Fiscal Days of Reckoning National Association of Music Merchants May 11, 2010 Eugene Steuerle Richard B. Fisher Institute Fellow The Urban Institute To receive Gene’s regular column, “The Government We Deserve,” send an to:

Outline The current fiscal mess Budget for a declining nation (even if deficits=0) Removal of all “give” or “slack” Some forcing events Some possible solutions Crisis or opportunity?

The U.S. Federal Debt (Percentage of GDP) 3 Civil War SOURCE: PGPF compilation. Projections based upon official government sources. Past

The Current Squeeze

Source: C. Eugene Steuerle and Stephanie Rennane, The Urban Institute Based on The President’s FY 2011 Budget, OMB. 5 Revenues Under President Obama’s Proposals

A Budget for a Declining Nation? Less saving (long-run) & work Increased dependence upon foreign lenders Reduced investment in our children 6

A Look Forward to 2015 Additional Revenues in President’s FY2011 Proposal ($2009) $1137 billion = increase in revenues in 2015 relative to 2009 Source: C. Eugene Steuerle and Stephanie Rennane, The Urban Institute, Based on data Budget FY2011.

How Additional Revenues will be Spent in 2015 Total = $1.137 Trillion ($2009) Source: C. Eugene Steuerle and Stephanie Rennane, The Urban Institute, Based on data Budget FY2011.

A Look Forward to 2015 Additional Revenues in President’s FY2011 Proposal ($2009) $1137 billion = increase in revenues in 2015 relative to 2009 Source: C. Eugene Steuerle and Stephanie Rennane, The Urban Institute, Based on data Budget FY2011.

Residual in 2015 = $426 Billion ($2009) Source: C. Eugene Steuerle and Stephanie Rennane, The Urban Institute, Based on data Budget FY2011.

Spending on Children’s Programs Over Time % of GDP

Source: Stephanie Rennane, Timothy Roeper and C. Eugene Steuerle, Based on Historical Data from the Office of Management and Budget and 2010 Congressional Budget Office projections for alternative baseline and health reform. Excludes TARP spending. Index of Fiscal Democracy Percent of Revenues not already allocated to Mandatory Programs

Near-Term Forcing Events: Health Health reform A huge amount left to regulation Health costs not really tackled yet Can we wait for more information? Kinks in almost-universal 4 subsidy system: Medicare Medicaid Exchange Employer subsidies Uncertainty how employers will react

Near-Term Forcing Events: Social Security Has moved back into visibility Administration and Congress may be forced to prove they are doing something Social Security a target if health temporarily off table Might be integrated with private pension reform or “add-on” Social Security accounts

Near-Term Forcing Events: Tax Bush tax cuts expire in 2010 Estate tax Child credits Lower rates Alternative minimum tax (AMT): continuing issues Push for lower corporate rates but fewer corporate incentives

Near-Term Forcing Events: Markets Greece, Spain, Ireland: Fear of Contagion Any market plunge

Some Long-term Solutions Additional work less drop in employment Bundling and voucher-izing health movement away from fee for service Placing budgets on each government program to provide incentives for improvement Reallocating budgets to needs, such as greater anti-poverty protection removal of Soc. Sec. discrimination against single heads of household relatively more for health prevention and primary care Budget process reforms

Crisis or Opportunity? The Former Defining Myths Democrats: completing New Deal Agenda, mainly healthcare Republicans: restraining government encroachment on freedom Neither party has a real long-term vision The Encroaching Reality Two Santa Claus policy—trying to control the future--can’t survive Mutual sacrifice required for mutual gain Opportunity to redefine fundamental direction for government