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

2. 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

3. 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

4. Yet Tax Cuts Have Not Held Down Growth of Spending Real Annualized Growth Rates in Total Federal Spending Source: Authors’ calculations from Budget of the United States Government, FY 2007, Table 8.2

5. Much of Spending Growth Has Occurred in Defense Real Annualized Growth Rates in Defense Spending Source: Authors’ calculations from Budget of the United States Government, FY 2007, Table 8.2

6. Although Other Spending Not Exactly “Austere” Growth in Non-Defense, Non-Homeland Security Spending Source: Authors’ calculations from Budget of the United States Government, FY 2007, Tables 1.3, 4.1, 8.2

7. Income Inequality Has Increased Increases 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

8. 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

9. 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

10. Americans Are Not Saving for the Future Personal Saving as a Percentage of Disposable Income, 1947 - 2005 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

11. Public Saving As a Public Good Net Public, Net Private, and Net National Saving as Share of GDP

12. But Interest Rates Have Stayed Low Through Foreign Financing of Our Debt Foreign Holdings as a Share of Marketable U.S. Public Debt May 2005: Foreign holdings exceed 50% threshold for first time.

13. 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?

14. 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

15. Status Quo Won’t Do Savings from Deficit Reduction Act of 2005 Compared with Plausible Baseline of Projected Deficits

16. Longer-Term Revenue Effects of IRA Conversion Provision in 2006 Tax Reconciliation Agreement (This Is Called Paying for the Tax Cuts?) Source: Brookings-Urban Tax Policy Center

17. 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

18. 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.