1 Why Deficits Matter Paul R. Cullinan, Research Director for Budgeting for National Priorities Project, Brookings Institution, April 2008

2 The Problem FY 2007 Deficit: $162 B (1.2% of GDP) FY 2007 Deficit: $162 B (1.2% of GDP) Projected with plausible policies (2018): $700 B (3.1% of GDP) Projected with plausible policies (2018): $700 B (3.1% of GDP) Such deficits reduce national savings and jeopardize future living standards 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 Current fiscal policy is unsustainable over the long run because of rising costs of entitlements, primarily the health care programs

3 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.

4 Dealing with an Aging Population Ratio of Population Aged 65+ to Working Age Population (20-64), Source: Concord Coalition

5 Why Deficits Matter Reduce national savings Reduce national savings Increase dependence on foreign lenders Increase dependence on foreign lenders Increase burden on future generations: Increase burden on future generations: –Through rising debt service costs; –By reducing productivity-enhancing investments Weakened ability to meet contingencies or new challenges Weakened ability to meet contingencies or new challenges

6 Budget Deficits Reduce Saving ($ billions in FY 2007) ($ billions in FY 2007) Personal saving: 53 Business saving: 373 State and local govt. saving: 1 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.

7 National Savings and Investment by Historical Standards Source: Author’s calculations from BEA, NIPA Tables and 5.1

8 Dependence on Foreign Lenders Source: U.S. Treasury Department (through September 2007) and U.S. Bureau of Public Debt (through September 2007)

9 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

10 Other Costs of Deficits Deficits raise uncertainty about future policies Deficits raise uncertainty about future policies Deficits reduce the government’s flexibility for dealing future contingencies and crises Deficits reduce the government’s flexibility for dealing future contingencies and crises Deficits undermine budget discipline Deficits undermine budget discipline

11 Social Security Income and Outlays Source: Author’s calculations based on Social Security Administration’s Office of Chief Actuary data from 2008.

12 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.

13 The Relative Importance of Social Security, 2005 Source: SSA, Fast Facts & Figures About Social Security, 2007.

14 OECD Health Spending and Outcomes, 2005 Source: OECD, Health at a Glance: OECD Indicators 2007

15 Spending on Health Care as a Percentage of GDP 1 1 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.

16 Variations Among Academic Medical Centers Source: Elliot Fisher, Dartmouth Medical School, retrieved from Peter Orszag’s presentation for AEI, November 27, 2007.

17 Reform Options for Federal Health Programs Improve Price Setting Improve Price Setting Develop Information Develop Information Improve Health Care Delivery Improve Health Care Delivery Promote Consumerism and Competition Promote Consumerism and Competition Budget for Health Care Spending Budget for Health Care Spending

18 Why We Should Address the Future Deficits Now Changes now improve national savings and enhance future living standards Changes now improve national savings and enhance future living standards Burden of government commitments would be spread over more taxpayers and beneficiaries Burden of government commitments would be spread over more taxpayers and beneficiaries Exposure to an international crisis would be reduced Exposure to an international crisis would be reduced 17

19 What Needs To Happen First and foremost, public recognition that deficits are a problem 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) 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 The sooner this is done, the less costly it will be Bipartisanship to make the tough choices Bipartisanship to make the tough choices Rules to help politicians stay fiscally responsible Rules to help politicians stay fiscally responsible

20