9/14, 2015
by
Richard Kogan, Paul N. Van de Water, and Cecile Murray
Under current budget policies, the nation’s fiscal outlook is stable for the rest of this decade and then worsens gradually, according to CBPP’s new long-term budget projections.
Policymakers should not ignore the long-run budget problems, which remain challenging. No deficit or debt crisis looms, however, and promoting further labor market improvements remains the nation’s most immediate economic concern. Policymakers should therefore avoid too much deficit reduction too soon, which would weaken the economic recovery, and focus deficit-reduction efforts on measures that take effect after the labor market has more fully recovered.
Policymakers should avoid too much deficit reduction too soon.Under our projections of current policies, the federal debt will be virtually flat in relation to the economy for the next several years and then slowly rise. The ratio of debt to gross domestic product (GDP) — which was 74 percent at the end of fiscal year 2014 — will drop slightly to 73 percent by 2017 but grow to 92 percent by 2040, we project. That’s a marked improvement over the situation just five years ago (see Figure 1), but policymakers need to take further significant steps to address the problem.
A stable — or declining — debt-to-GDP ratio is a common goal for fiscal stability. Although a rising debt ratio is advantageous when the economy is operating well below its potential, as it was in the Great Recession and ensuing sluggish recovery, a rising debt ratio in a strong, high-employment economy, in contrast, reflects an unsustainable budget policy that ultimately jeopardizes financial stability and long-term growth. Policymakers should reduce projected debt-to-GDP ratios through carefully designed policies that strengthen the economic recovery in the near term, while putting in place equitable and balanced deficit reduction that grows in size over time. (See box.)
These long-run budget projections are not a prediction. Rather, they show what will likely happen, under reasonable expectations of how the economy will perform in coming decades, if policymakers continue current laws and policies — that is, without reducing projected deficits or expanding them (by cutting taxes or boosting spending without covering the cost).
Our new projections update those we published in May 2014 to reflect the latest Congressional Budget Office (CBO) ten-year and long-term budget projections, the latest projections by the Social Security and Medicare trustees, changes in budgetary policies, and other recent developments.[1] On a comparable basis, our new projections are very similar to last year’s. The technical note at the end of this paper provides more information about how we made the projections.
Figure 1
The Revenue Outlook
Federal revenues are projected to continue at their current level of a bit over 18 percent of GDP in 2016 through 2025. After 2025, two trends — rising real incomes that push people into higher tax brackets (so-called “real bracket creep”) and growing, taxable withdrawals from tax-favored retirement accounts by an aging population — will help push up revenues gradually as a percentage of GDP.[2] By 2040, they are projected to reach 19.4 percent of GDP, close to their level in the final years of the Clinton Administration. (See Figure 2.)
Figure 2
The Spending Outlook
Federal outlays are projected to rise from 20.6 percent of GDP in 2015 to 23.6 percent of GDP in 2040. Only about one-third of the rise stems from primary, or non-interest, spending — that is, spending on programs that pay benefits to ordinary Americans and carry out the functions of government. (See Figure 2.) The bulk of the rise stems from net interest, as interest rates rise from historic lows and the federal debt gradually mounts.
The composition of federal non-interest spending will also change significantly by 2040. Because of an aging population and rising health care costs, Social Security, Medicare, Medicaid, and health insurance subsidies will grow substantially — both as a percentage of GDP and as a share of total federal spending — while all other programs as a whole will shrink. Social Security and the major health programs, which today account for 53 percent of non-interest spending, are projected to reach 69 percent of the total in 2040, with all other programs representing a correspondingly smaller share.
Social Security. Benefits under the Old-Age, Survivors, and Disability Insurance programs (together known as Social Security) will rise slowly but steadily in the next two decades — from a bit under 5 percent of GDP today to just over 6 percent in the 2030s — and then stabilize. That pattern largely mirrors the aging of the population and is dampened by the scheduled rise in the program’s full retirement age — which was historically 65, is now 66, and will climb to 67 between 2017 and 2022. (Each year that the full retirement age is raised lowers benefits across the board for future retirees by about 7 percent, regardless of whether they claim benefits early or work until the full retirement age or beyond).[3]
The Debt-to-GDP Ratio
Generally, the debt-to-GDP ratio should rise only during hard times or major emergencies and then decline during good times. That enables the government to combat recessions through tax cuts and spending increases and to alleviate hardship during bad times, while creating a presumption against policies that markedly increase the debt during good times.
A stable debt-to-GDP ratio is a key test of fiscal sustainability. Increases in the dollar amount of debt are not a serious concern as long as the economy is growing at least as fast. Between 1946 and 1974, for example, debt held by the public grew significantly in dollar terms but — thanks to economic growth — plummeted as a percentage of GDP, from 109 percent to 24 percent.
Some suggest that certain debt-to-GDP ratios have a particular meaning in terms of their effect on the economy. In reality, there are no absolute thresholds.
Until a few years ago, for instance, many pointed to a 2010 analysis by economists Carmen Reinhart and Kenneth Rogoff suggesting that debt-to-GDP ratios of 90 percent or more are associated with significantly slower economic growth. But the authors have acknowledged computational errors in their original work and clarified that there is no “magic threshold” for the debt ratio above which countries suddenly pay a marked penalty in terms of slower economic growth. To the extent that countries with higher levels of debt experience slower growth, there is not much evidence that the high debt caused the slow growth; the reverse is just as likely to be true — that the slow growth caused the high debt — or some combination of the two effects.
Similarly, some analysts call for a debt ratio of 60 percent of GDP or less, a goal that the European Union and the International Monetary Fund (IMF) adopted some years ago. No economic evidence supports this or any other specific target, however, and IMF staff have made clear that the 60 percent criterion is arbitrary and should not guide near-term fiscal policy in the wake of the recent financial crisis, which drove up government debt worldwide. IMF recently stated, “Our results do not identify any clear debt threshold above which medium-term growth prospects are dramatically compromised.”a
All else being equal, a lower debt-to-GDP ratio is preferred because of the additional flexibility it provides policymakers facing economic or financial crises and the lower interest burden it carries. But all else is never equal. Lowering the debt ratio comes at a cost, requiring larger spending cuts, higher revenues, or both. That is why we emphasize the importance of not only the quantity but also the quality of deficit reduction, which should not hinder the economic recovery or cut spending in areas that can boost future productivity or harm vulnerable members of society.
a Andrea Pescatori, Damiano Sandri, and John Simon, Debt and Growth: Is There a Magic Threshold?, International Monetary Fund WP/14/34, February 2014, p. 4.
Medicare. Net outlays for Medicare benefits — that is, total payments minus the premiums that enrollees pay — are expected to rise from 3 percent of GDP today to 5 percent of GDP in 2040. Medicare fundamentally faces the same demographic pressures as Social Security. But Medicare faces an extra cost pressure: the tendency of medical costs, fueled by technological advances and increased utilization, to outpace GDP growth. The cost controls and delivery system reforms in the Affordable Care Act (ACA), plus other developments in health care delivery, are expected to curb (though not eliminate) that pressure. Our projections are based on current law and assume that policymakers will retain the ACA’s cost-control provisions.
Medicaid, CHIP, and health insurance subsidies. Medicaid — a joint federal and state program — provides acute health care coverage and long-term supports and services to eligible low-income people, while the Children’s Health Insurance Program (CHIP) covers many low-income children through capped grants to states. The ACA expanded the reach of Medicaid, at state option, and created new state-based marketplaces to enable millions of people without other coverage to buy health insurance at reasonable prices and without exclusions for pre-existing conditions or other restrictions that often made coverage unaffordable.
Figure 3
In the short term, the ACA expansion of enrollment in state-based marketplaces will push up spending for this trio of programs from 2.2 percent this year to 2.5 percent in 2017. After 2025, demographic and cost pressures will lead this category of health spending to reach 2.9 percent of GDP in 2040.
The fact that health care costs remain the largest driver of increased future spending should not obscure how dramatically their projected costs have fallen over the last few years. As Figure 1 shows, in January 2010 we projected that debt would exceed 200 percent of GDP by 2040; we now project less than half that ratio. Much of the improvement is from lower health care costs: in January 2010 we projected that Medicare and Medicaid together would cost 11.1 percent of GDP in 2040, but (based on the latest projections from CBO and the Medicare actuaries) we now project that Medicare, Medicaid including the ACA expansion, CHIP, plus the new marketplace subsidies will together cost 7.9 percent of GDP, or about 30 percent lower than the previous estimate. (See Figure 3.) This development has substantially improved the long-run fiscal outlook.
Other program spending. This category includes hundreds of programs for which Congress appropriates funding on an annual basis — known as defense and non-defense discretionary programs — as well as entitlement or mandatory programs such as SNAP (formerly food stamps), pensions for federal civilian and military retirees, veterans’ disability and education benefits, the refundable portions of the Earned Income Tax Credit and certain other tax credits, Supplemental Security Income (SSI) for poor elderly and disabled people, unemployment insurance, Temporary Assistance for Needy Families (TANF), farm price supports, and various smaller programs.
Over the next ten years, this broad category — which spiked to nearly 14 percent of GDP in 2009, during the economic downturn — is projected to fall as a percentage of GDP from 9.2 percent in 2015 to 7.4 percent in 2025. Both these figures are well below the 11.1 percent average of the last four decades. Almost all of the drop from 2015 to 2025 occurs in discretionary spending and is concentrated between now and 2021, as the caps and sequestration provisions of the 2011 Budget Control Act (BCA) squeeze defense and non-defense programs alike, and as the war in Afghanistan and similar military operations continue to wind down. Spending for the mandatory programs in this part of the budget also drifts down as a percentage of GDP, though less precipitously; unlike Social Security and the major health programs, most other mandatory programs do not face particular demographic or cost pressures, and some — such as unemployment insurance and SNAP — shrink naturally as the economy recovers.[4]
After 2021 (for discretionary programs) and after 2025 (for the entire “other program spending” category), we assume that outlays keep pace with inflation and population growth — in other words, that real spending per person remains constant. That’s consistent with the historical pattern: we’ve generally found that these categories of spending rise faster than inflation and population growth only a) if Congress affirmatively acts to increase these programs, which is by definition not consistent with a projection of current law or policy; or b) during recessions, when unemployment insurance and similar automatic stabilizers rise temporarily but then fall back to normal levels when the economy recovers. Keeping pace with inflation and population growth implies a continued downward drift in this spending category as a percentage of GDP, from 7.4 percent in 2025 to 6.2 percent in 2040.[5]
Interest. Unlike every other spending category, net interest doesn’t reflect explicit funding decisions by policymakers. Instead, it’s jointly determined by the amount of borrowing fueled by policymakers’ other spending and revenue decisions (in other words, by the debt) and by the interest rates set in financial markets.
Today, federal net interest costs represent 1.2 percent of GDP, almost matching the historic lows posted in the 1950s through early 1970s, when federal debt was far smaller. But today’s low interest rates, which are holding down borrowing costs, will not last forever. As a result, by 2025, net interest costs are expected to climb to 2.7 percent of GDP, even though the debt hardly rises (from 74 percent to 76 percent of GDP) during that period. By 2040, we expect net interest to reach 3.3 percent of GDP and debt to reach 92 percent of GDP.
Assuring Solvency for Social Security and Medicare
Assuring long-run solvency for the Social Security and Medicare Hospital Insurance (HI) trust funds would substantially improve the long-run budget picture. Like other organizations’ long-term projections, ours assume that full benefits will continue to be paid even after those trust funds are exhausted. Nevertheless, the programs lack legal authority to pay full benefits in that situation. Their trustees project that the HI fund will be exhausted in 2030 and the combined Social Security trust funds in 2034.[6] In those years, incoming revenues would support 86 percent of Medicare HI benefits and about three-quarters of Social Security benefits.[7]
Bringing the Social Security and HI trust funds into financial balance — through tax increases, benefit cuts, or some combination of the two — would forestall much of the projected rise in the debt-to-GDP ratio. If Social Security and HI expenditures equaled their revenues in each year after the projected depletion of those trust funds, federal debt would peak at 84 percent of GDP in 2033 and decline to 79 percent of GDP by 2040. The “Trust Fund Solvency” line in Figure 4 assumes that solvency is restored to the trust funds abruptly, through a sudden benefit cut or tax increase once the assets of the trust funds are depleted. Since, by law, benefit payments cannot exceed amounts available in the trust funds, it is indeed plausible to assume that, one way or another, solvency will be restored to the trust funds. Phasing in some combination of additional revenues and lower benefits more gradually, starting sooner, might produce slightly lower debt ratios than those shown here.
Figure 4
To summarize, policymakers can avert about three-quarters of the projected 18-point increase in the debt ratio through 2040 by restoring solvency to the trust funds through revenue increases, benefit reductions, or a combination of the two.
Uncertainty of Long-Run Projections
Users of these or any long-run budget projections should keep in mind that they are highly uncertain. CBO recently estimated, for example, that if productivity in the economy grew by ½ percent a year less or more rapidly than it projects, the debt ratio in 25 years would be about 17 percentage points higher or lower.[8] Thus, the debt ratio in 2040 under current budgetary policies could easily be as high as 110 percent of GDP or as low as 76 percent, given our projection of 92 percent.
Likewise, if interest rates over the 2016-2040 period are one-half of a percentage point higher or lower than we project, the debt ratio in 2040 would be roughly 10 percentage points higher or lower than we project, all else equal. Since other critical variables such as health care costs are also inherently difficult to predict, the actual range of estimating uncertainty surrounding these long-run projections is even greater.
In addition to uncertainty about the economic future, considerable policy uncertainty surrounds our projections. As the technical note explains, our projections approximate a continuation of current laws and policies. But consider the “tax extenders,” a set of tax provisions primarily benefiting businesses that policymakers routinely extend for a year or two at a time, most of which expired at the end of 2014. Suppose that policymakers revive and continue these extenders without offsetting their cost. Suppose also that policymakers repeal or circumvent the sequestration of discretionary funding, both defense and non-defense, without offsetting those costs, and that war costs continue at current, real levels indefinitely instead of winding down. Those three additional costs would increase the 2040 debt ratio by 7 percentage points, 8 percentage points, and 5 percentage points, respectively, producing a 2040 debt ratio of 112 percent of GDP rather than 92 percent.
Monday, September 14, 2015
CBPP Projections Show Long-Term Budget Outlook Has Improved Significantly Since 2010 But Remains Challenging | Center on Budget and Policy Priorities
Boone County to consider fees for nonprofits serving food at fundraisers - News - Rockford Register Star - Rockford, IL
By Ben Stanley
BELVIDERE — Nonprofit groups in Boone County may soon have to pay fees to the Health Department to serve food at fundraisers.For years the Boone County Health Department waived food-permit charges for nonprofits, but the County Board recently backed a measure that changes course. The county is looking to implement permit fees for nonprofits but at a significantly reduced rate.The County Board will consider the proposal at 6 p.m. Wednesday at the Boone County Administration building. If approved, nonprofits would have to pay 50 percent of the permit fee normally charged to organizations.Opponents of the proposal say charitable organizations will feel the pinch."By the time you (factor in) buying the food and everything, a lot of fundraisers don’t produce that much money," said Marion Thornberry, legislative director of the Illinois State Grange and moderator for St. John's United Church of Christ in Belvidere. The money raised "goes right back into the county to help the homeless and the needy in one way shape or form."An annual permit allows a group to serve food at essentially as many fundraisers as it wants as long as it meets inspection standards. The price of the permit is based on several factors, including the level of risk associated with the types of foods organizations plan to serve.According to Health Department records of food permits issued to nonprofits from Sept. 4, 2014, to Sept. 4, 2015, the average price of an annual or seasonal food permit was $216. If the new measure passes, nonprofits would be on the hook, on average, for $108 a year.Bill Hatfield, director of environmental health for the Health Department, said the maximum fee the county can charge for a high-risk annual food permit is $450, which means the most a nonprofit would have to pay for a permit would be $225.The new fees are estimated to bring in $9,000 a year.Health Department officials believe they're one of the only counties in the state still waiving the fees for nonprofits; Winnebago County does not.“One of the things that’s getting overlooked here is this is a user fee," Hatfield said. "A not-for-profit is choosing to drive down the food highway, and there’s rules, and inspections. They could choose to drive down a road that is not food. They could sell sports equipment. They could sell Popsicle sticks. They could do whatever kind of fundraiser they want and not even have to worry about a food permit. But they’re choosing to do food, and the general public needs to have assurance that the food that’s being offered meets the public health code ... and there are expenses involved."
My View: Red alert for Boone County nonprofits - Opinion - Rockford Register Star - Rockford, IL
By Cathy Ward
Posted Sep. 13, 2015 at 5:33 PM
Hundreds of Boone County volunteers in nonprofit groups will get a clear picture of how much they are valued when the the Boone County Board votes Wednesday on a proposed fee for any food permits for these groups.The Boone County Health Department is again seeking to impose a fee, snatching a portion of the profits, when church groups, community groups, school groups have dinners, breakfasts, ice cream socials, spaghetti dinners, etc., as fundraising activities.The agency tried this a couple years ago, but the proposal was defeated; some board members even suggested at the time that the department be eliminated and services be contracted out to other counties. At the time, County Board member Ron Wait, who was a state representative for years, noted that counties are not required to have health departments.So the department is back again seeking the fee with a new board that, so far, has not seen a fee hike it didn't like.The proposal has had easy passage from the Health Board; County Board member Sherry Branson and new Health Board member Barb Thrun voted no. At the County Board committee level, only I voted no; Paul Larson, Sherry Giesecke and Ray Larson voted yes.Health Board official Bill Hatfield says they need the money to help balance the budget, even though figures show more than $500,000 in the combined reserves. He also says the fee will not even cover the costs of the work done to supervise these events. However, sometimes the only work done is to file the permit sheet.Besides, Boone County residents already pay for the services of the Health Department every time we pay taxes. That's their job! The department also receives many grants, which is also taxpayer money.When asked how much each nonprofit group would have to pay, Hatfield said: “What is the speed limit in Illinois?” I guess that smart-aleck reply to a legitimate question was meant to mean that each permit could carry a different fee.Hatfield also claimed that the Boone County Health Department is a nonprofit group. However that is an apples-to-oranges comparison because Health Department staff members are certainly paid (Hatfield's annual salary is more than $62,000, plus health benefits, vacation and holiday pay) while volunteers in nonprofits usually pay for the privilege of serving on these groups with time, gas, dues, buying tickets.At a time when distrust of many government activities is apparent, it seems a poor time for any board to raise fees for people working hard to help their communities. It will be certainly hard to convince these volunteers of the statement “We're from the government. We're here to help.”The County Board will meet at 6:30 p.m. at the Logan Avenue Administration Building. (Wednesday, September 16, 2015)
My View: Red alert for Boone County nonprofits - Opinion - Rockford Register Star - Rockford, IL
AP Exclusive: GOP's Walker proposes vast union restrictions - Yahoo News
MADISON, Wis. (AP) — Republican presidential candidate Scott Walker on Monday will call for sweeping restrictions on organized labor in the U.S., seeking to replicate nationwide his successful effort as Wisconsin's governor to curb the power of unions.
At a town hall meeting in Las Vegas, Walker will propose eliminating unions for employees of the federal government, making all workplaces right-to-work unless individual states vote otherwise, scrapping the federal agency that oversees unfair labor practices and making it more difficult for unions to organize.
Many of Walker's proposals are focused on unions for workers at all levels of government, while others would also affect private-sector unions. Labor law experts said such an effort, if successful, would substantially reduce the power of organized labor in America.
While Walker could enact some of the proposals via presidential executive order, others would require an act of Congress or changes in federal regulations. The goal, Walker said, is "to achieve fairness and opportunity for American workers."
"This will not be easy," Walker said in a statement to The Associated Press. "Many — including the union bosses and the politicians they puppet — have long benefited from Washington rules that put the needs of special interests before needs of middle-class families."
Experts were taken aback by the scope of Walker's proposals, which seek to undo decades of law and would gut the landmark National Relations Labor Act — adopted in 1935 and signed into law by President Franklin D. Roosevelt at the height of the Great Depression.
"I've never seen anything like this," said Ann Hodges, a professor at the University of Richmond who has studied labor law for more than 40 years. "This will take the breath away from anyone who's worked in labor relations for any length of time. ... It's pretty draconian."
Walker's plan also calls for prohibiting automatic withdrawal of union dues to be used for political purposes and forbidding union organizers to access employees' personal information, such as their phone numbers.
Lee Adler, a labor law expert at Cornell University, said Walker's proposals would eliminate workers' rights and make it more difficult for people to join the middle class.
"Mr. Walker could only be making these type of proposals to satisfy his most backward-looking, wealthy contributors, just as he pursued, as governor, policies advanced by these people that sought to destroy school teachers and other public employees' rights in Wisconsin," he said.
Walker rose to national prominence in 2011, when just six weeks after taking office as governor, he proposed effectively ending collective bargaining for most public workers in Wisconsin. In the face of protests that often numbered in the tens of thousands, Walker muscled the changes through the state legislature — even after Democratic lawmakers fled the state in an unsuccessful effort to stave off his plans.
Democrats responded by forcing Walker into a recall election in 2012, which he won — making him the first governor in U.S. history to do so. He went on to make Wisconsin a right-to-work state earlier this year. Under right-to-work laws, workers can't be required to pay union dues as a condition of employment.
His decision to focus on fighting unions at the national level comes as Walker seeks to gain momentum for a presidential campaign that has fallen behind following billionaire businessman Donald Trump's rise to the top of early opinion polls. And some of Walker's comments drew derision — such as when he said earlier this month that he's not a career politician, even though he's been in office since he was 25 years old.
Walker was all the buzz in Iowa a couple months ago, said attorney Mike Mahaffey, a past state chairman of the Iowa Republican Party. "He does not come up as much as he did two months ago," Mahaffey said. "And that's a problem."
Another former Iowa GOP chairman, Matt Strawn, said while fighting unions may not be the biggest issue on the minds of Iowans, it's a good one for Walker to take on because it reminds them of his victories in neighboring Wisconsin.
Walker, 47, says he intends to be more aggressive in next week's second GOP debate, while insisting he isn't concerned about his standing in the race.
"None of this intimidates us," Walker said at a recent campaign appearance. "I think if people are looking for someone who is truly going to shake things up and wreak havoc on Washington, they want someone who's got real solutions and someone who is truly tested. I'm the only one on that stage that fits the bill."
AP Exclusive: GOP's Walker proposes vast union restrictions - Yahoo News
Subscribe to:
Posts (Atom)