Advantages of This Approach

1. Grounded in broad existing agreement. Everyone from Sam Johnson to Bernie Sanders, for example, agrees on Social Security solvency.

2. Feasible but meaningful line to draw and defend. Feasible to pay for departures from the CBO baseline since the big issues are resolved.

3. Agnostic on debates over the size/role of government.Treats taxes/spending symmetrically both in PAYGO and for solvency.

4. Allows solution to be reached in stages. E.g. could continue to address Medicare solvency through periodic legislation drawing on new lessons.

5. Automatically adjusts as uncertainty is resolved. Solvency projections are updated annually, so more/less adjustment if the problem is more/less severe.

Looking Backward and Forward at the U.S. Fiscal Trajectory

Jason FurmanSenior Fellow, PIIE

Peterson Institute for International Economics | 1750 Massachusetts Ave., NW | Washington, DC 20036

The Concord Coalition Washington, DC

June 29, 2017

Presentation: Looking Backward and Forward at the US ... · Source: Congressional Budget Office;...

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