1 America’s National Debt

2 Important Concepts What’s the difference between deficits and debt? Deficits: The annual imbalance between revenues and spending Debt: The accumulation of deficits over time Public debt: Federal government securities held by Americans and foreigners Intragovernmental debt: Held by government trust funds (e.g., Social Security) and other accounts What are “unfunded liabilities”? Benefits (e.g., Social Security or Medicare) that have been promised to be paid in the future, with no dedicated source of revenue to fund them

3 Projecting the Future? Projections of future deficits and debt are based on assumptions about the future Examples of assumptions that could affect projections Changes to current spending and tax policies Population trends Workforce participation rates Projections can be wrong—too low or too high: Spending and tax policies may or may not change Health care breakthroughs could change birth or death rates Immigration policy changes could affect the age mix of the population People may decide to work longer and retire later

U.S. Budget Deficits or Surpluses,

Current Policy Trends Lead to Large Sustained Deficits Fiscal Years Fiscal Year CBO March 2008 Baseline The Concord Coalition Plausible Baseline assumes that discretionary spending grows at the rate of nominal GDP, that war costs slow gradually, and that all expiring tax provisions are extended with AMT relief. Source: Congressional Budget Office, March 2008 and Concord Coalition analysis. Billions of Dollars $6.5 Trillion Deficit $270 Billion Surplus 5

National Debt, (in non-inflation adjusted dollars) 6

7 Unless Changes are Made, the National Debt Will Grow Even Faster 1962 ‘72 ‘82 ‘ ‘12 ‘22 ‘32 ‘42 ‘50 Source: Heritage Foundation; CBO data

Public Debt Projected to Soar 8

9 Entitlement Spending is Consuming an Ever Larger Share of the Federal Budget Defense Social Security Net interest Medicare & Medicaid All other spending Sources: Office of Management and Budget and the Department of the Treasury. Note: Numbers may not add to 100 percent due to rounding. 2007

Selected Federal Discretionary Spending (FY 2008 Projected) Source: Congressional Budget Office, January 2008 *includes ground, air, and water 10

Composition of Actual FY 2007 Federal Government Revenues and Outlays (Deficit: $163 Billion) Interest Domestic* Social Security Medicare & Medicaid Other Entitlements Defense Estate & Gift Taxes Other Taxes Corporate Taxes Social Insurance Taxes Individual Income Taxes Outlays: $2.73 trillionRevenue: $2.57 trillion *Includes all appropriated domestic spending such as education, transportation, homeland security, housing assistance, and foreign aid. Source: CBO Billions of Dollars

Current fiscal policy is on an unsustainable path Social Security Medicaid Medicare All Other Interest Source: Government Accountability Office, March 2008 Average tax revenue

Social Security and Medicare Part A Cumulative Cash Surpluses and Deficits In Constant 2008 Dollars—2008 through 2085 In Billions of Constant 2008 Dollars Calendar Year Source: Social Security Trustees’ Report—March 2008 (Intermediate Projections) $496 Billion: Cumulative Social Security Cash Surplus -$27 Trillion: Cumulative Social Security Cash Deficits -$55 Trillion: Cumulative Medicare Part A Cash Deficits Trillion: Cumulative Social Security and Medicare Part A Cash Deficits 13

Percent of Debt Held by the Public Owned by Foreigners Source: United States Treasury Department ( )

Health-Care Costs Rise Faster than Economic Growth and are Key to Rising Federal Spending and Debt 15 Percentage of GDP

16 Medicare Obligations Will Explode as Health Care Costs Rise Calendar Year As a Percentage of GDP General Revenues required to fund the program Income from dedicated taxes, premiums, and state transfers Source: Medicare Trustees’ Report, 2007

17 State and Local Government Deficits Add to Federal Fiscal Challenges Federal Surplus/Deficit Source: Historical data from National Income and Product Accounts, GAO Analysis. Note: Historical data from 2000 – 2006, projections from 2007 – 2050; state and local balance measure is similar to the federal unified budget measure. Federal Simulation Assumptions: Discretionary spending grows with GDP after AMT exemption amount is retained at the 2006 level through 2017 and expiring tax provisions are extended. After 2017, revenue as a share of GDP returns to its historical level of 18.3 percent of GDP plus expected revenues from deferred taxes, i.e. taxes on withdrawals from retirement accounts. Medicare spending is based on the Trustees’ April 2007 projections adjusted for the Centers for Medicare and Medicaid Services’ alternative assumption that physician payments are not reduced as specified under current law. Combined State, Local, and Federal Surplus/Deficit Percent of GDP

State Governments Face Growing Medicaid Costs, Squeezing Other Spending 18 Source: National Association of State Budget Officers, State Expenditure Report 2006

19 Current Fiscal Policy Is Unsustainable The “Status Quo” is Not an Option We face large and growing structural deficits largely due to rising health care costs and demographic trends GAO simulations show that balancing the budget in 2040 could require actions as large as Cutting total federal spending by 60 percent; or Raising federal taxes to double today's level Faster Economic Growth Can Help, but It Cannot Solve the Problem Closing the current long-term fiscal gap based on reasonable assumptions would require real average annual economic growth in the double digit range every year for the next 75 years During the 1990s, the economy grew at an average of only 3.2 percent per year Tough choices will be required

20 The Sooner We Get Started, the Better Compound interest is currently working against us Less change would be needed, and there would be more time to make adjustments Demographic changes will make reform even more difficult over time

21 Framing the Discussion Which Federal programs and policies should be changed and how? Entitlement programs Other spending Tax policy How can budget processes and controls be reformed? What should be the roles of government, business and individuals in ensuring economic well-being in 21 st- century America? Investing in the future (education, infrastructure, science, environment, etc.) Providing Income Security and Good Living Standards Providing health care for all Americans