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87–610—PDF 2013

S. HRG. 113–255 

THE BUDGET AND ECONOMIC OUTLOOK: 

FISCAL YEARS 2013 TO 2023 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

FEBRUARY 26, 2013 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

SHERROD BROWN, Ohio 

MICHAEL F. BENNET, Colorado 

ROBERT P. CASEY, Jr., Pennsylvania 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

JOHNNY ISAKSON, Georgia 

ROB PORTMAN, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

AMBER COTTLE, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee 

on Finance ............................................................................................................ 1 

Hatch, Hon. Orrin G., a U.S. Senator from Utah ................................................. 4 

WITNESSES 

Holtz-Eakin, Douglas, Ph.D., president, The American Action Forum, Washington, DC ............................................................................................................. 7 

Greenstein, Robert, president, Center on Budget and Policy Priorities, Washington, DC ............................................................................................................. 9 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

Opening statement ........................................................................................... 1 

Prepared statement .......................................................................................... 35 

Elmendorf, Douglas, Ph.D.: 

Prepared statement with attachment ............................................................. 39 

Responses to questions from committee members ......................................... 119 

Greenstein, Robert: 

Testimony .......................................................................................................... 9 

Prepared statement .......................................................................................... 128 

Responses to questions from committee members ......................................... 139 

Hatch, Hon. Orrin G.: 

Opening statement ........................................................................................... 4 

Prepared statement with attachments ........................................................... 152 

Holtz-Eakin, Douglas, Ph.D.: 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 159 

Responses to questions from committee members ......................................... 170 

COMMUNICATION

Center for Fiscal Equity .......................................................................................... 175 

(III) 

(1) 

THE BUDGET AND ECONOMIC OUTLOOK: 

FISCAL YEARS 2013 TO 2023 

TUESDAY, FEBRUARY 26, 2013 

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC. 

The hearing was convened, pursuant to notice, at 10:07 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus 

(chairman of the committee) presiding. 

Present: Senators Wyden, Schumer, Stabenow, Cantwell, Nelson, 

Menendez, Carper, Cardin, Brown, Bennet, Casey, Hatch, Grassley, 

Roberts, Enzi, Cornyn, Thune, Burr, Isakson, and Portman. 

Also present: Democratic Staff: Amber Cottle, Staff Director; 

John Angell, Senior Advisor; and Mac Campbell, General Counsel. 

Republican Staff: Chris Campbell, Staff Director; and Aaron Taylor, Professional Staff Member. 

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR 

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The committee will come to order. 

President John F. Kennedy once said, ‘‘The solid ground of mutual confidence is a necessary partnership of government with all 

of the sectors of our society in the steady quest for economic progress.’’ 

In the close to 4 years since the end of the recession, steady progress has been made in our economic recovery, but a feeling of uncertainty nevertheless continues to spread across the Nation. 

The dysfunction of our government is degrading confidence in our 

economy and creating uncertainty for families and businesses. It is 

preventing families from planning for the future, dragging down investment, and leaving businesses sitting on the sidelines and holding back our economy. 

Like many members of the committee, I just returned from a 

week at home—in my case, Montana—talking with the people I 

work for. I heard from small business leaders in Billings, I met 

with law enforcement in Missoula and Bozeman, and I talked with 

the commander of Montana’s Army National Guard based in Great 

Falls. As part of our traditional, what I call work day, I worked 

early shift at Wheat Montana Bakery in Three Forks. I started at 

7 a.m. I cleaned tables, served coffee, and greeted the customers 

taking a break from their weekend travels. 

At each stop in every corner of the State, I heard one thing over 

and over: the people we work for need certainty. It is time Washington started listening, they say. They are tired of being jerked 

2 

around from one crisis to the next. They want us to work together 

and get our act together. 

They make tough decisions every month to keep their budgets in 

the black, and they deserve a Congress and a President that can 

work together and do the same. In the coming days and weeks, we 

must confront a number of fiscal challenges facing our Nation. 

Just 3 days from now on March 1st, across-the-board budget 

cuts, known as the sequester, will hit. Eighty-five billion dollars in 

Federal spending will be sliced from thousands of programs, including Medicare, rural development, and early education. 

The repercussions will ripple through every sector of our economy. In Montana, more than 800 civilian employees at Malmstrom 

Air Force Base and the Army and Air National Guards will face up 

to a 20-percent reduction in pay. These are not just numbers, these 

are real people with bills to pay and families to care for. 

Cuts to national parks hit home in our State, because 64,000 

Montana jobs depend directly on outdoor recreation. 

Nationwide, the Department of Justice’s Office of Violence Against Women will lose $21 million. That means fewer grants to 

support the very critical work of the folks I met with in Missoula 

and in Billings—folks doing heroic work to help prevent violence 

against our mothers, sisters, and daughters. These are impressive 

people undertaking these programs, I can tell you. And cuts to the 

Community Oriented Policing Services (COPS) grants program 

could mean fewer police officers on the streets keeping our communities safe. 

The uncertainty over how these and other cuts will play out is 

weighing heavily on businesses like Wheat Montana, and those I 

have met with in Billings. The nonpartisan Congressional Budget 

Office predicts the sequester cuts could slow economic recovery and 

result in another year of sluggish growth and high unemployment. 

Yes, we need to cut our debt and get our fiscal house in order. 

We know there are some places to trim the fat. But we need to 

take a scalpel to waste and inefficiency, not allow a hatchet to hack 

into American jobs. We have a plan on the table to bridge the sequester and still cut $110 billion from our debt without putting 

working families and American jobs in jeopardy. The proposal is 

not perfect. I have concerns about cuts to programs family farmers 

rely on, but I understand the alternative of doing nothing could be 

far worse for agriculture and the rest of our economy. 

That is why I secured a compromise that will extend the Supplemental Revenue Assistance Payments (SURE) program and give 

farmers a bridge between direct payments and the next farm bill. 

This includes livestock disaster assistance for ranchers recovering 

from the worst drought in decades. That too is important. So, while 

this plan is not exactly how I would have designed it on my own, 

I recognize that compromise is necessary to get something done. 

My hope is that my colleagues will support this plan or offer 

their own to stop the sequester. We can then work together to prevent these indiscriminate cuts from causing lasting economic damage. 

Our economy will be put to the test again in just weeks when 

the continuing resolution expires on March 27th. We face the 

threat of a government shut-down. On the horizon, the Federal borVerDate Nov 24 2008 16:57 Apr 24, 2014 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 R:\DOCS\87610.000 TIMD
3 

rowing limit will be reached in late May. That will require another 

extension of the debt ceiling. 

This is no way to run a country. Congress has been lurching from 

one fiscal show-down to the next, leaving the Nation with uncertainty. The only way we will be able to get past these budget battles is by working together. It is a truism, but, like a lot of truisms, 

it is true. We can start right here in this committee. We need to 

take a balanced approach as we tackle these issues and work together to cut the debt. 

Over the past 2 years, we have made real progress cutting defi- cits and the debt. In 2011, we passed $1.4 trillion in spending reductions. Last month, Congress passed legislation that reduced the 

deficit by another $600 billion. 

Together, with interest savings, these actions will cut the deficit by $2.5 trillion over the next 10 years. Add to this the savings from 

winding down the wars in Iraq and Afghanistan, and our deficit reduction will reach almost $3.5 trillion over 10 years. 

As the Nation’s economy continues to recover, the long-term 

budgetary outlook has changed. CBO’s forecasts for Medicare and 

Medicaid spending have dropped significantly. Current projections 

for the programs’ costs through the end of the decade are $200 billion less than in March 2010. 

CBO also forecasts decreasing deficits in a stable debt-to-GDP 

ratio over the next several years. It projects the 2013 budget deficit 

will be a full third lower than it was in 2010, and it will be cut 

in half by 2015. CBO notes that there will be a slight uptick at the 

end of the decade, so we must continue to attack the deficit headon. 

The unemployment rate is still unacceptably high. American 

families’ budgets are being pinched: skyrocketing gas prices, rising 

food prices, and stagnant wage growth are making it harder for 

families to make ends meet. More must be done to strengthen our 

country’s economy. 

Today we will discuss how we can enact additional balanced savings to further reduce the deficit, give families and businesses certainty, and protect economic recovery. As we do that, I would like 

this committee to focus on three goals. 

First, job creation. Twelve million people are actively looking for 

work but cannot find a job. An additional 8 million Americans are 

stuck working part-time, and they would like to work full-time. Job 

creation must be the top priority of the administration, this Congress, and this committee. 

Second, we must simplify our tax code for America’s families and 

businesses. It has been close to 30 years since the last major overhaul of America’s tax code. In that time, our world has changed 

dramatically. Back then, China was our 18th-largest trading partner. China is now our 2nd-largest. Over the past 30 years, exports 

as a share of GDP have nearly doubled. 

Our tax code is antiquated and acting as a brake on our economy, especially when compared with our overseas competitors. We 

need a pro-growth tax code that gives America’s businesses the certainty they need to compete globally and plan and expand operations, instead of living and hoping for a continuation of temporary 

tax breaks. 

4 

Finally, we must make it a priority to return stability and confidence to our economy. We have to get off this roller coaster of a 

ride, going from one fiscal crisis to the next. We must give families 

and businesses certainty. We must agree on a balanced, comprehensive plan to cut the debt that includes both more revenue 

and spending cuts. The math will not work any other way. 

A long-term, balanced plan will bridge the budget battles and 

make real progress solving our deficit problem. A balanced plan 

will also encourage businesses to invest and enable investors to return to the markets with confidence and, most importantly, put 

Americans back to work. 

Expert witnesses are here today to help the committee examine 

the progress of America’s economic recovery, as well as our economic outlook for the next decade. I look forward to hearing from 

each of you as you provide this committee with the necessary insight to take on the tough challenges ahead. 

I also hope today this committee can complete its review of three 

individuals nominated to key administration posts. I urge the committee members, when we have a quorum, to support the nominations of William Schultz, to be General Counsel at the Department 

of Health and Human Services; Christopher Meade, to be the General Counsel at the Department of the Treasury; and Jack Lew, to 

be the Secretary of Treasury. 

As we will discuss today, our Nation faces a number of great 

challenges. We need bright and dedicated individuals like these 

three nominees to work with us to find solutions. 

So let us listen to the facts about our budget from our experts. 

Let us work together to make tough decisions and do the hard 

work and face the great responsibility before us. As President Kennedy understood, let us recognize that our economic progress in 

fact depends on the solid ground of mutual confidence. Let us embrace this opportunity to restore certainty and get America back on 

track. 

[The prepared statement of Chairman Baucus appears in the appendix.] 

The CHAIRMAN. Senator Hatch? 

OPENING STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH 

Senator HATCH. Well, thank you, Mr. Chairman, for holding today’s hearing. I want to welcome our witnesses and thank them for 

their willingness to appear here with us today. 

This is an important hearing. Given that we are currently in the 

midst of a national debate over our country’s fiscal future, it could 

not be more timely. Anyone who takes a careful look at our Federal 

finances should be very nervous. We have had 4 consecutive years 

with deficits above $1 trillion, and it looks like we are into the 5th 

now. 

By the end of this fiscal year, CBO projects that the debt held 

by the public will reach the largest percentage of GDP since 1950. 

It only gets worse as time goes on. After a temporary lull in the 

growth of debt in 2018, CBO projects that the debt will rise for the 

remainder of the 10-year budget projection window, measuring 77 

percent of GDP by the end of 2023. 

5 

Now, according to the CBO, ‘‘Along such a path, Federal debt 

held by the public will equal a greater percentage of GDP than in 

any year between 1951 and 2012 and will be far above the average 

of 39 percent over the 1973 to 2012 period. Moreover, it will be on 

an upward trend by the end of the decade. Debt that is high by historical standards, and heading higher, will have significant consequences for the budget and the economy.’’ 

Now, these negative consequences of our growing national debt 

will include higher interest costs, lower national savings, more borrowing from abroad, less domestic investment, lower incomes, lesser abilities of policymakers to respond to unexpected challenges 

like natural disasters, and a greater likelihood of a fiscal crisis. 

While some will try to argue that the coming debt crisis can be 

blamed on a lack of sufficient revenue, nothing could be further 

from the truth. With the tax increases included as part of a fiscal 

cliff package that passed on New Year’s Day, the Federal revenue 

as a share of our GDP is on a path to exceed the average of the 

last 40 years. So, despite some adamant claims to the contrary, it 

is clear that our government has a spending problem, not a revenue problem, and it is our problem. 

Another common claim we have heard from the White House and 

from many here in Congress is that, over the last year and a half, 

we have already cut spending dramatically. This is also untrue. By 

any measure, spending has increased, and there is no use in kidding about it. It has increased significantly under this administration. 

For starters, Federal outlays in fiscal year 2012 are well-above 

2009 levels. Now, some have argued that it is not fair to hold the 

Obama administration entirely accountable for all of the outlays incurred during 2009, so for now let us consider fiscal year 2010. 

When you compare Federal outlays in fiscal year 2012 with those 

of fiscal year 2010, you see an increase in spending of over $82 billion. At the same time as the economy has sluggishly recovered, 

Federal revenues have increased. In fiscal year 2012, they were up 

by more than $286 billion compared to 2010. 

So, between 2010 and 2012, the deficit went down by just over 

$204 billion, and literally no part of that reduction can be attributed to spending cuts; it is all due to high revenues. Despite these 

facts, the President continues to resist any real spending restraint 

and calls for even more tax hikes, even though he just raised taxes 

less than 2 months ago. 

He also refuses to entertain serious structural changes to our entitlement programs, even though everyone agrees that entitlement 

spending is the main driver of our debts and our deficits. As far 

as I am concerned, any conversation about reducing our deficits 

that does not focus on shoring up and reforming our entitlement 

programs is a missed opportunity. 

In the more immediate future, we face the indiscriminate spending reductions that are scheduled to begin on March 1st under the 

so-called sequester, which CBO says will reduce actual outlays in 

fiscal year 2013 by around $44 billion, or just over 1 percent of 

total Federal spending. 

The debate over the sequester appears to be headed down the 

same path that all of our recent fiscal debates have followed, with 

6 

the President and his allies here in Congress insisting that, in lieu 

of actually cutting spending, we raise taxes on the so-called ‘‘rich.’’ 

Once again, none of the tax hike proposals we are hearing about 

was considered by this committee. Instead, they have been drafted 

somewhere else behind closed doors. 

Today we will hear more about these and other fiscal challenges 

facing our Nation. In addition to discussions about our long-term 

budgetary problems, I expect we will hear recommendations about 

how to deal with short-term spending reductions scheduled under 

the sequester. 

I assume we will also continue to hear grand claims of deficit reduction that measure progress using selective baselines and include 

only promises to reduce spending in the future. Once again, by any 

measure, spending has not been cut to date. We have promises for 

future cuts in spending, but nothing really has been realized. 

I hope today’s hearing will, among many other things, help us to 

get to the bottom of some of these claims and clarify for the American people how much Congress has actually done to reduce the 

deficit in recent years. 

Now, Mr. Chairman, I want to thank you again for holding today’s hearing, and I look forward to hearing from the witnesses. I 

will speak right now rather than later. I may reserve some rights 

to speak later, but I will speak right now on the Lew nomination. 

In addition to the budget hearing, I also want to take a few minutes to comment on the committee’s consideration of the nomination of Jack Lew to be Secretary of the Treasury. At the outset, let 

me say that I intend to vote today in favor of Mr. Lew’s confirmation. I believe the President is owed a fair amount of deference in 

choosing people to work in his administration. Though I would 

have chosen a different person for this particular post, I intend to 

defer to President Obama with regard to the Lew nomination. 

That said, I do have serious reservations regarding Mr. Lew. I 

like him personally very much. He certainly has a lot of experience 

in this town. But I have reservations regarding Mr. Lew that have 

not been assuaged through the committee’s consideration of this 

appointment. 

In the end, I hope that he will prove me wrong. For example, I 

strongly disagree with Mr. Lew on some significant policy issues, 

most notably his decision to backtrack from the administration’s 

previous position on the need for entitlement reform and his belief 

in the need for higher taxes. 

Ultimately, I hope we end up with the Jack Lew of the Clinton 

administration, not just another acolyte of the Obama White 

House. I hope we get a Treasury Secretary willing to work with the 

other side of the aisle to put our Nation first in order to confront 

the challenges facing us today. If Mr. Lew is that kind of Treasury 

Secretary, then I think we can work together to accomplish some 

great things for our great country. 

But, if Mr. Lew is committed to playing the same partisan games 

that have gone on for the better part of the last 4 years, then we 

are going to have serious difficulties in getting anything done. I 

hope that will not be the case. 

In addition, as my questions during the hearing demonstrated, I 

believe that Mr. Lew has been less than forthcoming about his time 

7 

at Citigroup and NYU. Indeed, after extensive questioning, we still 

know very little about these areas of his record. This is problematic, and I plan to go into these concerns more fully when the nomination is debated on the floor. 

Furthermore, I am deeply concerned about the general lack of responsiveness from the Obama administration to legitimate questions that I and other members of this committee have asked. 

Sometimes we get no answers at all, and that is entirely unacceptable, as I have said all too many times from this very spot. 

Mr. Chairman, I expect the committee will report the Lew nomination today, and, once again, I intend to vote in favor of doing so. 

However, as I stated, I have significant concerns that I hope will 

be addressed by greater responsiveness and transparency from the 

administration. I hope you will continue to work with me to address these concerns, and I believe you will because of our relationship. I want to thank you, Mr. Chairman, for the work that you 

do. 

The CHAIRMAN. Thank you, Senator. 

[The prepared statement of Senator Hatch appears in the appendix.] 

The CHAIRMAN. A quorum is present. I thank my colleagues for 

their attendance. We will now interrupt the hearing to conduct 

some business. 

[Whereupon, at 10:26 a.m., the hearing was recessed, reconvening at 10:40 a.m.] 

The CHAIRMAN. We will now resume the hearing. 

I would like to now introduce our witnesses. Our first witness is 

Douglas Holtz-Eakin, former CBO Director and president of the 

American Action Forum; next, Bob Greenstein, who is president of 

the Center on Budget and Policy Priorities. Thank you both very 

much for coming. 

We will start with you, Dr. Holtz-Eakin, then proceed to Mr. 

Greenstein. We ordinarily give 5 minutes. You might take a couple 

more if you want, but not many more. We have full attendance 

here, so do your best. Thank you. 

STATEMENT OF DOUGLAS HOLTZ-EAKIN, Ph.D., PRESIDENT, 

THE AMERICAN ACTION FORUM, WASHINGTON, DC 

Dr. HOLTZ-EAKIN. Well, thank you, Mr. Chairman, Ranking 

Member Hatch, and members of the committee, for the privilege of 

being here today to discuss the budget and economic outlook. I 

have really three points to make in my oral remarks. I did submit 

a written testimony for your reading. 

The first is that we face a very sobering fiscal and economic picture in the United States. The second is that controlling the debt 

that we have and are projected to accumulate is consistent with 

better economic growth and job creation, not at odds with it, as is 

often portrayed. The third is that the current reliance on the sequester and the budgetary caps in the Budget Control Act is not 

as fruitful a strategy as a comprehensive tax and entitlement reform would be to deal with these problems, and I would like to 

elaborate on each briefly. 

The first point is simply the sobering outlook presented in the 

most recent CBO budget and economic outlook. The outlook has the 

8 

virtue of looking forward. It is starting from the point where we 

find ourselves and depicting what happens if the fiscal position is 

left on auto-pilot. If one looks at that, we start with a position of 

$16 trillion in gross Federal debt and would accumulate $7 trillion 

more in deficits over the next decade. 

This would leave us in a situation where gross Federal debt 

would exceed GDP each and every year and end the decade in that 

position, a benchmark that I want to return to as an important one 

in its implications for economic growth. 

The deficit and debt in the hands of the public, a more conventional measure, might decline briefly but will be rising both in absolute terms and as a percentage of GDP toward the end of the decade. This all occurs despite the recent efforts to close the deficit by 

raising $600 billion in new taxes at the turn of this year. 

The economic outlook is no more promising, with subpar economic growth this year projected at 1.4 percent, and to me a more 

troubling aspect being the long-term growth rate marked down 

from 2.5 percent last year to 2.2 percent per year in the most recent economic outlook. 

This is indeed a troubling projection for the United States over 

the next decade. Controlling the debt imbedded in this outlook is 

not at odds with robust economic growth and job creation. The result of research led by Carmen Reinhart, Ken Rogoff, and others 

shows that countries with the U.S.’s situation, situations where the 

gross debt exceeds 90 percent of GDP—and we are at 100 percent 

and will remain so in this outlook—those countries tend to grow 

more slowly, about a percentage point more slowly each year, than 

do comparable countries that are less burdened by debt. 

That price that we are paying right now, the growth penalty, 

would translate into about a million jobs a year at this point in 

time—something desperately needed by Americans who are out of 

work—and lower incomes that could total as much as $10,000 per 

median family over the next decade or so. 

So this is a situation which is harming the U.S., and it makes 

sense that high debt burdens inhibit economic growth, something 

I would be happy to elaborate on in the Q&A, because of the potential they raise for higher taxes and fiscal crises. So, being serious 

about controlling debt is a way to be serious about growing more 

rapidly. 

But another lesson of the literature that has displayed the price 

you pay for high debt is that there are better and worse ways to 

deal with it. The playbook that has emerged is one in which the 

best approach to dealing with large debt and bad growth is one 

that keeps taxes low and reforms them to be more pro-growth. 

I want to echo the call of the chairman for pro-growth tax reform. 

I know this committee has worked on this over the past year. I 

hope you get pro-growth tax reform over the finish line; it is desperately needed in the United States. 

On the spending side, restraint must be displayed in order to 

control the level in growth and debt, but not all spending is created 

equal. It is important to preserve core functions of government— 

national security, basic research, infrastructure, education—and instead cut transfer programs. 

9 

In the United States, that means less reliance on things like the 

sequester and Budget Control Act discretionary caps and, instead, 

entitlement reform, which is the bulk of the spending in the Federal budget and is the place where the largest growth is projected 

over the next decade. 

These reforms, I might point out, would also be a good idea in 

and of themselves. At the moment, the ‘‘plan’’ for Social Security 

is to keep it actuarily solvent on the government’s books by cutting 

retirees’ benefits 25 percent across the board 2 decades from now. 

That is not a particularly good way to run a retirement program. 

Medicare at the moment is running a $300-billion-a-year cash 

flow deficit, the gap between premiums and payroll taxes and 

spending going out. We get 10,000 new beneficiaries every day. 

That is a program that is alone responsible for a quarter of all the 

Federal debt outstanding since 2001. Given its current State, it will 

fall under its own financial weight unless reformed. 

Medicaid, similarly, has financial problems, and is a program 

where its beneficiaries end up in emergency rooms for ordinary 

care at twice the rate of the uninsured. So, these are programs that 

are hardly doing well at the moment and merit reforms on the 

basis of their services to beneficiaries. And reforms are what is 

needed to control the debt and the growth in debt and to grow 

more rapidly as a Nation. So I look forward to the conversation 

today. I would be happy to answer your questions and look forward 

to strategies which would improve our performance and lower the 

future debt. Thank you. 

The CHAIRMAN. Thank you very much, Dr. Holtz-Eakin. 

[The prepared statement of Dr. Holtz-Eakin appears in the appendix.] 

The CHAIRMAN. Mr. Greenstein? 

STATEMENT OF ROBERT GREENSTEIN, PRESIDENT, CENTER 

ON BUDGET AND POLICY PRIORITIES, WASHINGTON, DC 

Mr. GREENSTEIN. Thank you. Let me start by partly agreeing, 

but partly disagreeing, with my colleague, Doug. I agree that we 

are on an unsustainable fiscal course and we need to act. On the 

other hand, I think the statement or the notion that we are already 

in a danger zone because gross debt exceeds 90 percent of GDP and 

that this is already costing jobs is not one most economists would 

agree with. 

Most economists, and CBO, have long said that the best measure 

is the publicly held debt. That is the amount of debt we have to 

go and borrow in private credit markets. The difference between 

the publicly held debt and the gross debt, the additional debt, is 

that one part of the Federal Government owes another part because of the Social Security and Medicare trust funds. That is not 

money we go and borrow in private credit markets. 

Reinhart and Rogoff did find a correlation between debt persistently being above 90 percent of GDP and slower growth, but those 

observations were based on European countries where what is 

called gross debt in those countries is essentially what we call publicly held debt here, because those countries do not have trust 

funds where one part of the government owes money to another. 

10 

Their gross debt is money you go and borrow in private credit markets, like our publicly held debt. 

So the moral of the story, I think, is that the lesson we should 

derive from Reinhart and Rogoff is that the U.S. will be in a danger zone if our debt climbs to, and remains above, 90 percent of 

GDP—the publicly held debt. We are not there yet, but, if we do 

not take any action, over time we will end up there, and that will 

be a problem. 

So where does this leave us? Based on the latest CBO projections, policymakers could stabilize the public debt as a share of the 

economy over the coming decade with $1.5 trillion in additional 

deficit reduction. That is the minimum policy, in my view, that policymakers should pursue. 

To do that would require significant action that phases in as the 

economy recovers, and it would mean, if we stabilize the debt at 

about its current level—which is about 73 percent of GDP—for the 

coming decade with $1.5 trillion in deficit reduction, policymakers 

would then subsequently need to enact additional deficit reduction 

for the long term due to the aging of the population and rising 

health care costs, especially as we learn more about how to control 

the growth of health care costs throughout the U.S. health care 

system. 

Now, let me add that a greater amount of deficit reduction would 

be desirable if policymakers can design it without doing harm in 

other areas, meaning deficit reduction really needs to be designed 

in a way that does not impede or slow the current economic recovery; does not jeopardize future productivity growth by providing inadequate resources for education, infrastructure, and basic research; does not increase poverty and inequality, which are already 

wider here than in most western nations; and does not increase the 

number of Americans who are uninsured or sacrifice health care 

quality. 

In short, it is not just the quantity of deficit reduction that matters, it is the quality of the deficit reductions that are chosen that 

matters as well. This is particularly true in the health care area, 

where there are things we can and should do now, but where 

knowledge about effective ways to slow health care cost growth 

system-wide without risking the quality of care or jeopardizing access to needed care is not at the level that we need, and where 

such knowledge is likely to be significantly greater in a few years 

than it is now. 

So let me note a few principles I would recommend for the design 

of deficit reduction. First, CBO says it will take at least 4 more 

years before the economy fully recovers. CBO’s estimate that sequestration, for example, would lead to the loss of 750,000 jobs by 

the fourth quarter is an indication that we want to enact deficit reduction now, but you want to design it so it phases in as the economy recovers rather than taking a big whack out of the economy 

right now. 

Number two, the Bowles-Simpson report made it a core principle 

that deficit reduction should not increase poverty or harm the disadvantaged, that it largely shield the programs for the disadvantaged from the cuts it recommended. 

11 

Bowles and Simpson, just last week, stated, ‘‘Broad-based entitlement reforms,’’ which they recommend, ‘‘should either include protections for vulnerable populations or be coupled with changes designed to strengthen the safety net for those who rely on it the 

most.’’ The Gang of 6 followed a similar course, and I would recommend that. 

I would also note, as you think about these areas, some important new research quite relevant to this committee because of your 

jurisdiction with regards to the Earned Income Tax Credit. We 

have known for a long time from extensive research that it significantly increases work among single female parents, and the research suggests it had as large an effect in increasing work and reducing welfare receipt as the 1996 welfare law. The two actually 

reinforced each other. 

The new research finds that the receipt of the EITC by families, 

particularly with young children, leads to improved test scores and 

educational attainment in school and increased earnings and employment in adulthood. I think this is quite important. 

Finally, the last point in this big debate: taxes, spending, a mix? 

How should we do deficit reduction? I was struck by a Wall Street 

Journal column last week by Martin Feldstein. He observed, ‘‘Republicans want to reduce the deficit by cutting government spending. Democrats insist raising revenue must be part of the solution. 

Yet,’’ Feldstein continues, ‘‘the distinction between spending cuts 

and revenue increases breaks down if one considers tax expenditures.’’ 

If I buy a solar panel for my house, the government pays me. 

But, instead of sending me a check, it gives me a tax credit or a 

tax deduction. I am hoping there might be a bipartisan process on 

the notion of focusing on spending, but spending in the tax code 

and spending in the outlay side of the budget as well. 

Feldstein has written that tax expenditures are one of the first 

places policymakers should go to restrain spending. Douglas Elmendorf, in testimony earlier this month on the House side, said, 

‘‘Many economists agree that tax expenditures are really best 

viewed as a form of government spending.’’ Alan Greenspan 

summed it up when he said that ‘‘tax expenditures should be reviewed as tax entitlements and looked at along with spending entitlements.’’ 

Let me just close with an example to illustrate what I am trying 

to say. The example involves child care. So a parent with low or 

moderate income may be able to obtain a Federal subsidy to help 

defray child care costs, and it comes through a spending program 

on the spending side of the budget. But a parent higher on the income scale also gets government subsidies to reduce child care 

costs. Those are delivered through the tax code via a tax credit or 

an exclusion from income. 

Now, there is a significant difference here. The main difference 

is the low- or moderate-income parent may fail to get a subsidy because the spending programs in question are capped. They only 

serve as many people as the funding allows. Only about 1 in 6 eligible low-income working families with children gets a Federal 

child care subsidy. 

12 

By contrast, the child care tax-based subsidies for middle- and 

upper-income households operate as open-ended entitlements. Everybody who has it and takes it on the tax return gets it and, unlike with the working poor families who get the child care spending 

subsidies, most of the higher-income families who get a child care 

subsidy through the tax code could afford child care without the 

subsidy anyway. 

I bring this up just to make the point that spending occurs on 

both sides of the ledger, and it would not make sense, as you seek 

deficit reduction, to put tax code subsidies off-limits for deficit reduction while putting program-side subsidies on-limits. I would 

urge you to look at both. 

Thank you. 

The CHAIRMAN. Thank you both very much. 

[The prepared statement of Mr. Greenstein appears in the appendix.] 

The CHAIRMAN. I would like to focus a bit on health care, health 

care costs, Medicare. I think you, Dr. Holtz-Eakin, mentioned that 

10,000 people turn 65 ever year. 

Dr. HOLTZ-EAKIN. Every day. 

The CHAIRMAN. Excuse me. Every day. Ten thousand people turn 

65 every day. I saw somewhere that 60 percent of health care cost 

increases in Medicare and Medicaid are due to just demographics: 

more people. The other 40 percent are because health care costs 

are just going up. Could you focus a little more on how we can address short-term/mid-term health care costs in this country and 

what it means for Medicare and Medicaid? 

I am going to ask you, Mr. Greenstein, to do the same thing. I 

would just like to focus on how we get control over health care 

costs in this country, because that is going to be one of the biggest 

challenges and most important efforts we can undertake. 

Dr. HOLTZ-EAKIN. I think, obviously, this is a difficult area, and 

a broad one. Let me just say a couple of things. Number one, I 

think that delivery system reform and health care reform in the 

United States begin with entitlement reforms. It is the case that 

Medicare and Medicaid and new Affordable Care Act programs 

mean that the government is the majority payer of health care bills 

in the United States. 

The way it pays bills matters a lot for practice patterns, so, if we 

do a better job in the entitlement programs, we will in fact enact 

broader health care reforms. 

The CHAIRMAN. What would be some examples there of entitlement reform? 

Dr. HOLTZ-EAKIN. So, first, stop doing the wrong thing. We know 

fee-for-service medicine leads to no emphasis on quality, an emphasis on quantity, and has been the source of a lot of bad practice of 

medicine in the United States. So, no fee-for-service, please. 

The CHAIRMAN. Right. That is one. 

Dr. HOLTZ-EAKIN. Number two, do not rely on provider cuts and 

other kinds of price controls, the SGRs, the living example of bad 

health care policy that comes back to haunt the Congress every 

year. Do not do it again. We saw most recently CMS, in the recent 

rule on Medicare Advantage, cutting payments that are just going 

to preclude services to beneficiaries, cause them to change their 

13 

provider networks, and harm health care as a whole in the United 

States. 

The CHAIRMAN. All right. That is two. Three? 

Dr. HOLTZ-EAKIN. The other thing I would recommend is, put 

these programs on budgets. People make bad decisions with other 

people’s money. It is a deep economic insight. Unlimited access to 

other people’s money is a recipe for bad decisions, so let us put 

Medicare on a budget, let us put Medicaid on a budget, and say to 

the providers and the beneficiaries as a collective, here is your taxpayer money for the year, go do something of high quality and benefits with it. Stop giving them an unlimited draw on the U.S. 

Treasury to the tune of $300 billion a year and rising. None of that 

is going to promote good health care in the United States. 

The CHAIRMAN. Mr. Greenstein? 

Mr. GREENSTEIN. The big issue in Medicare and Medicaid—obviously, one part is demographics. Older people have higher average 

health care costs than younger people, and the population is aging. 

But the other is, it is not as though health care costs are rising 

more rapidly in Medicare or Medicaid than in private sector health 

care. They are rising system-wide. They have actually been rising 

a little more slowly of late in Medicare and Medicaid. 

On the one hand, there has been a big slow-down in health care 

cost increases. If you compare the current CBO 10-year forecast to 

where CBO was, say, in August 2010 while Bowles-Simpson was 

meeting, the Medicare costs over the next 10 years are down $500 

billion, and Medicaid, $200 billion. 

Well, we hope some of that will endure. We do not know yet for 

sure. What that reduction in Medicare and Medicaid largely reflects is a slow-down in health care cost growth throughout the 

U.S. health care system. We need to find the ways to promote that. 

Now, I think there are some reforms that can be looked at now 

in Medicare, ranging from more use, for example, of competitive 

bidding in purchasing medical equipment. There are still some 

over-payments in Medicare Advantage. We can get better prices for 

drugs. I think we can expand both the scope and the size of 

income-related premiums. 

I think you can look at restructuring cost-sharing, catastrophic 

care, Medigap, that whole part of Medicare. If you do all of those 

things, you can get a few hundred billion dollars in savings over 

the next 10 years, but ultimately we are going to need more than 

that. To get significantly more than that, it really turns on changes 

in the overall U.S. health care system. If the current slow-down in 

cost growth proves to be enduring, we will be a significant part of 

the way there, and we need to build on that. 

It is very important for us to learn in the years ahead from what 

has happened in the last few years to better understand why the 

cost growth has slowed, how can we build on that, to learn from 

various demonstration pilots now going on, some publicly funded, 

some entirely—— 

The CHAIRMAN. Do either of you disagree with what the other 

said, or do you both agree with what the other said? 

Dr. HOLTZ-EAKIN. I think Bob said this, but I would emphasize 

it, that the recent slow-down in national health care cost growth 

is something you cannot rely on. I mean, this is a picture I would 

14 

be happy to share which shows the history of these slow-downs. We 

have had them before. It happened in the 1990s when the budget 

got better. It went away. It has happened before. I would not count 

on that, particularly when we are about to expand coverage next 

year dramatically. When people are covered, they spend more, so 

I would expect this to reverse quickly, and I am nervous about relying on it. 

The CHAIRMAN. My time is about up, Mr. Greenstein. Very quickly, very quickly. 

Mr. GREENSTEIN. While I would not count on it as a guarantee, 

I do not expect it to reverse quickly. I have talked to health care 

experts: Bob Reischauer, Peter Orszag, Henry Aaron. All of them 

think there are growing signs that some of this slow-down is likely 

to endure. We cannot count on it, but we should look for that. 

Where I disagree with Doug is, I do not think one can artificially 

put some cap on Medicare and Medicaid expenditures separate and 

apart from total health care expenditures, public and private sector, throughout the U.S. health care system. 

The CHAIRMAN. All right. Thank you. 

Senator Hatch? 

Senator HATCH. Dr. Holtz-Eakin, your testimony says it would be 

sensible to reduce debt such that the ratio of gross debt-to-GDP is 

below the 90-percent threshold that economic research has identified as a threshold above which the debt is associated with about 

a 1-percent reduction in economic growth. Now, you offer an example of getting gross debt-to-GDP down to 85 percent, which you say 

would require around $4 trillion of additional promised debt reduction over 10 years. Now, if we were to set a goal of $4 trillion in debt reduction over 

the next 10 years, and, if we hold spending at levels envisioned in 

CBO’s most recent budget outlook, let me ask you three things. I 

will just read through the list, and then you can respond. 

First, do you have any sense of what tax rates on upper-income 

earners, which would encompass many flow-through businesses, 

would be necessary to obtain the $4 trillion of debt reduction if we 

put tax hikes on the middle-class off-limits? 

Second, how high would we have to set taxes on the middle class 

to facilitate the existing spending path if all taxes were raised? 

Third, what might a more balanced way of doing things look like, 

in your mind, and do you think it ultimately has to involve entitlement reforms? 

Dr. HOLTZ-EAKIN. Thank you, Senator. Four trillion dollars in 

tax increases is obviously an enormous impact on the economy. If 

you tried to pull that out of the top rates, you would have to have 

it exceed the 80-percent marginal rate. We can get you an exact 

number, but my guess is it is going to be north of 80 percent. It 

is extremely punitive. 

Right now, if you look at taxpayers as a whole, the typical 

weighted average tax rate is something like 23, maybe 25 percent 

at tops. It would have to go close to 40 percent. Again, I can get 

you precise numbers. These are dramatic tax increases, a near doubling of all taxes. 

Obviously, a more balanced approach is what would come out of 

the literature, which says that it is important to do tax reform so 

15 

that you support economic growth, that tax reform would give you 

a more efficient tax code and might raise more revenue in the process, but the reliance would be on reforming the spending programs 

which, in the U.S., are these large entitlement programs. 

As I mentioned in my opening statement, it is important to do 

those for economic growth reasons. It is important to do this for 

budgetary reasons, but I also think it is very important to do that 

on behalf of the beneficiaries. These programs are not going to 

serve them well and not survive to the next generation of seniors 

and low-income Americans. 

Senator HATCH. Well, your fellow panelist argues that much of 

the leg work on deficit reduction has already taken place with the 

promises of future fiscal restraint embedded in the legislation enacted over the past several years. Mr. Greenstein also argues, as I view it, that $1.5 trillion in additional deficit reduction would stabilize the debt-to-GDP ratio over 

the coming decade and that such stabilization would be the minimum appropriate budget policy. 

Now, do you agree that, if we enacted legislation promising an additional $1.5 trillion in future deficit reduction, we would then 

have stabilized the debt-to-GDP ratio in the coming decade at a 

safe level, and do you agree that $1.5 trillion of added future promised deficit reduction would be sufficient to avoid substantial risks 

to the economy from our debt? 

Dr. HOLTZ-EAKIN. I will spare the committee the geeks’ fight 

over gross debt versus debt in the hands of the public. I use gross 

debt just because that is what the research used, and I wanted 

comparability. As I said, it indicates we are at too high a level, so 

reducing deficits by only $1.5 trillion in the next decade does not 

get us out of what I view as the danger zone. It might stabilize 

debt in the hands of the public, but it would stabilize it at a dangerously high level. There is no reason why one should cement, as 

a matter of objective, a policy that leaves us with subpar growth. 

I believe we are growing poorly and that we can understand the 

reasons for that, and which leaves us constantly on the edge of the 

potential for a crisis. If you look at the recent budgetary travails 

of Congress and the administration, we are constantly in crisis. I 

think that is not a great future for the economy. If world capital 

markets decide to join the chorus of people who think we are, in 

large amount, on the edge of trouble, that would be a very troubling decade. 

So I think a much more aggressive approach would take us out 

of the danger zone, would more than just stabilize debt at a high 

level, and would actually set the debt trajectory on a sensible level 

and relieve us of the poor economic performance and the threat of 

constant crisis. 

Senator HATCH. My time is up, Mr. Chairman. I have some questions for Mr. Greenstein. 

The CHAIRMAN. Thank you very much, Senator. 

Senator Wyden? 

Senator WYDEN. Thank you, Mr. Chairman. Mr. Chairman, I 

want to echo your comments with respect to health care costs. For 

our witnesses, in this week’s Congressional Quarterly, the cover 

page says, ‘‘A Crisis in Plain Sight: As Washington Does Nothing, 

16 

the Challenge of an Aging Population is Quickly Overwhelming the 

System.’’ 

That is why I would like to turn to Medicare to get a reaction 

from both of you. The longer I go on—and of course, the program 

has changed pretty dramatically since my Gray Panther days, and 

I think I have talked about this with both of you—the ball game 

to a great extent is those with multiple chronic conditions. 

Seventy percent of Medicare costs go for those with three or more 

multiple chronic conditions, so, to a great extent, if we can find 

ways to ensure that those folks get quality care that is more affordable, we are going to go a long way toward fixing Medicare. 

Now, I think there generally is bipartisan support for approaches 

that integrate services, that move away from this approach where 

someone who, say, has diabetes or pulmonary health issues just 

goes and gets services physician by physician and ends up without 

a care plan and eventually goes to the hospital emergency room. 

The Accountable Care Organizations go, certainly, in the right direction in this regard, but it seems to me that considerably more 

has to be done. 

I would be interested in your views on this question of how we 

are going to deal with what I think is really the heart of an effective reform strategy with Medicare, and that is dealing with those 

with multiple chronic conditions. Either one of you can go first. 

Mr. GREENSTEIN. I think you are absolutely right, Senator. This 

is just the sort of thing I had in mind when I said we do not have 

all the knowledge we need right now to write a piece of legislation 

that mandates how to do the care integration. We have more to 

learn. Some of the innovations going on in the private sector are 

hopeful. 

As you know, there are individual examples of individual medical 

systems that do it better and save money. There also are a whole 

array of State-run demonstration projects that are starting up this 

year, particularly focusing on integrating care better for the dualeligibles. We need to rigorously pursue these, and rigorously evaluate these, and try to set ourselves a goal that, as we learn how to 

do this in ways that both improve quality and save money, as you 

suggest, then we need to adopt them and implement them in Medicare and Medicaid. 

Sadly, we do not have the silver bullet or know exactly how to 

do it yet, but, as you say, it is one of the most important things 

for us to learn and adopt as we find the answers. 

Dr. HOLTZ-EAKIN. Again, it is a very important problem. The 

Medicare system was designed for an era of acute care as the primary medical expense. We now have chronic care as its leading 

problem, with multiple co-morbidities as the typical expensive 

Medicare patient. So moving the focus on that and integrated care 

is very important. 

I would say a couple of things. Number one, I have started an 

organization called The Partnership for the Future of Medicare 

with Ken Thorpe, a bipartisan effort to guide reforms that are sustainable for Medicare. We have put out some ‘‘guard rails,’’ do’s and 

don’ts on Medicare reform, which I can provide to you and would 

be happy to. 

17 

One of the things going forward is, we need more options that 

provide the integrated care. We are concerned about the cuts to 

Medicare Advantage because it is an integrated platform. You may 

or may not like that. I do not want to get into a debate over Medicare Advantage, per se, but having less, not more, is a mistake. 

You need patient buy-in. You cannot simply litter the landscape 

with smart health innovations and expect the world to change. Patients have to buy in both personally and financially to get—— 

Senator WYDEN. Can I interrupt you on that point? Because Senator Portman is here, and he and I have introduced the first bill 

that essentially would reward those who stop smoking, lower their 

blood pressure, lower their cholesterol. It is really based on the 

work that was done at the Cleveland Clinic and Oregon Health 

Sciences Center. I gather that you feel that those kinds of behavioral changes, it is time that that would be part of the program. 

Dr. HOLTZ-EAKIN. Yes. I do not know the specifics. I would be 

happy to look at it. 

Senator WYDEN. Mr. Greenstein, are you all right with that? Because I think, and Senator Baucus might remember, that in the Affordable Care Act we began to start to integrate those preventive 

incentives. Senator Carper did some particularly good work on 

that, as I recall, for those under 65, but we have not begun to build 

that in in terms of those over 65. I think Oregon Health Sciences 

and the Cleveland Clinic kind of provide that model. I think it is 

time for those kind of behavioral changes, and I appreciate both of 

you being interested. 

My time is up, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Grassley? 

Senator GRASSLEY. I have a very general question at the end of 

a statement and some charts I am going to put up here. Obviously 

America faces no greater threat to our growth and prosperity than 

out-of-control national debt, $16 trillion today. As we move forward, we have to discuss spending. So I am trying to promote a 

thoughtful conversation that focuses upon where our Federal 

spending most calls for containment. 

So, pay attention to the chart. This CBO chart details noninterest spending as a percentage of GDP. We already know the 

significant role health care spending plays in our budget. Over the 

next decade, the Federal Government will spend over $7 trillion on 

Medicare and $4.5 trillion on Medicaid. Together, these two programs account for one-fourth of the entire Federal Government 

spending over the next 10 years. 

But look very closely at the even longer-term projections of our 

spending. According to CBO, the middle graph—pay attention—Social Security as a percentage of GDP will remain relatively stable 

over the next 25 years. The same for non-interest spending, the 

bottom graph. As a percentage of GDP, it will also remain relatively stable. 

Now take a look at the top graph. Over the next 25 years, spending on health care entitlements will basically double as a percentage of GDP. So, unless we take a serious look at health care spending, we are not genuinely acting to reduce our country’s debt. Now, 

25 years may today seem like a long time, but we know, as we 

18 

have looked at these problems over a couple decades, it is not a 

long time. We need to be talking about health care spending right 

now. 

My question, and either or both can respond, is simple: do you 

think that we must take steps now to reduce the growth of our 

health care entitlements as a percentage of GDP over the next 25 

years? 

Dr. HOLTZ-EAKIN. Absolutely. There is no question that, for a 

long time, the long-term budget outlook has been driven by the 

mandatory spending, health spending in particular. You are not 

going to grow your way out of it. It has been clear for a long time 

you cannot tax your way out of it. This is about controlling spending. 

Senator GRASSLEY. Mr. Greenstein? 

Mr. GREENSTEIN. I think the key issue here is—and I think for 

years a number of experts from across the political spectrum have 

agreed on the following—over time we are not going to be able to 

sustain a rate of growth in Medicare and Medicaid costs per beneficiary that is substantially lower than the rate of growth of health 

care costs per beneficiary system-wide and in the private sector. 

They are all linked. Our big challenge is slowing the rate of growth 

of health care costs system-wide. 

Now, Medicare is such a big player that it can help play a leading role. We have seen this in the past. As we learn ways to bring 

down costs to introduce efficiencies into Medicare, a lot of the private insurers pick it up because they want the efficiencies as well. 

There are limits at the present time, I believe, to how much we 

can enact in Medicare now because of our lack of knowledge of 

some of the system-wide issues that we are learning about, and because Medicare is actually not a wildly generous benefit package. 

If you look at seniors between one and two times the poverty 

line, $11,500 and $23,000 a year, they now spend 23 percent of 

their budgets, on average, on out-of-pocket health costs, even 

though they have Medicare. So, we have some constraints there. 

Medicaid, I think, is a different issue. Medicaid pays providers 

very low rates. Medicaid, per beneficiary, costs 20 to 25 percent 

less than private insurance for the same beneficiaries. These are 

poor people. We cannot ask them to pay large amounts. I think in 

Medicaid our savings really are dependent on slowing the rate of 

growth system-wide, and I would not look for going in right now 

and making big cuts in Medicaid. 

In Medicare, I think we should do those things that make sense 

now and really aggressively pursue all these demonstrations and 

private sector reforms and be prepared as we learn more to come 

back and continually make, over a number of years, a series of 

growing changes in Medicare. 

Senator GRASSLEY. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. I compliment you on your 

good staff over there. You were speaking with them. You had great 

staff work over there helping you out. 

Senator GRASSLEY. Yes, I know. That is really nice of you. 

The CHAIRMAN. Senator Stabenow? 

19 

Senator STABENOW. Thank you, Mr. Chairman. I was going to 

say the same thing. Next time you need a stick or something so you 

can do a more accurate job. 

But welcome to both of you. Thank you very much for your input. 

If I could talk just—I would like to continue the discussion on 

health care costs, because clearly this is a challenge for us. We 

have tackled it as we have looked at health reform. We have actually begun to see health care costs slow, which is good. There is so 

much more that needs to be done. 

We have seen Medicare Advantage premiums go down about 7 

percent last year based on not providing over-payments, and we 

have seen a number of things begin to happen, but there is much, 

much more to do. The challenge in health care, as we all know, is 

that it is not optional. 

I mean, as human beings, people are going to get sick. We cannot 

control when or where. The question is, how do we get care? What 

kind of care? How do we get care? How do we not use emergency 

rooms inappropriately but get preventative care? 

So I would ask, Mr. Greenstein, specifically, there have been proposals that would cap spending through block-grants or other kinds 

of caps that really just shift costs from the Federal Government to 

States, ultimately to families. 

Then we have what we are beginning, which is to provide expanded help under Medicaid which gets people out of emergency 

rooms and into a doctor’s office. In Michigan, our Governor has 

supported expanding Medicaid because the recent estimates in 

Michigan show that we will save about $351 million over 10 years 

by getting people out of emergency rooms. All of us then will not 

be paying for it through higher rates. 

Could you talk a little bit more about the differences in how we 

approach Medicaid and the impact of proposals to block-grant or 

cap Medicaid, what it would do to hospitals, communities, ultimately families? 

Mr. GREENSTEIN. Yes. In Medicaid, as I noted a minute ago, the 

studies show that, on average, it costs already about 20 percent 

less per beneficiary relative to private insurance for adult, nonelderly, disabled beneficiaries, and about 27 percent less for children, primarily because Medicaid pays providers significantly lower 

rates. 

So, if there is a big cost shift to States and they do not have 

enough funding, their choices are really, to cut the provider rates 

even more, limit eligibility, which would result in more people 

being uninsured, or have a benefit package that makes people 

under-insured rather than fully insured. 

People talk about managed care. It should be noted that all but 

a handful of States already contract with private managed care 

companies to run their Medicaid programs for people other than 

the elderly and disabled. We hope that, over the next number of 

years, as a result of a series of demonstration projects now starting, State-run, federally supported—these are demonstration 

projects to try to find ways to improve the quality of care while 

saving money for the dual-eligibles, the people who get both, the 

elderly and disabled on both Medicare and Medicaid—if those piVerDate Nov 24 2008 16:57 Apr 24, 2014 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 R:\DOCS\87610.000 TIMD
20 

lots find successful ways to do that, then that ought to be an avenue for savings. 

But we have to follow the Hippocratic Oath and do no harm. We 

do not know yet how to do it. In fact, when the super committee 

asked CBO about various proposals on the dual-eligibles, CBO’s response was, it would not score them as saving money because we 

do not know yet how to do it to save money. But that is the kind 

of approach we should pursue. 

Senator STABENOW. That is the kind of thing we should be doing. 

Mr. GREENSTEIN. Rather than just arbitrarily limiting the money 

for States and then, if there is a flu epidemic, if there is a new disease—hopefully there will not be—like HIV–AIDS, or maybe there 

is a breakthrough on Alzheimer’s or heart disease, and there is a 

new set of drugs that at least initially has higher costs but saves 

lives, you do not want to be in a situation where we are denying 

those to poor people, but higher-income people get them. 

Senator STABENOW. Right. 

Mr. GREENSTEIN. We do not want to be a country where health 

care is based on your income. 

Senator STABENOW. Very quickly, if I might just ask, when we 

look at the $2.5 trillion that has already been put into place in deficit reduction and, if sequester is going to take effect, how much of 

the total deficit reduction since 2011 will be in cuts to services to 

middle-class families as opposed to asking those at the top to do 

a little bit more? 

The CHAIRMAN. If you could keep your answer very short. 

Senator STABENOW. Yes. 

The CHAIRMAN. Time is over here. 

Senator STABENOW. Yes. 

Mr. GREENSTEIN. Well, simply on a spending versus tax basis, 

over the period from 2013 to—we are now moving into another 10- 

year period—we have about $1.5 trillion in cuts in discretionary 

programs, about $600 billion in revenues. If the sequestration goes 

into effect, we will have a total of about $2.5 trillion in spending 

cuts, not counting interest savings, to the $600 billion in revenues. 

Obviously there will be impacts on many people. Spending programs on the spending side of the budget primarily benefit middleand low-income people, who are the bulk of the population. Spending programs on the tax side of the budget—tax entitlements, tax 

expenditures, use what term you will—the data show, heavily benefit people in the upper part of the income scale. 

The CHAIRMAN. Thank you very much. 

Senator Thune? 

Senator THUNE. Thank you, Mr. Chairman. 

The CHAIRMAN. I might say, Mr. Greenstein, your point about 

dual-eligibles is one this committee feels very strongly about. Melanie Bella, who is heading the program on the pilots, has been before this committee a couple of times, and we are trying to focus 

very much and help her out with those pilots. Thank you. 

Senator THUNE. Thank you, Mr. Chairman. 

I would like to get Dr. Holtz-Eakin’s reaction—maybe this has 

been discussed a little bit already—to Mr. Greenstein’s statement 

in his opening statement about gross debt versus publicly held debt 

and the impact correlation between economic growth and indebtedVerDate Nov 24 2008 16:57 Apr 24, 2014 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 R:\DOCS\87610.000 TIMD
21 

ness. Debt-to-GDP is the standard that is used. I have read the 

book ‘‘This Time Is Different.’’ Reinhart and Rogoff make that correlation based upon a great deal of research of modern economies, 

primarily in Europe, as well as more ancient economies as well. 

Mr. Greenstein drew a distinction between those and that the 

European example is different because they characterize their debt 

differently than we do in this country. It seems, to me at least, either way we have a big debt problem which I believe is impacting 

economic growth in this country. But would you care to just react 

to that, your thoughts with regard to the comparison there? 

Dr. HOLTZ-EAKIN. Point number one, we have a lot of debt. The 

CBO outlook, which is a forward-looking document, says we are 

going to have around $7 trillion in deficit over the next 10 years. 

So, we are going to have more. So that is point one. 

Point number two. It is not rocket science that this harms the 

economy. One option is, we do nothing and we run straight into 

what Erskine Bowles has characterized as the most predictable crisis in history. That cannot be a pro-growth policy to say we are 

going to run into a financial crisis. Or we could just raise taxes, 

as I did in that example for Senator Hatch. 

If a businessman or anybody who is looking at a country that is 

going to double its tax rates over the next 10 years as its strategy 

for dealing with and avoiding a financial crisis, they are not going 

to expand, not going to hire, not going to locate in that economy. 

It is simply not sensible tax policy. 

That leaves you with the reality that you have to control spending, and that is a reality that has been very hard for people to 

come to terms with. We have raised taxes, cut taxes, and reformed 

taxes in this country. We have never cut spending. It is visible this 

week how hard it is to cut even $85 billion in budget authority, 

which will turn into $44 billion in actual outlay reductions. This is 

trivial stuff compared to the problems we have. 

In terms of gross debt versus debt in the hands of the public, I 

like debt in the hands of the public. I understand the economics of 

it. It is what I would choose. But when I talked with Ken Rogoff 

about his research and how I should think about it, he emphasized 

the only way to be correct in doing the comparisons is to use the 

gross debt measure. 

The gross debt measure says we are over the danger line where 

you pay the price of slower growth and a higher probability of financial crisis. That is where we are, and the outlook says that is 

where we stay every year for 10 years. 

I think it is a disservice to all the people whom these programs 

serve—the poor, the elderly, those who have health problems—to 

put them in an economy that is chronically growing too slowly and 

buffeted by the potential for crisis. That does not serve them well, 

so we need to actually do better on that front. Being sensible about 

entitlement reform is a way to do that. 

Senator THUNE. Now, in coming back in on this correlation between debt and growth, this is the weakest economic recovery we 

have seen since World War II. We are growing roughly 2 percent, 

a little under. There has been some research done by the Republican staff of the Joint Economic Committee which suggests that, 

if you had economic growth that was equal to the average economic 

22 

growth of the past 60 years since the beginning of this recovery, 

that you would have cut last year’s deficit in half. 

I guess I would like to get your reaction, both of you, to the idea 

that long-term economic growth rather than short-term stimulus 

measures ought to be our focus if we are really interested in improving our fiscal condition. Do you agree that, if we lowered rates 

across the board and, in tax reform, broadened the tax base, it 

would be an effective way to increase economic efficiency in longterm growth? First, long-term growth versus short-term stimulus; 

second, tax reform as a way to get long-term growth. 

Dr. HOLTZ-EAKIN. Yes. Absolutely. There is a place for countercyclical policy. At the end of 2008, beginning of 2009, we were falling like a rock. I understand why it is necessary to step in. This 

recovery dates from June 2009. We are now closing in on the fourth 

year of poor economic growth. This is not a cyclical problem, this 

is a bad long-term trend growth problem. We need policies that improve the long-term trend growth, and that should be the focus, 

there is no doubt about it. 

Tax reform is central to that. There is no doubt about the benefits of having a more efficient tax code so that we do not waste 

scarce resources on unproductive investments, on uncompetitive 

tax codes, that harm our most efficient global companies. There is 

a great place for that. 

I think one of the lessons of the Bowles-Simpson Commission is, 

if you want a route to higher revenue, do not try to use a broken 

tax code; do the tax reform. So that should be central. This committee, I know, has done a lot of work on that. I think that is very 

important. 

Mr. GREENSTEIN. Let me quickly note, I think the key finding of 

Reinhart and Rogoff is that financial crises, recessions resulting 

from financial crises, are deeper and have much slower, longer recoveries. This is the only recession we have had in decades that 

comes out of a big financial crisis. That is the key reason why the 

growth is so slow. 

Second, yes, debt is a long-term problem. The idea that the current debt is reducing growth right now to me does not really compute, because the way debt slows growth over the long term is by 

competing for capital and pushing up interest rates, but interest 

rates—real interest rates—are close to zero now, so we are not seeing that effect right now. 

I think the policy right now should be what Peter Orszag has referred to as the barbell. We actually should be doing more to stimulate the economy right now, like infrastructure, on a purely temporary basis, coupled with enacting deficit reduction that grows as 

the economy recovers and has the biggest impacts in future decades. 

The CHAIRMAN. Thank you very much. I appreciate that. Thank 

you, Mr. Greenstein. 

Senator Cardin? 

Senator CARDIN. Thank you, Mr. Chairman. 

Mr. Greenstein, I am going to follow up on the point that you 

were just talking about, that we have to do this deficit reduction 

plan in a way sensitive to economic growth. I was recently at the 

National Institutes of Health, talking to our workforce there. It is 

23 

not just the direct impact of these cuts on the Federal workforce 

which has an impact on our economy—there is no question about 

that—but it is the related impact it has on those companies that 

depend on the basic research at NIH and the grants that are given, 

et cetera, and the impact of these cuts to our economy is very clear. 

We need more people working. When we cut those types of programs, we are just adding to the unemployed and adding to the difficulty of our economic recovery. 

I also want to emphasize a point, Mr. Chairman, that you made. 

I met with small business leaders yesterday, and they said the 

same thing that your constituents in Montana told you, and that 

is: make a decision here. Get some predictability here. We would 

rather have a policy that we do not like but we know it is there 

than no policy at all. These short-term extensions are not helping 

us, and we need to deal with a game plan that we all agree on and 

implement for the future of our economy. I look forward to that 

type of a discussion. 

But I think, Mr. Greenstein, the point that you made that we 

really need to look at the mandatory side—yes, the mandatory side 

includes the health care issues, and that has certainly been dominant. But it also includes the tax code and tax expenditures. I 

think you raise a very good point. 

The people who are getting the benefits—you pointed out child 

care, but we could use housing, we could use health care, we could 

use so many different energy areas, where there are programs that 

people qualify for and are entitled to without any cap that we really have not evaluated. 

I think of the work that was done before I got to Congress in the 

1986 tax reform. That was an effort to try to evaluate the efficiencies of our tax code, and progress was made. But since 1986, 

there have been a lot of individual tax provisions that have been 

put in the tax code where their efficiency really is questioned. We 

do not have a process to evaluate the efficiencies of those tax expenditures. So, yes, we call it tax reform. 

Can we not look at tax reform and, through that, help reduce the 

deficit through reducing the amount of tax expenditures and, I 

would say, encouraging economic growth? But do you have any advice for us as to how we can evaluate the programs in our tax expenditures versus the efficiency factors that we may have in other 

parts of the Federal spending code? Is there some material out 

there that could help us in trying to evaluate the efficiencies on the 

tax side? 

Mr. GREENSTEIN. Well, of course this is compounded by the difficulty that some of the spending programs that are in the same 

area, and some of the tax expenditures, are under different committees. Nevertheless, given the central role of the Finance Committee, I do think it is something this committee could try to look 

at. It is interesting. I am unfortunately going to have to leave here 

in a few minutes, because I am moderating a Hamilton Project 

panel. 

The panel I am moderating is a series of papers of people from 

both Republican and Democratic backgrounds, top analysts, looking 

at some specific tax expenditures and their economic efficiencies 

and inefficiencies and better ways to do it to both save money and 

24 

increase efficiency, and make the tax incentives more effective at 

the same time. It is kind of analogous to what we talk about in 

health care. How do we deliver better quality for less cost? 

I think these areas, in the area of housing, in the area of retirement savings, in the area of health expenditures, all warrant looking at. I also think there are a number of individual provisions that 

have crept in over the years that usually go below the radar. 

Yes, there has been a lot of attention in recent years, say, to carried interest, but you also want to look at things like the like-kind 

exchange rules, valuation discounts, all of these things that tax attorneys and accountants have come up with that arguably reduce 

efficiency, lose a lot of money; they would not be affected by some 

kind of global limitation on deductions. They are really different. 

They are in their own area, but they really warrant looking at. 

The last thing I would note is, when CBO and the Joint Tax 

Committee, several years ago, looked at the economic impacts of 

things like the tax cuts enacted in 2001, their assessment was that, 

while the rate cuts would improve growth, over the long run they 

were more likely to reduce growth than increase it because of the 

negative impact on the deficit. 

My point being, yes, all else being equal, a broader base and a 

lower rate is positive for the economy. But the single-biggest 

threats to long-term economic growth are the deficit and debt 

issues we are talking about. On both the spending and the tax side, 

the single best thing we can do for the economy is find sensible, 

efficient ways to make changes that contribute to deficit reduction, 

both on the revenue side and on the spending side. 

Senator CARDIN. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Bennet? 

Senator BENNET. Thank you, Mr. Chairman. Thank you for holding this important hearing, and thank you for your testimony. 

The columnist David Brooks has a piece today in which he observes that ‘‘the future has no lobby.’’ The longer I am here, the 

more I think that is true. When I hear these numbers—$2.5 trillion 

in spending cuts on the discretionary side, the $600 billion in revenue on the revenue side—none of these pieces are being done together, all of them being done in these short-term deals, none of 

them addressing the main issue. It makes me think he is right 

about that. 

If we do not do something about this, we are going to drastically 

fail to invest in the future of this country. I detected a difference 

in opinion at the beginning of the conversation about how urgent 

the problem is. I do not know the answer to that. But what I would 

suggest to both of you and to people who have been working, people 

of good will, on these issues, is, whether you think it is urgent or 

not, the longer we delay this, the harder it is going to be to solve. 

We have to find a way to come together. There are enough moving parts here for us to actually do this in a meaningful way, to 

send the capital markets and our competitors around the world a 

message that we are serious about this. We have not done that. 

This Congress has not done that. 

I would encourage both of you to think about how we could work 

together on this with a sense of urgency, simply because matters 

25 

will only get worse if we do not do it. I wonder if you have a reaction to that before I have a health care question. 

Dr. HOLTZ-EAKIN. I am beside myself with urgency. I think this 

is a big problem. I think it is a tremendous disservice to the next 

generation. I mean, we can fight about the fairness of raising one 

person’s taxes, cutting somebody’s spending program, whatever it 

may be. All of them pale in comparison to the fundamental immorality of what we are doing to the next generation. That is point 

one. 

Number two, the way the budget is structured makes that worse. 

We are letting the legacy programs of the past, the mandatory 

spending programs, crowd out our ability to do discretionary spending, which is all about the future. So we are building a trap to really do a disservice to the next generation. 

The third, and the reason I think it is so urgent, is, with all due 

respect, nothing has been done yet. When people talk about $1.2 trillion in discretionary spending 

cuts, those are basically the caps in the out-years which are promises—‘‘honest,’’ ‘‘really’’—that like never before we are not going to 

spit the bit and we are really going to spend less. It has not happened. Nothing has happened on the spending side. So, yes, I think 

it is really urgent, because right now this town is in a frenzy, and 

there is $85 billion, and it is not even—— 

Senator BENNET. Well, you do not have to say ‘‘with all due respect’’ to me. I think what we have engaged in is the lowest common denominator partisan politics. It is putting our children in an 

incredibly precarious position. 

Dr. HOLTZ-EAKIN. Yes. 

Mr. GREENSTEIN. I agree on the urgency front. I think we need 

to distinguish a few things. Sometimes people think urgency means 

we need to start putting the cuts into effect this moment, even 

though the unemployment rate is close to 8 percent. I know that 

is not what you mean or what I mean. Urgent, in terms of reaching 

a deal and enacting it now, but designing it so the cuts phase in 

as the economy recovers. 

I think an argument for going sooner rather than later is—for example, we saw in the presidential campaign, neither party wanted 

to talk a lot about changes that would affect current beneficiaries 

in Social Security and Medicare. 

When the 1983 Greenspan Commission legislation was enacted, 

it raised the Social Security retirement age starting in 2000, 17 

years down the road. So anything we enact in some programs is 

probably not going to start for a while and phase in slowly, which 

adds to your point of, do it sooner rather than later. 

The last point, though, is, I actually think it is counterproductive 

when people say, well, within 2 years the financial markets will 

implode. Then, when they do not, that leads people who think it 

is not urgent to say, see? So we are seeing a lot of quotes now of 

Simpson and Bowles having said 2 years ago, we only have 2 years. 

I think it was a mistake for Erskine and Alan to say that. You do 

not need to say that to say we have a mid-term and a long-term 

problem and we should act now. 

Senator BENNET. That is my point. Actually, I do think if we 

were able, tomorrow, to say we have reached a broad-based biparVerDate Nov 24 2008 16:57 Apr 24, 2014 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 R:\DOCS\87610.000 TIMD
26 

tisan agreement that is balanced on the revenue side and on the 

spending side, that we would be shocked at how fast the $2 trillion 

that is sitting on balance sheets in this country would actually be 

invested in this country’s future. 

But my point is, you do not need to agree with that to agree that 

acting now is going to be much easier than acting later, and certainly much easier than acting on the back end of an economic crisis, if that is what we have. 

Dr. HOLTZ-EAKIN. If I could say, briefly: the reason why entitlement reform is so important is, think of Social Security. It is a system that merits getting fixed for the reasons that I mentioned at 

the outset. If we were to fix it, it would have no near-term austerity effects whatsoever. It would take 10 years for anything to 

show up. It would send a signal to international capital markets 

that we can take on an important part of our spending problem, 

doing entitlement reform, some things that have been traditionally 

the third rail of politics. Why not do that? 

The CHAIRMAN. Senator Roberts? 

Senator BENNET. Thank you. 

Senator ROBERTS. Well, thank you, Mr. Chairman. 

I see here that the CBO is estimating an $845-billion budget deficit, and I would add, only if current law is not changed. Now, the 

President asked for 43 new programs in his State of the Union address. That current law base line does not include the tax extenders passed by this committee, the doc fix, likely other spending. 

You could have another Sandy. We certainly hope that is not the 

case, but we will have forest fires, we will have a drought in Montana and Kansas. I do not know about the gentleman from Utah. 

The CHAIRMAN. Excuse me. I understand Mr. Greenstein has to 

leave now to chair that panel. Thank you very much, Mr. Greenstein. You have a few minutes? 

Mr. GREENSTEIN. I have a few more minutes. 

The CHAIRMAN. You can answer Senator Roberts’ question. 

Senator ROBERTS. Well, I have not asked a question yet, that is 

the problem. [Laughter.] 

You have SSI climbing to 1 out of 15 Americans, you have food 

stamps doing the same thing. I do not see where the $845 billion 

is an accurate number, if current law is not changed, and it is 

going to be changed. This assumes also we are going to have the 

sequester. We just had some very good remarks by my distinguished predecessor. 

I hope we can get that done, but the chances of that happening 

are—I do not know. We are talking about $85 billion, ‘‘b,’’ that is 

bravo. You are indicating that the first step we ought to take is 

$1.5 trillion, ‘‘t,’’ for tough. I do not know if we are going to get that 

done. 

I also wonder about the CBO prediction that the Federal tax revenue will increase by 25 percent. This is based on the prediction 

for economic growth. Well now, if you have the Affordable Care Act 

out there and small businesses trying to figure out how they can 

work around it, businesses with 50 employees, so having people 

going down to 48, changing employees from business to business, 

and the part-time employees and a lot of people who have just 

given up in regards to looking for work, plus the official 7.9 percent 

27 

unemployment, you are looking at 12, 13, 14 percent in regards to 

real unemployment. 

Then, if we do not reach an accord on the sequester or even the 

$1.5 trillion, which I wish we could do, or 2.5—I do not know. I just 

think that these estimates—that is a glass half-full. I am sort of 

a glass half-empty guy. I do not know if you want to comment on 

that, either one of you. 

Mr. GREENSTEIN. Well, my only comment is, on the one hand, 

when you talk about all these numbers, the $85 billion, as Doug 

has noted, is a small percentage. 

It is a small percentage of the total. On the other hand, the CBO 

estimate is that the sequestration, by the 4th quarter of this year, 

will take six-tenths of a point off GDP and result in 750,000 fewer 

jobs than we would otherwise have. 

Senator ROBERTS. Well, I know that. Listen, I serve on a lot of 

committees, and everybody else here does. So the people who understand that who serve on the committee—and I am semi-senior, 

so I am somebody—they come in, and everybody has pressed the 

hot-button. 

The commandant of the Marine Corps. I am the senior Marine 

in the Congress. My God, my God, look what is happening to the 

Marine Corps! That was a pretty dumb thing we did. I think it was 

done on purpose to really single out the military, but we ought to 

do it when every agency comes in and then makes their own discretionary cuts so that this loss that you are talking about would not 

occur, or at least it would be less devastating. 

So, everybody is talking about that. My Lord, we had the Secretary of Agriculture saying we were going to cut off all the meat 

inspectors, shut down the packing plants. Every cowboy in Kansas 

has been in touch with me saying, ‘‘What in the hell am I going 

to do with my cow herd?’’ They have already been devastated by 

a drought. 

So I do not know what that answer is, but rest assured I know 

that all the hot-buttons have been pushed. Let me push mine. I 

said in regards to the nomination of Mr. Lew, who is already approved, the sub-regulatory guidance documents—bulletins, guidances, posting on the website, FAQs, so on and so forth—everything that goes out from the Federal Government, and more particularly I am talking about Medicare, is in regard to the subregulatory guidance. Who knows about these things? 

My question to you, since we have people leaving and not paying 

any attention, basically, is there some way you can estimate regulatory costs? I will promise the chairman I will not go into my regulatory rant, but there has to be some cost to all the regulations, because what we are doing in terms of Medicare, over 50 percent of 

the doctors are not serving Medicare patients, and our hospitals, 

our community hospitals, are hanging on by a thread. 

The rural health care delivery system is threatened. Every provider I know out there is hanging on by a thread, very worried 

about the fact that they are guilty as opposed to innocent, being 

fined, so on and so forth. There has to be a cost to the regulatory 

process. That affects every manufacturer, every business, every 

segment of our economy. 

28 

Do you have any comment on how on earth we would measure 

that? 

Dr. HOLTZ-EAKIN. Yes. At the American Action Forum that I run, 

we have a section devoted to regulatory issues, and we total up the 

regulatory costs. They are $500 billion in new regulatory costs 

since 2008. We keep track of the Affordable Care Act, we keep 

track of Dodd-Frank, we keep track agency by agency, the EPA. I 

could not do justice to our efforts to measure regulatory costs and 

look at impacts in the economy in this brief time, but I would be 

happy to sit down with you, and I would be happy to bring those 

numbers to your attention. 

Senator ROBERTS. Thank you. 

The CHAIRMAN. Thank you, Senator. 

Senator Portman? 

Senator PORTMAN. Thank you, Mr. Chairman. Thank you and 

Senator Hatch for having this hearing. It has been fascinating. I 

have so many questions and so little time. I was going to give Bob 

the chance to respond to some of these. But Doug, it is great to 

have you here, and I appreciate what you said. 

Senator Roberts just talked about growth, really. Senator Bennet 

talked about the $2 trillion on the balance sheets. I think one thing 

I was going to ask Bob about is, I think that is not part of the 

Rogoff and Reinhart study in a sense, because I think we have an 

unusual situation now in this country. 

I spoke to the CEO of a major company in the last week and a 

business round table of small business folks, and they all said the 

same thing, which is, they are not taking that capital off the sidelines and investing it. Even though the earnings are good, the employment is bad. A lot of it does relate to the uncertainty over the 

debt and deficit. 

You talked about tax reform. I appreciate Bob’s support of that, 

and the chairman and ranking member have both been way out 

front on pro-growth tax reform that broadens the base and lowers 

the rates. There is $1.8 trillion locked up overseas alone. So, that 

is another huge opportunity for us to give the economy a shot in 

the arm. 

I have a question for you that relates to the CBO report you 

talked about, and it was sobering. I think that is a good way to put 

it. A lot of it is because of the low economic growth because of the 

debt and deficit. But in a sense, as I look at it, I think what they 

are saying is that entitlement costs and the resulting higher interest on the debt accounts for 100 percent of our rising long-term 

deficits. 

So, in other words, discretionary spending as a percent of GDP 

actually goes down, and tax revenue actually goes up from the historic level, about 18 percent, to over 19 percent. So you could say, 

I think—tell me if I am wrong—that 100 percent of our rising longterm debt is due to entitlement costs, to three entitlement programs—very important but unsustainable—and interest on the 

debt. Is that accurate? 

Dr. HOLTZ-EAKIN. Yes. It is the fundamental problem of the Federal budget. 

Senator PORTMAN. And let me ask you something else with regard to what is going to happen in the future. As I look at that 

29 

report, discretionary spending, which is about 27 percent of the 

budget 10 years from now, goes up about 10 percent in nominal 

dollars. The entitlements, as I look at it, go up about 100 percent. 

They go from $1.5 trillion to $2.9 trillion. 

So, instead of up 10 percent in the discretionary entitlements, 

Medicare, Medicaid, and Social Security alone go up 100 percent. 

They become almost 50 percent of the budget. Other entitlements 

go up about 39 percent. Interest goes up, by the way, 284 percent. 

The question I was going to ask Bob was, is he taking into account those interest payments which are going to be so substantial, 

that go up 284 percent, along with this entitlement increase? 

Again, it is 100 percent of the problem. 

Dr. HOLTZ-EAKIN. It is not quite fair, since Bob is not here. But 

I mean, we have looked pretty carefully at strategies like $1.5 trillion. I understand Bob does not want to touch a lot of things. We 

have had this discussion, and I get it. 

But waiting is dangerous, and not touching things is dangerous, 

in part because that kind of an estimate is a hair-trigger estimate 

that needs the growth. If we do not get growth, we fall way short, 

and the debt does not stabilize. It relies on low interest rates. 

If we get anything like a more rapid normalization, or God forbid 

an above-average normalization of borrowing costs, again, those 

stabilization trajectories fall apart quickly. So I think the prudent 

thing to do is to be more aggressive, and that is one of the reasons 

I went with the strategy I did. 

Senator PORTMAN. Doug, let me ask you quickly, if I could, about 

Medicare Advantage. Over a third of the seniors in Ohio rely on it. 

The administration has come out with some new rulemakings with 

regard to reimbursement in Medicare Advantage. Talk to us a little 

about that. Is this going to push more folks into Medicare fee-forservice as you talked about earlier and the problems associated 

with that? Richard Foster, a recently retired actuary, has talked 

about this. What are your thoughts on it? What should we be doing 

on Medicare Advantage? 

Dr. HOLTZ-EAKIN. Well, number one, I think an 8-percent yearover-year cut is a sharp cut. It will unambiguously reduce plan offerings in Medicare Advantage. I do not see any way around that. 

That means people currently in Medicare Advantage will have to 

leave their provider network. It is never good to change providers, 

and that often interrupts episodes of care in a detrimental way. It 

will move people from an integrated plan to fee-for-service, which 

is the opposite of what we need to be doing as a broader health 

care strategy. 

It is typical of what has been a strategy of trying to impose provider cuts—whether they are MA plans, hospitals, doctors, or whatever it might be—as a strategy for controlling the budget costs that 

ultimately does nothing to improve the quality which we need and 

backfires in terms of really getting the spending problem under 

control, because fee-for-service is worse than almost every other alternative. 

Senator PORTMAN. I asked about Medicare Advantage and, generally, about Part D as well, because I think that, per the chairman’s good question about health care, it is a critical issue. If it 

is not solved, we cannot solve this bigger problem. In some reVerDate Nov 24 2008 16:57 Apr 24, 2014 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 R:\DOCS\87610.000 TIMD
30 

spects, right before us there is an example, which is Part D and 

the cost estimates which were in the $600-plus billion range from 

Richard Foster and other actuaries, $400-plus billion from CBO, 

that ended up coming in below that. 

Dr. HOLTZ-EAKIN. And mine was? 

Senator PORTMAN. Well, I am not sure. 

Dr. HOLTZ-EAKIN. Three hundred ninety-five billion dollars, 

roughly. 

Senator PORTMAN. Yes. I am not sure if you were responsible for 

that estimate. But my point is, we have an opportunity here to look 

at a competitive model where you have the private sector working, 

competing for the business of seniors. Do you think that is something we should be looking to for the future? 

Dr. HOLTZ-EAKIN. I think Part D is our most successful entitlement program. I remember working with the chairman a lot on it. 

We should try to make all of our entitlements look more like Part 

D and not the reverse, that is for sure. 

Senator PORTMAN. All right. Thank you, Doug. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Carper? 

Senator CARPER. Thanks, Mr. Chairman. 

Dr. Holtz-Eakin, how are you doing? Do you think if your parents 

had known you were going to be testifying before all these congressional committees for all these years, that they would still have hyphenated your name and made it so hard for guys like me to pronounce? 

Dr. HOLTZ-EAKIN. You have opened an enormous can of worms, 

because they did not, and they will never forgive me because I did. 

[Laughter.] 

Senator CARPER. Well, we are glad you are here. 

Dr. HOLTZ-EAKIN. Thank you. 

Senator CARPER. I have been urging our chairman and ranking 

member to do what they have done so many times in the past, and 

that is to provide real leadership for us on this committee, and for 

this committee to provide real leadership for the Senate and for the 

Congress and for the country, to figure out how we get better 

health care results for less money. We have been talking about that 

today. I just spoke about that on the floor, and spoke on behalf of 

the nomination of Chuck Hagel a few minutes ago. 

One of the things I said on the floor was, we spend more money 

for defense as a Nation than I think the next five or six, maybe 

seven nations combined. If we cannot find ways to provide for our 

defense and maybe at the same time save some money, shame on 

us. We also spend, as you know, way more money for health care 

than any other advanced nation in the world. I think the next closest nation is Norway, and they spend 52 percent or so less than 

we do, and they get better results, and they cover everybody. 

You have given us a lot of good advice in the past. Where do you 

think the sweet spot lies for Medicare reform that is actually going 

to be likely to give us better results for less money? If you will, just 

think of a bunch of concentric circles, where they overlap. The 

edges where they overlap are where Democrats and Republicans 

can find agreement and actually pass something that does provide 

31 

better health care results for less money. You have spoken to some 

of it, but just give us a couple of highlights and headlines, please. 

Dr. HOLTZ-EAKIN. Just as a brief aside, on the defense front, one 

of the things that is poorly appreciated is that a big part of the defense budget is a health care problem and a pension problem. It 

has all the same problems the budget as a whole does, but smaller. 

I think reform of the defense health programs is just as important 

in many cases as Medicare and often gets forgotten. 

Senator CARPER. That is a good point. Thank you. 

Dr. HOLTZ-EAKIN. That is really, really important. 

On Medicare, Medicare’s problem is that it has Part A that pays 

hospitals, B pays some doctors, C pays some insurance companies, 

D pays drug companies. There is no beneficiary to be found in 

there anywhere. It is not coordinated, it is not integrated. It rewards volume, and you have to move away from that. 

So there have been some suggestions which are sensible first 

steps on integrating the Part A and B co-pays and deductibles to 

turn them into a more sensible insurance policy, such as reforms 

of Medigap so that we do not have seniors completely insulated 

from the health care decisions that are made either by them or on 

their behalf. 

So, these are not rocket science. These are sensible first steps. 

There is now, I think, a bipartisan recognition that practice patterns driven by legal liabilities ought to be taken out of the system 

so we have practice patterns driven by medical decisions, and a 

sensible tort reform would be a good thing that has not yet been 

accomplished. 

So not everything has to be radical and new. I think there are 

some very sensible steps that can be taken and should be taken. 

I guess my biggest concern about the discussions that go on often 

in health care is that Republicans and Democrats agree more about 

delivery system reform than anything else. They agree on the diagnosis of lack of coordination, lack of prevention, too much acute 

care, not enough chronic disease. You go through the list, they are 

there. 

Then they say, let us go study it and have a demonstration. My 

personal view is that the road to health care failure is paved with 

demonstrations. We have had demonstrations and pilots for decades in Medicare, and they do not turn into the program itself. We 

need to be more aggressive about making actual changes in the 

program and not going to do more demonstrations, because the 

baby boom is now retiring, the debt is very high. We have given 

up our cushion and our lead time, and we have to move more 

quickly. 

Senator CARPER. All right. 

Among the drivers in health care that have been just raised with 

me, literally in the last week, with folks whom I met with mostly 

in Delaware, number one is obesity. We are eating ourselves to 

death and at the same time just choking our Medicare program 

and our budget. 

Number two is care for folks who have dementia. I used to think, 

before I became Governor—actually, before I became a Congressman, I used to think that we spent most of our money in Medicaid 

for poor families, mostly single women and children. That is not 

32 

true. We spend most of our money in Medicaid, as you know, for 

folks who are old, elderly, and a lot of them have dementia. We 

spend a ton of money for dementia, trying to figure out, how do we 

get someplace? I just met with the leadership of Johnson and Johnson earlier this week to see what they are doing, what they suggest. But number one, obesity, number two, dementia. 

A third one—and Bill Frist, God bless him, our former majority 

leader here, a collegue from Tennessee, has raised his voice of late 

and said it is about time for us to again look in a humane and caring way about end-of-life care. For us to continue to ignore that, 

I think we do it at our own peril. But those are at least three of 

the things that have been raised to me as items that we ought to 

focus on. 

Do you want to just respond to any of those three? 

Dr. HOLTZ-EAKIN. I do not have a lot to say about obesity. I 

think it has been widely recognized. On the dementia, this is an 

example of a genuinely very hard problem that has been left unaddressed, which is how we finance long-term care in the United 

States. I mean, the problem is simple. There will be rising demands for aides for daily living assistance, and, as the population 

ages, there will be diminishing supplies because most of it is done 

by daughters and wives. 

Most of them are now working in a way that they did not in the 

past, and it is just not going to hang together. We do not have a 

good solution. So, I am here to tell you we do not have a good solution. I wish I did, but it is going to be a very large deal. It ought 

to be integrated with the delivery of medical services, probably in 

a home setting. So, that is a great challenge. I think there is no 

question about that. 

Senator CARPER. All right. 

Am I out of time, Mr. Chairman? 

The CHAIRMAN. Take whatever time you want. 

Senator CARPER. Thanks a lot. 

Could you just, as a compassionate person, give us a word on 

end-of-life care? It is a really tough issue for everybody. 

Dr. HOLTZ-EAKIN. That is enormously hard. One of the reasons 

that I have favored health care reforms that put the dollars closer 

to the beneficiary and the family is this issue, because, in my view, 

the American public is simply not going to let an insurance company make these decisions. They are not going to let the government make these decisions. In the end, the only place that is ethically well-suited for this decision is with the beneficiary and their 

family. They ought to have the monies close to where the decisionmaking is going to be made. 

Having said that, they are not socially or intellectually equipped 

to make these decisions at this point. This is at odds with the way 

we have done business. We need to change it so that it is less at 

odds, to educate the people who are in fact going to be relied upon 

to make these decisions, inform them about their options more 

carefully. That is going to take a long time. That is not a 2013, 

2014, 2015 initiative, it is a change in the way we think about this 

problem. It is very important. 

Senator CARPER. All right. 

33 

Mr. Chairman, I just want to say to you and to Senator Hatch, 

this has been a terrific hearing. This is terrific and so timely, so 

timely, as we face the sequestration issues at the end of this week 

and try to figure out how, by the end of the fiscal year, we can actually put in place a comprehensive balanced deficit plan. This is 

just very helpful, and I thank you and both of our witnesses for 

their testimony. 

The CHAIRMAN. Thank you, Senator, very much. 

Dr. Holtz-Eakin, I wonder if you could help me a little bit here. 

The big problem in Washington is it is dysfunctional. It cannot get 

together, it is partisan. Neither side trusts the other, especially on 

economic matters. We have Bowles-Simpson who had a stab at it, 

Gangs of 6, Gangs of 8, lots of gangs. Bowles-Simpson was bipartisan at one level. 

But I am wondering—and maybe it is not going to work, but you 

are a very good economist—if you could give some thought to 

maybe putting a couple or 4 economists together, two definitely 

ones whom Republicans listen to more than others, two whom 

Democrats will listen to more than others, and the four would get 

together with a plan. It is just an idea. We have to keep trying. 

We need to keep working on different ideas. On the surface that 

might sound a little stale because they are just four economists. On 

the other hand—— 

Dr. HOLTZ-EAKIN. A desperate appeal to economists to save the 

Nation is unusual, I will say. [Laughter.] 

The CHAIRMAN. Right. Right. But if you have two on each side 

whom each side tends to listen to, that might work. Anyway, I urge 

you to think about it. 

Dr. HOLTZ-EAKIN. Thank you. 

The CHAIRMAN. And maybe if there are three others you can 

think of that you could team up with. 

I have no further questions. Actually I do, but I do not have time. 

Senator HATCH. Mr. Chairman, one of the witnesses raised the 

topic of tax expenditures. There is a lot of discussion about those 

expenditures that I think sometimes can confuse issues. 

Now, to listen to some, you would think that policies that incentivize desirable behavior, like charitable giving and retirement savings, are somehow akin to potentially wasteful government spending and they should be removed or scaled back to shave down deficits so Federal outlays do not have to be cut. Well, I do not agree 

with that. 

Now, I delivered a series of floor speeches in the summer of 2011 

which discussed myths about tax expenditures, and I would ask 

that they be placed in the record at this point. 

The CHAIRMAN. Thank you. 

[The information appears in the appendix on p. 155.] 

The CHAIRMAN. We have a little bit of a dilemma here. There is 

a roll call vote. We have one more witness. It would be my 

thought—the other witness is Doug Elmendorf—that Doug, you 

could come back at a later date. Otherwise, I do not want to be 

rude. It does not give you the justice that you deserve when we are 

running off to a vote. I am not sure how many can come back after 

the vote, frankly. So I would just suggest that you come back at 

a later date. 

34 

Dr. ELMENDORF. Whatever suits you is fine. 

The CHAIRMAN. Well, I would just say at a later date to give the 

committee a better opportunity to ask you a lot of questions. 

Senator HATCH. I know it is hard to concede that point, Doug, 

but we sure would like to have you back when we have enough 

time to really ask you all the questions that we would like to ask. 

The CHAIRMAN. All right. Thanks, everybody. Thanks to all members, and thanks to the witnesses. 

The committee is adjourned. 

[Whereupon, at 12:05 p.m., the hearing was adjourned.] 

(35) 

A P P E N D I X 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD


87610001.eps
36 


87610.002

In Montana, more than 800 civilian employees at Malmstrom Air Force Base and the Army and Air 

National Guards will face up to a 20 percent reduction in pay. These aren't just numbers, these are real 

people with bills to pay and families to care for. 

Cuts to national parks hit home in our state. Because 64,000 Montana jobs depend directly on outdoor 

recreation. 

Nationwide, the Department of Justice's Office of Violence Against Women will lose $21 million. That 

means fewer grants to support the critical work of folks I met with in Missoula and Billings - folks doing 

heroic work to help prevent violence against our mothers, sisters and daughters. These are impressive 

people undertaking these programs. 

Cuts to the COPS grants program could mean fewer police officers on the streets keeping our 

communities safe. 

The uncertainty over how these and other cuts will play out is weighing heavy on businesses like Wheat 

Montana and those I met with in Billings. 

The nonpartisan Congressional Budget Office predicts the sequester cuts could slow the economic 

recovery and result in another year of sluggish growth and high unemployment. 

Yes, we need to cut our debt and get our fiscal house in order. We know there are some places to trim 

the fat. 

But we need to take a scalpel to waste and inefficiency, not allow a hatchet to hack into American jobs. 

We have a plan on the table to bridge the sequester and still cut $110 billion from our debt without 

putting working families and American jobs in jeopardy. 

This proposal is not perfect. I have concerns about cuts to programs family farmers rely on. But I 

understand the alternative of doing nothing could be far worse for agriculture and the rest of our 

economy. 

That's why I secured a compromise that will extend the SURE program and give farmers a bridge 

between direct payments and the next farm bill. 

And I worked to include livestock disaster assistance for ranchers recovering from the worst drought in 

decades. That, too, is important. So while this plan is not exactly how I would have designed it on my 

own, I recognize that compromise is necessary to get something done. 

My hope is that my colleagues will support this plan or offer their own proposal to stop the 

sequester. We can then work together to prevent these indiscriminate cuts from causing lasting 

economic damage. 

Our economy will be put to the test again in just weeks when the continuing resolution expires on 

March 27. We face the threat of a government shutdown. 

And on the horizon, the federal borrowing limit will be reached in late May. That will require another 

extension ofthe debt ceiling. 
37 


87610.003

This is no way to run a country. Congress has been lurching from one fiscal showdown to the next, 

leaving the nation with uncertainty. The only way we'll be able to get past these budget battles is by 

working together. And we can start right here on this Committee. 

We need to take a balanced approach as we tackle these issues and work together to cut the debt. 

Over the past two years, we have made real progress cutting deficits and debt. In 2011, we passed $1.4 

trillion in spending reductions. And last month, Congress passed legislation that reduced the deficit by 

another $600 billion. 

Together, with interest savings, these actions will cut the deficit by $2.5 trillion over the next ten 

years. Add to this the savings from winding down the wars in Iraq and Afghanistan and our deficit 

reduction will reach almost $3.5 trillion over ten years. 

And as the nation's economy continues to recover, the long-term budgetary outlook has 

changed. CSO's forecasts for Medicare and Medicaid spending have dropped significantly. Current 

projections for the programs' costs through the end of the decade are $200 billion less than in March 

2010. 

CSO also forecasts decreasing deficits and a stable debt-to-GOP ratio over the next several years. It 

projects the 2013 budget defiCit will be a full third lower than it was in 2010, and it will be cut in half by 

2015. CSO notes there will be a slight uptick at the end of the decade, so we must continue to attack 

the deficit head on. 

While progress has been made, the job is certainly not done. 

The unemployment rate is still unacceptably high. American families' budgets are being pinched. 

Skyrocketing gas prices, rising food prices and stagnant wage growth are making it harder for families to 

make ends meet. More must be done to strengthen the American economy. 

Today we will discuss how we can enact additional balanced savings to further reduce the deficit, give 

families and businesses certainty, and protect the economic recovery. 

As we do that I want this Committee to focus on three key goals. 

First, job creation. Twelve million people are actively looking for work but can't find a job. An additional 

8 million Americans are stuck working part-time when they would like full-time work. Job creation must 

be the top priority of the Administration, this Congress and this Committee. 

Second, we must simplify our tax code for America's families and businesses. It has been close to 30 

years since the last major overhaul of America's tax code. In that time, our world has changed 

dramatically. 

Back then, China was our 18th largest trading partner. Now China is our second largest. And over the 

past 30 years, exports as a share of our GOP have nearly doubled. Our tax code is now antiquated and 

acting as a brake on our economy, especially when compared with our overseas competitors. 
38 


87610.004

We need a pro-growth tax code that gives America's businesses the certainty they need to compete 

globally and plan and expand operations, instead of leaving them hoping for a continuation of 

temporary tax breaks. 

Finally, we must make it a priority to return stability and confidence to our economy. We have to get off 

this roller coaster of a ride. Going from one fiscal crisis to the next is undermining our economy. 

To give families and businesses certainty, we must agree on a balanced, comprehensive plan to cut the 

debt that includes both revenue and spending cuts. The math will not work any other way. 

A long-term balanced plan will bridge the budget battles and make real progress solving our deficit 

problem. A balanced plan will also encourage businesses to invest, enable investors to return to the 

markets with confidence, and, most importantly, put Americans back to work in a growing economy. 

Three experts are here today to help the Committee examine the progress of America's economic 

recovery as well as our economic outlook over the next decade. I look forward to hearing from each of 

you as you provide this Committee with the necessary insight to take on the tough challenges ahead of 

us. 

I also hope today this Committee can complete its review of three individuals nominated to key 

Administration posts. I urge Committee members to support the nominations of William Schultz to be 

the General Counsel at the Department of Health and Human Services, Christopher Meade to be the 

General Counsel at the Department ofTreasury, and Jack lew to be the Secretary of Treasury. 

As we will discuss today, our nation faces a number of great challenges. We need bright, talented and 

dedicated individuals -like these three nominees -to work with us to find solutions and ensure a better 

future for America. 

So let us listen to the facts about our budget from these experts with us today. Then let's work together 

to make the tough decisions. let us do the hard work and face the great responsibility before us. As 

President Kennedy understood, let us recognize that our economic progress depends on the solid 

ground of mutual confidence. let us embrace this opportunity to restore certainty and get America 

back on track. 

### 
39 


87610.005

Testimony 

The Budget and Economic Outlook: 

Fiscal Years 2013 to 2023 

Douglas W. Elmendorf 

Director 

Before the 

Committee on Finance 

United States Senate 

February 26, 2013 
40 


87610.006

Chairman Baucus, Senator Hatch, and Members of the 

Committee, thank you for inviting me to testif)' on the 

Congressional Budget Office's (CBO~",) most recent analysis of the outlook for the budgct and the economy. 

statement summarizes CBO's new economic 

baseline budgct projections, which cover fiscal years 2013 

to 2023. Those estimates were released earlier in the 

month in the titled The Budget and Economic 

Outwok: fli'cal to 2023. 

Economic growth will remain slow this year, CBO anticias gradual improvement in many of the forces that 

the economy is offset by the effects of budgetary 

changes that are scheduled to occur under current law. 

After this year, economic growth will speed up, CBO 

causing the unemployment rate to decline and 

and interest rates to eventually rise from their 

current low levels. Nevertheless, the unemployment rate 

is expected to remain above 7Y2 percent through next 

year; if rhat happens, 2014 will be rhe sixrh consecurive 

with unemployment exceeding 7Y2 percent of the 

force-the longest snch period in the past 70 years. 

If the current !a"vs that govern federal taxes and spending 

do not change, the budget deficit will shrink rhis ro 

$845 billion, or 5.3 percenr of gross domestic 

(GOP), its smallest size since 2008. In CBO's 

projections, deficits continue to shrink over the next fevil 

years, falling to 2.4 percent of GOP by 2015. Deficits are 

projected to increase later in the coming decade, however, 

because of the pressures of an aging population, rising 

health care costs, an expansion of federal subsidies for 

health insurance, and growing interest payments on federal debt. As a result, federal debt held by the publk is 

projected to remain historically high relative to the size of 

the economy for the next decade. By 2023, if current laws 

remain in place, debt will equal percent of GDP and 

be on an upward parh, CBO projects (see Figure 1). 

Such high and rising debt would have serious negative 

consequences: When interest rates rose to more normal 

levels, federal spending on interest payments would 

increase substantially. Moreover, because federal borrowing reduces national saving, the capital stock would be 

smaller and total wages would be lower than they would 

be if the debt was reduced. In addition, lawmakers would 

have less flexibility than they might ordinarily to use 

tax and spending policies to respond to unexpected 

challenges. Finally, such a large debt would increase the 

risk of a fiscal crisis, during which investors would lose so 

much confidence in the government's ability to manage 

its budget that the government would be unable to 

borrow at affordable rates. 

Under Current Law, Federal Debt 

Will Stay at Historically High Levels 

Relative to GDP The federal budget deficit, which shrank as a percentage 

of GOP for the third year in a row in 2012, will fall again 

in 2013, if current laws remain the same. At an estimated 

$845 billion, the 2013 imbalance would be rhe first deficit in five years below $1 trillion; and at 5.3 percent of 

GOp, it would be only about half as large, relative to the 

size of the economy, as the deficit was in 2009. Never·· 

theless, if the laws that govern taxes and spending do not 

change, federal debt held by the public will reach 76 percent of GOP by the end of this fiscal year, rhe largest 

percentage since 1950. 

With revenues expected to rise more rapidly than spend~ 

ing in the next few years under current law, the deficit is 

projected to dip as low as 2.4 percent of GOP by 2015 

(see Table 1). In Iaret years, however, projected deficits 

rise steadily, reaching almost 4 percent of GOP in 2023. 

for the 2014-2023 period, deficirs in CBO's baseline 

projections total $7.0 trillion. Wirh such deficits, federal 

debr would remain above 73 percent of GOP-fur higher 

than the 39 percenr average seen over the past four 

decades. (As recently as rhe end of 2007, federal debt 

equaled just 36 percent of GOP) Moreover, debt would 

he increasing relative to the siz.e of the economy in dle 

second half of the decade. 

Those projections are not CRO's predictions of future 

outcomes, As specified in law, CRO's baseline projections 

arc constructed under the assumption that current laws 

generally remain unchanged, so that they can serve as a 

benchmark against which potential changes in law can 

be measured. 

Revenues 

Federal revenues will increase by roughly 25 percent 

berween 2013 and 2015 under current law, CBO projects. That increase is expected to result from a rise in 

income because of the growing economy, from policy 

changes that are scheduled to take effect during rhat 
41 


87610.007

2 THE Hl1)GET ,1:-;n ECO:\OMICOl:rLOOK: FISCAL YE,·\HS 201.1 TO 202; TESTtMO:\Y 

the Public 

(Percentage of gross domestic product) 

120 

100 

80 

60 

40 

20 

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 

as the recent increase in tax rates 

on income above certain thresholds). 

revenues will rernain at 19 percent ofGDP from 

2015 through 2023, CBO estimates. 

outlays are projected to dedine from 22.8 PCfcem in 2012 ro 21.5 percent by 2017, they will 

still exceed their 40-year of21.0 percent. (Ontpeaked at 25.2 percent in 2009 but have 

relative to GDP in the past few years.) 

After 2017, if current laws remain in 

start growing again as a percentage 

outlays will 

The aging 

of the population, increasing health care costs, and significant expansion of eligibility for federal subsidies for 

health insurance will substantially boost spending h)r 

Social Security and for major health care programs relative to the size of the economy. At the same time, rising 

interest rates will significantly increase the government's 

dcbt-sen'ice costs. In CRO's baseline, outlays reach about 

23 percem ofGDP in 2023 and are on an upward 

trajectory. 

Changes from C80's Previolls Projections 

The deficits projected in CBO's current baseline are 

signitIcantly larger than the ones in CBO's baseline of 

August 2012. At that time, CBO projected deficits total~ 

ing $2.3 trillion forthe 2013-2022 period; in the current 

baseline, the total deficit for that period has risen by 

$4.6 trillion. That increase stems chiefly from the enactment of the American Taxpayer Relief Act of2012 

(P.L 112-240), which made changes to tax and spending 

laws that will boost deficits by a rotal of $4.0 trillion 

(excluding debt-service costs) between 2013 and 

according to estimates. by CRO and the starf of the Joint 

Committee on Taxation. CRO's updated baselille also 

takes into account other legislative a.ctions since August, 

as we!! as a new economic forecast and some technical 

revisions to its projections. 
42 


87610.008

TF~iIMO~l' THE BlT>GET AJ,!) ECO.";OMIC OUTLOOK: FISCAL lliAR$ 20 I ~ TO 2023 

Table 1. 

CBO's 

Total 

Actual. 2014~ 2014-

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2018 2023 

In Billions of Dollars 

Revenues 2,449 2,708 3,003 3,373 3,591 3,765 3,937 4,101 4,279 4,496 4,734 4,961 17,669 40,241 

Outlays ~ 3,553~~~~~~~~~~ 20,330 47,199 

Deficit (~) or Surplus -1,089 -845 -616 -430 -476 -535 -60S -710 -798 -854 -957 -978 -2,661 -6,958 

On-budget -1,151 -872 -630 -433 -476 -533 -598 -693 -763 -799 -878 -872 -2,670 -6,675 

Off-budgee 62 27 14 -2 -6 -17 -35 -55 -79 -106 9 -283 

Debt He!d by the Public 

at the End of the Year 11,280 12,229 12,937 13,462 14,025 14,642 15,316 16,092 16,957 17,876 18,902 19,944 0.8. n.a. 

As a Percentage of Gross Domestic Product 

Revenues 15.S 16.9 18.0 19.1 19.1 IS.9 18.8 18.7 18.7 lS.9 19.0 19.1 18.8 18.9 

Outlays 22.8 22.2 11.7 11.6 21.6 21.5 11.7 21.0 22.2 22.4 22.9 22.9 21.6 12.1 

Deficit -7.0 -5.3 -3.7 -2.4 -2.5 -2,7 -2.9 -3.2 -3.5 -3.6 -3.8 -3.8 -2.8 -3.3 

Debt He!d by the Public 

atthe End of the Year 72.5 76.3 77.7 76.3 74.6 73.4 73.1 73.5 74.2 75.0 76.0 77.0 o.a. 

Source: Congressional Budget Office. 

Note: * between -$500 million and zero; o.a. =: not applicable. 

3. Off-budget surpluses or deficits comprise surpluses or deficits In the Sodal Security trust funds and the net cash flow of the 

Postal Service. 

Looming Policy Decisions May 

Have a Substantial Effect on the 

Budget Outlook Current law leaves 

and this year, 

budgetary deadlines: 

issues unresolved, 

significant 

.. Automatic reductions in he 

implemented at the when that 

happens, funding for many government activities will 

be reduced by 5 percent or more. 

• The continuing resolution that currently provides 

operational funding for much of the government will 

expire in late March. If no additional appropriations 

are provided by then, nonessential fun<.:tlons of the 

government will have to cease operations. 

.. A statutory limit on federal debt, which was temporarily removed, will take effect again in mid-May. The 

Treasury will be able to continue borrowing for a shorr 

time after that by using what are known as extraordinary measures. But to avoid a default on the government's obligations, the debt limit will need to be 

adjusted before those measures are exhausted later in 

the year. 

in effect in recent years. Such 

ued, by extending some tax provisions that 

are (and that have routinely been 

extended in the or by preventing the 25 percent cut 

in Medicare's payment rates for physicians that is due to 

occur in 2014. If, tc)r instance, lawmakers eliminated the 

automatic spending cuts scheduled to take effeCT in 

March (but left in place the original caps on discretionary 

funding set by the Budget Control Act), prevented the 

sharp reduction in Medicare's payment rates for physicians, and extended the tax provisions that are scheduled 

to expire at the end of calendar year 2013 (or, in some 

3 
43 


87610.009

4 THE Bl'DGET A~D ECO~OMIC OlTWOK: FISCAL YL\RS 20U TO 202) 

Figure 2. 

GDP and Potential GDP 

(Trillions of 2005 doliars) 

20 

18 

16 

14 

12 

10 

2004 2008 2012 2016 2020 2024 

Sources: Congressional Budget Office; Department of Commerce, 

Bureau of Economic Analysis. 

Notes: Potential gross domestic product (GOP) is CBO's estimate of 

the maximum sustainable level of output of the economy. 

Data are quarterly. Actual data are plotted through the third 

Quarter of 2012. Projections are plotted through the fourth 

cases, in later years), budget deficits would be substantially larger over the coming decade than in eRO's 

baseline projections. With those changes, and no offsetring reductions in deficits, debt held by the public would 

rise to 87 percent ofGDP by the end of2023 rather than 

to 77 percent, 

In addition to those decisions, lawmakers will continue to 

face the longer-term budgetary issues posed by the substantial federal debt and by the implications of rising 

health care costs and the aging of the population, 

Economic Growth Is Likely to 

Be Slow in 2013 and Pick Up in 

Later Years The U.S. modestly in calendar year 

2012, continuing recovery seen since the recession ended in mid-2009. Although economic growth is 

expected to remain slow again this year, eBO anticipates 

that underlying factors in the economy will spur a more 

rapid expansion beginning next year. 

TESTIMOW 

Even so, under the fiscal policies embodied in current 

law, output is expected to remain below its potential 

(or maximum susrainable) level until 2017. ByCBO's 

estimates, in the fourth quarter 0[2012, real (inflationadjusted) GOP was about 5Y2 percent belO\".' its potential 

leveL That gap was only modestly smaller than the gap 

between actual and potential GOP that existed at the end 

of the recession (see Figure 2) because the growth of Output since then has been only slightly greater than the 

grov·nh of potential output. With such a large gap 

between acmal and potential GOP persisting for so 

CBO that the total loss of Output, relative to 

potential, between 2007 and 2017 will be 

equivalent to nearly half of the output that the United 

States produced laSt year. 

The Economic Outlook for 2013 

CBO expects that economic activity will expand slowly 

this year, with real GOP growing by just 1.4 percent 

(see Table 2). That slow growth reflects a combination 

of ongoing improvement in underlying economic factors 

and fiscal tightening that has already begun or is 

scheduled to occur-including the expiration of a 2 percentage-point cut in the Social Security pay toll tax, an 

increase in tax rates on income above cermin thresholds, 

and scheduled automatic reductions in federal spending. 

That subdued economic growth will limit businesses' 

need to hire additional workers, thereby causing the 

unemployment rare to stay near 8 percent this year, 

CBO projects. The rate of inflation and interest rates 

are projected to remain low. 

The Economic Outlook for 2014 to 2018 

After the t:'conomy adjusts this year to the fiscal tightening inherent in current law, underlying economic factors 

will lead to more tapid growth, CBO projects-3.4 percent in 2014 and an average of 3.6 percent a year from 

2015 through 2018. In particulat, CBO that the 

effects of the housing and financial crisis continue 

to fade and that an upswing in housing construction 

(though from a very low level), rising real estate and stock 

prices, and increasing availability of credit will help to 

spur a virtuous cycle of faster growth in employment, 

income, consumer spending, and business investment 

over the next few years. 

Nevertheless, under current law, CRO expects the 

unemployment rate to remain high-above 7V2 percent 

through 20 14-before falling to 5 \/2 percent at the end of 

2017. The rate of inflation is projected to rise slowly after 
44 


87610.010

Th'STIMO~Y THE BUDGET AND ECOi\OMIC OFlLOOK, FISCAL YEARS 201 3 TO 202l 

Table 2. 

eBO's Economic Years 2012 to 2023 

Estimated, Forecast Projected Annual Average 

2012 2013 2014 2015-2018 2019-2023 

Fourth Quarter to Fourth Quarter (Percentage change) 

Rea! Gross Domestic Product 1.9 1.4 3.4 3.6 2.2 

Inflation 

peE price index 1.5 1.3 1.8 1.9 2.0 

Core PCE price indexa 1.5 1.5 1.9 2.0 2.0 

Consumer price indexb 1.9 c 1.5 2.0 2.2 2.3 

Core consumer price index3 1.9 f. 1.8 2.0 2.2 2.3 

Fourth Quarter level (Percent) 

Unemployment Rate 7.8 t 8.0 7.6 5.5 d 5.2 e 

Calendar Year Average (Percent) 

Interest Rates 

Three"month Treasury bills 0.1 c 0.1 0.2 2.2 4.0 

Ten-year Treasury notes 1.8 c 2.1 2.7 4.5 5.2 

Source: Congressional Budget Office. (Actual values for 2012 are from Department of labor, Bureau of labor Statistics; Federal Reserve.) 

Notes: The numbers shown here do not reflect the values for GDP and related series released by the Commerce Department's Bureau of 

Economic Analysis on January 30. 

PCE personal consumption expenditures. 

a. Excludes prices for food and energy. 

b. The consumer price index for all urban consumers. 

c. Actual value for 2012. 

d. Value for 2018. 

this year: CBO estimates that the annual increase in the 

price index for personal consumption expenditures will 

reach about 2 percent in 2015. The interest rate on 

3-month Treasury bills-which has hovered near zero for 

the past several years-is expected to climb to 4 percent 

by the cnd of 20 17, and the ratc on 1 O-year Treasury 

notes is projected to rise from 2.1 percent in 2013 to 

5.2 percent in 2017. 

TIle Economic Outlook for 2019 to 2023 

For the second half of the coming decade, eBO does not 

attempt to predkt the cyclical ups and downs of the 

economy; rather, CBO assumes that GDP will stay at its 

maximum sustainable leveL On that basis, eBO projects 

thar both actual and potential real GDP will grow at an 

average rate of 21,4 percent a year ben'.'een 2019 and 

2023. That pace is much slower than the average growth 

rate of potential GDP since 1950. The main reason is 

thar the growth of the labor force will slow down because 

of the retirement of the baby hoomers and an end to the 

long-standing increase in women's participation in the 

labor force. CBO also projects that the unemployment 

rate will fall to 5.2 percent by 2023 and that inflation 

and intere...<;t rates will stay at about their 2018 levels 

throughout the 2019-2023 period. 

5 
45 


87610.011

Percentage of GOP 

120 

100 

80 

60 

40 

20 

o 

CONGRESS Of' THE UNITED STATES 

CONGRESSIONAL BUDGET OFI'ICE 

1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 

Federal Debt Held by the Public 

Trillions of 2005 dollars 

20 

18 

10 

o 

Actual Projected 

2000 2004 2008 2012 2016 2020 2024 

GDP and Potential GDP 

Percent 

12 

10 

o 

Ac£ua\ 'j Projected 

2000 2004 2008 2012 2016 2020 2024 

Unemployment Rate 

FEBRUARY 2013 
46 


87610.012

Notes 

Numbers in the text and tables may not add up to totals because of rounding. 

Unless otherwise indicated, years referred to in describing the budget outlook are federal fiscal 

years (which run from October 1 to September 30) and years referred to in describing the 

economic outlook are calendar years. 

The figures in Chapter 2 have white vertical bars that indicate the duration of recessions. 

(A recession extends from the peak of a business cycle to its trough.) 

The economic forecast was completed in mid-January 2013, and the estimates of2012 values 

shown in tables and figures in Chapter 2 and Appendix B are based on information available 

at that time. 

Supplemental data for this analysis and rhe historical budget data that are usually included in 

this report are available on CBO's Web site (www.cbo.gov). 

Pub. No. 4649 
47 


87610.013

Contents 

Summary 1 

1 The Budget Outlook 1 

Key Budgetary Decisions Facing Lawmakers in 2013 10 

Budgetary Outcomes in 2012 and the Outlook for 2013 11 

BOX: THE AIvtERlCAN TAXPAYER RELIEF ACT OF 2012 12 

CBO's Baseline Budget Projections for 2014 to 2023 18 

Uncertainry in Budget Projections 29 

Alternative Assumptions About Fiscal Policy 30 

2 The Economic Outlook 35 

The Economy in 2012 36 

The Economic Outlook for 2013 to 2018 40 

The Economic Outlook for 2019 to 2023 44 

Projections ofIncome 46 

Comparison with Other Economic Projections 41 

A Changes in CBO's Baseline Since August 2012 51 

B CBO's Economic Projections for 2013 to 2023 63 

List ofTables and Figures 61 

About This Documeut 69 
48 


87610.014

Summary 

Economic grow,h will remain slow this year, ,he 

Congressiol1<ll Budget Olliec (CBO) anticipates, as gradual improvement in many or the forces that drive the 

economy is offset by the cHeers that 

arc scheduled to occur under current 

economic growth wil! speed up, eBO 

the unemployment rate to decline 

imctcst rates to eventually rise from their current low 

levels. Nevcrthckss, the 

to remain above 7V.:; 

happens, 2014 will 

federal taxes and spending 

do not change, the will shrink this to 

$84') billion, or 5.3 percent of gross domestic 

(Gnp), its smallest size since 200B. In eRO's baseline 

projections, deficits continue to shrink over the next fC\\' 

years, [lHing to 2.4 percent ofCDP by 2015. Deficits arc 

projected to increase latcr in the coming decade, however, 

because of the pressures of an aging population, rising 

health care costS, an expansion of federal subsidies f()!' 

health insurance, and growing interest on federal debt. As a result, t~deral ~kbt held the public is 

projected to remain historically high relative to the size of 

thl.' economy for the next decade. By 202.), if current laws 

remain in place, debt wiI! equal percent of GOP and 

be on an upward path, CBO projects (sec Summary 

Figure 1). 

Such high and rising debt would have serious negative 

""'""IUC"cc.,. '\X;'hen interest rates rose to more normal 

on interest payments would 

because federal borrowing reduces national saving, the stock "vould be 

smaller and toral \vould be dUll they would 

be if the debt was In addition, bwrnakcrs would 

have less flexibility than they might ordinarily to use tax 

policies to respond to unexpected chalwch a large dcbt would increase the risk 

crisis, during which investors v·,rould lose so 

much confidence in thc government's ability to manage 

its budget that the government would be ullable to 

borrow at affordable rates. 

Under Current Law, Federal Debt 

Will Stay at Historically High Levels 

Relative to GDP The federal budger deficit, which shrank as a 

of G D P for The ;hird year in a row in 2012, fall again 

in 2013, if current Jaws remain the same. At an estimated. 

$84'; billion, the 2013 imbalance would be the first deficit in five years below $1 trillion; and at ).,) percent of 

GDI; it would be only about half as large, relative to the 

size of the as the deficit was in 2009. Never~ 

theless, if the laws govern taxes and do not 

change, redcral debt held by the public 76 percenr ofCDP by the end of this fiscal year, the largest 

percentage since 19')0. 

\'fith revenues expected to rise more than spending in the next few years under CUITent the defIcit is 

projected to dip as low as 2.4 percel1l ofGDP by 2015 

(see Summary Table 1). In latC[" years, however, projected 

deficirs rise steadily, reaching almost 4 percent of CDP 

in 2023. For the 2014~2023 period, deficits in CBO's 

baseline projections total $7.0 trillion. \'qith sllch deficits, 

federal debr would remain above 73 percent ofGDPbr higher than the ,39 seen over the past 

t{nIr decades. (As of2007, federal debt 

equaled just ,16 percent ofGDP.) Moreover, debt would 

be rdative (0 (he size of the economy in the 

decade. 

Those projections are not CBO's predictions of future 

outcomes. As specified in law, CliO's baseline projections 
49 


87610.015

2 mE m Dt;I~T ,\\1) ECO.\O\!IC OITLOOh: n;iC\]. )E>\HS 2013 TO 2025 fEBRt,U{) 2013 

Summary Figure 1. 

Federal Debt Held by the Public 

(Percentage of gross domestic product) 

120 

100 

80 

60 

40 

20 

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 

Source: Congressional Budget Office. 

against 

lw measured. 

Revenues 

that current laws 

they can serve as a 

Federal revenues \\'i1l incrc,tsc hy 2') percent 

CBO projects. That increase is l'XpcdcJ to result from a rise in 

income because of thl' economy, from policy 

thar arc [() take cHeet that 

until after the recent increase in tax rates 

on income above certain thresholds), 

As a result of those hetm.\, l"l'vcntlCS projected to grow 

from 15.8 percent ofGDP in 2012 to 19.1 

GDP in 201 ,) .. --compared \\lith:Oll1 

cent of GDP over the past 40 

rcvctwtS \vill remain at 19 percent of CD P from 

20 I") rhrough 2023, eBO estimates. 

Outlays 

In eBO's baseline projections, 

the next (C\V years in dollar [crms but 

ment compensation drops) and by provisions of the 

Rudgct Contro! Act of2011 (Public Law 112-25), 

Although outlays arc' projected to decline from 22.8 per-

(em ofGDP in 2012 to 21.') perct'nr by 2017. they will 

still excecd their 40-yeu of21.0 percen!. (Outbys peaked at 25.2 perceHt in 2009 hm have 

fallen relative to GDP in the past few years.) 

live to the of the economy. 

outlays will 

The 

interest rate.~ \vill significantly increa~e tbe 

deht-service COSts. I;l CBO's i)dselinc, outlays reach about 

25 pt..'l"cem of GDP in 202") and arc on an upward 

trajectory. 

Changes from COO's Previous Projections 

The deficits in eBO's current baseline are 

~igllificandy than rhe ones in CB(Ys baseline of 

Angust 2012. At that time, CBO projected deficits totaling $2.3 trillion for the 20 lJ-2022 period: in the current 

baseline, tilt' total defIcit t()f that period has risen hy 

$4J1 trillion. That increase SIems chicO:.' from the enactment of the American Rclid'Act of2012 

(l~L. 112-21t0), ",hich changes to tax ,1Ild spending 
50 


87610.016

I'm: Bl [}(lFT :\\D ECO\O\l!C O! TLOOk FlSC.\!. YEWS 2015 TO 2025 

Summary Table 1. 

eBG's Baseline Budget Projections 

Actual, 

2012 2013 2014 2015 2016 2017 201S 2019 2020 2021 2022 2023 

In Billions of Dollars 

Revenues 2,449 2,708 3,003 3,373 3,591 3,765 3,937 4,lOl 4,279 4,496 4,734 4,961 17,669 40,241 

Outlays 3,538 3,553 ],618 4.100 4,542 4.8ll 5,078 5,350 5,691 5,939 20,330 47,199 

Deficit (~) or Surplus -1,089 -S45 -616 -430 -476 -535 -605 -710 -798 -854 -957 -978 -2,661 -6,958 

On-budget -1,151 -872 -630 ·433 -476 -533 ~598 ~93 -763 ·799 -878 ·872 -1,670 '6,675 

Off-budget' 62 17 14 ·2 -D -17 ·35 ·55 ·79 ·106 ·283 

Debt Held by the Public 

at the End of the Year 1l,280 12,219 12,937 13.462 14,025 l4,642 15,316 16,092 J6,957 17,876 18,902 19,944 n,3. l1.il. 

As a Percentage of Gross Domestic Product 

ReV0flUeS 15.8 16.9 18.0 19,1 19.1 18.9 18.8 187 18.7 18.9 19.0 19.1 18.8 18.9 

Outlays 22.8 11.1 21.7 21.6 21.6 21.5 11.7 22.0 22.2 22.4 22.9 21.9 11.6 22.1 

Deficit -7.0 -5.3 -3.7 -2.4 -2.5 -2.7 -2,9 -3.2 -3.5 -3,6 -3,8 -3.8 -2.S -3.3 

Debt Held by the Public 

at the End of the Year 7?5 76.3 77.7 763 74.6 73.'1 73.1 735 75,0 76.0 77.0 n,a. n,a. 

Source: Congressional Budget Office. 

Note: * ::: between ¥$500 million and zero; n.a. := not applicable. 

a. Off~budget surpluses or deficits comprise surpluses or deficits in the Soda I Security trust funds and the net cash flow of the 

Postal Service. 

laws that will hoost deJicirs 

(excluding debt~servicc 

according to estimates by eno and thl.: staff of the Joint 

Cornrnittee on 'ElXation. CBO's updat-;d baseline also 

takes into aCCOllt1l other 

as well as a new economic 

revisions to its projectiom. 

Looming Policy Decisions May 

Have a Substantial Effect on the 

Budget Outlook Currcnr law leaves man}' budget issues unresolved, 

and this year, bwmakers 

budgetary deadlines: 

II '\utolll<ltic reductions in 

bl.le three significaJlt 

implemented at the beginning 

fO be 

funding for many government activities will 

hy 5 perCell! or more. 

.. The continuing resolution that currently provides 

operational funding for much of the government wil! 

II 

expire in bIt' March. If no additional 'lppropriatioJls 

,tre provided hy then, nonessential flll1ctions of the 

government will have to (case operations. 

th:1t by using what arc known as extraordinary I1lt\lSurCS. But to avoid a default on the 

ment's 

adjusted 

the year. 

the debt limit' will nCl'd to 

those measures art' exhausted later in 

25 perc('!1t cut 

that is due to 

eliminated fhe 

the original caps on discretionary 

3 
51 


87610.017

4 filE Bu)GET A\J) ECO\O\IIC OlllOOK: FI:;C-\L 'mRS 201,) TO 202,1 

to expire at the cnd 

cases, in later years), 

targer over the 

projections. \XTith and no of(<;et~ 

ring reductions in defIcits, debt held the puhlic would 

rise to 87 percent of CDP by the end of 202.3 rather than 

to 77 pcn.:cnt. 

In addition to those decisions, lawmakers will continue to 

filCe the longer~term the substantial federal debt and 

Economic Growth Is Likely to 

Be Slow in 2013 and Pick Up in 

Later Years The U.S. economy expanded modestly in calendar year 

2012, continuillg the slow recovery seen since tbe rcC\~ssion cnded in mid-2009. economic growth is 

to remain s!O\v ycal', CRO anticipares 

underlying t:lCtors in economy will spur a more 

rapid expansion beginning next year. 

Even so, under the t1sca! policies embodied in current 

law, ourput is expected to remain below its potential 

(or maximum sustainable) level until 2017. ByeRO's 

estimates, in the fourth quarter of2012, real (inflationadjusted) GDP was about 5Vl below its 

level. That 

2) because the 

then only slightly 

of pott'mial Output. \Virh such a 

between acmal and potential GDP for so 

CBO projects that the toralloss relative 

to economy's potential, between 2007 

be equivalent to nearly balf of the ourput that the United 

States produced laSt year. 

The Economic Outlook for 2013 

FEBRI ,\RY 201.1 

Summary Figure 2. 

GDP and Potential GDP 

(Trillions of 2005 dollars) 

20 

18 

16 

14 

12 

10 

o ~" _~. ~~' --.J~ __ ._L,," ____ "':.-.,--, 

2000 2004 2008 2012 2016 2020 2024 

Sources: Congressional Budget Office; Department of Commerce, 

Bureau of Economic Analysis. 

Notes: Potential gross domestic product (GOP) is CBO's estimate of 

the maximum sustainable level of output of the economy. 

Data are quarterly. Actual data are plotted through the third 

quarter of 2012. Projections are plotted through the fourth 

quarter of 2023, 

or is scheduled to ur--u:lc!11ding rhe expiration of;l 

Securiry payroll tax, 

olds, and scheduled auwmatic reductions in federal 

spending. That subdued economic \villlimit businesses' need to hire additional 

the unemployment ratc to 

CBO projects. The rate 

projt."ctcd to rl'main low. 

TIle Economic Outlook for 2014 to 2018 

After the economy adjusts this year to the ftscal 

inherent in current b..v, economic 

!cad to more rapid growth, projcCls-3A percem in 2014 and an average of3.6 percent a year from 

201'5 through 2018. in CBO that the 

eff.:..'cts of d1C 

(though from a very 

prices, and increasing availability 

spur a virtuous cycle of faster growth in employment, 

income, consumer spending, and husiness investment 

over rlll' next few year,,). 
52 


87610.018

SUMMARY TIlE BUDGET A.I-m ECONOMIC OlITLOOK: f'lSCAl. yEARS 2013 TO 2023 

Summary Table 2. 

CBO's Economic Projections for Calendar Years 2012 to 2023 ---------------------- Estimated, Forecast Projected Annual Average 

2012 2013 2014 2015-2018 2019-2023 

Fourth Quarter to Fourth Quarter (Percentage change) 

Real Gross Domestic Product 1.9 1.4 3.4 3.6 2.2 

Inflation 

peE price index 1.5 1.3 1.8 1.9 2.0 

Core PCE price index<l 1.5 1.5 1.9 2.0 2.0 

Consumer price indel 1.9 c 1.5 2.0 2.2 2.3 

Core consumer price index8 1.9 ' 1.8 2.0 2.2 2.3 

fourth Quarter level (Percent) 

Unemployment Rate 7.8 ' 8.0 7.6 5.5 ' 5.2 ' 

Calendar Year Average (Percent) 

Interest Rates 

Three-month Treasury biHs 0.1 ' 0.1 0.2 2.2 4.0 

L8 c 2.1 2.7 4.5 5.2 

Source: Congressional Budget Office. (Actual values for 2012 are from Department of Labor, Bureau of labor Statistics; Federal Reserve.) 

Notes: Economic projections for each year from 2012 to 2023 appear in Appendix B. 

The numbers shown here do not reflect the values for GDP and related series released by the Commerce Department's Bureau of 

Economic Analysis on January 30. 

PCE = persona! consumption expenditures. 

a. Exc!udes prices for food and energy. 

b. The consumer price index for all urban consumers, 

c. Actual value for 2012. 

d, Value for 2018. 

e. Value for 2023. 

Nevertheless, under current law, CBO expects the 

unemployment rate to remain high-above 7V2 percent 

through 2014-before failing (0 5Yz percent at the end of 

2017. The rate ofinflation is projected to rise slowly after 

this year: CBO estimates that the annual increase in the 

price index for personal consumption expenditures will 

reach about 2 percent in 2015. The interest rate on 

3-month Treasury bills-which has hovered near zero for 

the past several years---is expected to climb to 4 percent 

by the end 0[2017, and tbe ratc on 10-year Treasury 

notes is projected to rise from 2.1 percent in 2013 to 

5.2 percent in 2017. 

The Economic Outlook for 2019 to 2023 

For the second half of the coming decade, CBO does not 

attempt to predict the cyclical ups and downs of the 

economy; rather, eRa assumes that GDP will stay at its 

maximum sustainable leveL On that basis. eBO projects 

that both actual and potential real GDP will grow at an 

average rate of 21;4 percent a year between 2019 and 

2023. That pace is much slower than the average growth 

rate of potential GDP since 1950. The main reason is 

that the growth of the labor force will slow down because 

of the retirement of the baby boomers and an end to the 

long-standing increase in women's participation in the 

labor force. eBO also projects that the unemployment 

rate will £all to 5.2 percent by 2023 and that inflation 

and interest rates will stay at about their 2018 levels 

throughout the 2019-2023 period. 

5 
53 


87610.019

The Budget Outlook 

If current laws remain in place, the Congressional 

Budget Office (ellO) estimates, the federal budget deficit will rotal $845 billion in Fiscal year 2013; this will 

he the first time since 2008 that the budget shortfall 

will be less than $1 trillion. At '5.3 percent of gross 

domestic product (GOP), that deficit will he well below 

the peak of 10.1 petcent in 2009 but "illlarget than in 

all hut one year between 1947 and 2008 (see Figure 1-1). 

As a result, dcb[ held by the public is estimated to 

increase to 76 percent ofGDP by the end of 2013, the 

largest ratio since 1950. 

eBO constructs irs baseline projections of federal revenues and spending under the assumption that current 

la\vs generally remain unchanged, Under that assumption, revenues arc projected to rise as a share ofGDP over 

the next few years~from nc;:uly 16 percent in 2012 to 

17 percent in 2013,18 percent in 2014, :and then about 

19 percent irom 2015 through 2023 (see Table 1- 1). 

Outlays in the baseline drop from almost 23 percent of 

CDI' in 2012 to 21. 5 percent in 2017; they begin to rise 

again bter in the decade, reaching 22.9 percent in 2023. 

As a result, in CBC),s haseline projections, annual deficits 

remain ahove their prcrec('ssion !to-year average (l968 to 

2007) through 2023 rdative to the size of the economy. 

They decline as a percentage ofGDP t()r the next two 

years, to 3.7 percem in 2014 and 2.4 percent in 201 S. 

Rut, heginning in 20] 6, deficits in the baseline start to 

increase again, reaching 3.8 percent ofCDP at the end of 

the 1 O-year projection period. 

Those accumulating deficits would boost debt held by 

the public to a peak of almost 78 percent of GDP by the 

end of2014, eRO estimates. Relative to the nation's outpm, the debt would decline over the following few years 

but then start to climb again in the latter part of the projection period, reaching 77 percent ofGDP at the end of 

2023. (As recen tly as the end of 2007, the debr was equal 

to only 36 percent of GDr~) 

Although relative stability in the debt as a share ofGDP 

over the next 10 years would be a welcome developmcnt 

after its sharp upward the past several years, 

the projected path of the remains a signiflcant concern for several reasons, 

First, under the current-law baseline, the projected debt is 

very high historical standards. Throughout the 201:1-

2023 debr held by the public is projecred ro be 

greater relative to GDP than at any time 

just World War II: at no time is if anticipated 

to fall below the ofGDP it represented in any 

between and 2012. If the amount of debt held 

the public remains so 

cst payments \vilt increase when interest 

rates rise to more normal levels. Because federal horrowing generatiy reduces national saving, the stock 

assets, such as equipmt>rlt and Structures, will be 

and aggregate wages will be less than if the debt were 

lowef. In addition, lawmakers \vil! have less Hexibility 

than they ordinarily might to use tax and spending policies to respond to unanticipated challenges. Moreover, 

such a large debt poses an increased risk of precipitating a 

fiscal crisis, during which investors would lose so much 

confidence in the governrnenr's ability to manage its budget that the government would be unahle to borrow at 

affordable rates. I 

Second, ddlcits and the debt would he even ifcurrent laws were modified, as they have been in past, to 

or undo certain scheduled changes in policy, CBO's 

projections incorporate the assumption (hat (he 

automatic spending reductions established by [he 

Control Act of2011 (Public Law 112-25) will take 

of March, that sharp reductions in 

rales tl.1f physicians' services will 

of January 2014, and that certain 

have regularly been extended hut arc 

For <l discus.,ion of the come~luellcc" of elevated debt. ~('(' 

C(1ngrc~~ionJl nudget Office, 

(;-':;ovemhn 2(12), p.l 0, ,,"ww.""'.,,""PUI'''''''''O'"I.'I>'IL 
54 


87610.020

8 rilE Bl Dl;ET \\D ECO\O\llCot TWO!\" FISC .. \L Y[\!{S 201.'l TO 202.1 

Figure 1·1. 

Total Deficits or Surpluses 

(Percentage of gross domestic product) 

-5 

-10 

-15 

-20 

-25 

-30 

FEBHl \In 2015 

-35 L ____ L ____ L~ __ L~ ____ ' ____ , _____ , ____ "_~_L_ __ ~ __ ~ __ ~ __ ~ __ ~ __ L ___ ~ ___ ~ __ ~ __ ~_ 

1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 

Source: Congressional Budget Office, 

sct to (or, in some 

cases, in will expire:1:' If those provisions of current law were removed, and ifothcr changes 

in policies with cHeet" on budget deficits were 

not enacted, hudget the cOIning decade 

would be substantially shown in CBO's 

baseline projection:,. under an :.lltcrnativc fjscal scenario, ifthos~' provisions orb,,\! Vi/ere undone, debt 

held public would reach 87 percent of GDP at the 

end 

Third, deficits and tbe (kbt also than in 

eRO's baseline projections because 

spending within the limits required under current law 

might be diHlcult. Even if automatic reductions 

from tbe Rudget Control Act wcre ,lvoided, 

legislation v·could such spending to an unusually 

small amount relative to the size of rhe economy. eBO 

projects that, \vith just those original caps in place, discretionary spending would '5.8 of(;DP in 

2023: by comparison, the 1()J'discretionary 

in any since 1962 (the earliest for 

such data been reported) \vas 6.2 percent in 

1999. (Overall federal spending would be a larger share 

ofCDP than its average the past 40 years because 

or increased on l'vfcdicare, 

?vledicaid, carc suh~id;cs t()r people, 

and im(TeS[ payments on the debt.) Because the 

allocation of discretionary is determined by 

annual appropriation acts, have not 

decided which specific government services 

will be reduced or constrained to meet the speciflcd 

limits. 

risc 

Deciding now what 

tl1.lt long-term 

irnplcrnent.1tion, \vhlch would give 
55 


87610.021

CIIAPTER: O,E THE BUDGET A\!) ECO\O~HC 0l'1l00K: FISCAL YEAR') 2015 TO 2025 

Table 1·1. 

CBO's Baseline Budget Projections 

Revenues 

Individual income taxes 

Social insurance taxes 

Corporate Income taxes 

Other 

Total 

On-budget 

Off-budgetJ 

Outlays 

Mandatory 

Discretionary 

Net interest 

Total 

On-budget 

Off-budgeta 

Oeficit (-) or Surplus 

On-budget 

Off-budget" 

Oebt Held by the Public 

Memorandum: 

Gross Domestic Product 

Revenues 

Individual income taxes 

SocIal insurance taxes 

Corporate income taxes 

Other 

Total 

On-budget 

Off-budgee 

Outlays 

Mandatory 

Discretionary 

Netmterest 

Total 

On-budget 

Off-budgetd 

Deficit (-) or Surplus 

On'budget 

Off-budget" 

Debt Held by the Public 

----

Total 

Actual, 2014~ 2014-

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2018 2023 

In Billions of Dollars 

1,132 

845 

242 

229 

1,264 1,355 1,540 1,674 1,810 1,929 

953 1,021 1,068 1,129 1,195 1,256 

251 356 448 489 5ll 512 

241 270 317 

2,449 2,708 3,003 3,373 

1,880 2,038 2,271 2,607 

570 670 732 766 

2,ll6 

1,213 

224 

2,205 2,342 

1,170 1,189 

243 272 

299 

3,591 

2,779 

812 

249 239 

3,765 3,937 

2,904 3,029 

862 908 

2,535 2,655 2,768 

1,209 1,233 1,257 

323 412 517 

2,040 2,158 

1,314 1,372 

498 492 

258 

2,282 

1,433 

493 

288 

2,412 

1,498 

499 

249 326 

4,101 

3,149 

952 

4,279 4,496 4,734 

3,285 3,457 3,651 

995 1,039 1,084 

2,548 8,308 19,747 

1,565 5,670 12,852 

506 2,317 4,805 

342 1,374 2,837 --------

4,961 17,669 40,241 

3,832 13,589 30,963 

1,129 4,080 9,278 

2,924 3,087 3,263 3,501 3,658 12,504 28,938 

1,293 1,324 1,356 1,396 1,424 6,059 12,852 

593 667 730 795 857 1,767 5,410 --------

2,031 

1,285 

223 

3,538 

3,031 

508 

3,553 

2,910 

643 

3,618 3,803 4,067 4,300 4,542 4,811 5,078 5,350 5,691 5,939 20,330 47,199 

2,901 3,039 3,255 3,437 3,627 3,842 4,048 4,256 4,529 4,704 16,259 37,637 

717 763 812 864 915 969 1,030 1,094 1,162 1,235 4,011 9,562 

-1,089 -845 -616 -430 -476 -535 -605 -710 -798 -854 -957 -978 -2,661 -6,958 

-1,151 -872 -630 -433 -476 -533 -598 -693 -763 -799 -878 -872 -2,670 -6,675 

~ V M 3 ~ ~ -17 -35 -55 -79 -106 9 -283 

H,280 12,229 12,937 13,462 14,025 14,642 15,316 16,092 16,957 17,876 18,902 19,944 n.a. n.a. 

15,549 16,034 16,646 17,632 18,792 19,959 20,943 21,890 22,854 23,842 24,858 25,910 93,972 213,326 

7.3 7.9 

5.4 5.9 

1.6 1.6 

1.5 1.5 

15.8 16.9 

12.1 12] 

3.7 4.2 

13.1 13.2 

8.3 7.6 

1.4 1.4 

22,8 22.2 

19.5 18.2 

3.3 4.0 

-7_0 -5.3 

-7.4 -5.4 

0.4 0.2 

72.5 76.3 

As a Percentage of Gross Domestic Product 

8.1 8.7 8.9 9.1 9.2 9.3 9.4 9.6 

6.1 6.1 6.0 6.0 6.0 6.0 6.0 6.0 

2.1 2.5 2.6 2.6 2.4 2.3 2.2 n 1.6 1.8 1.6 1.2 1.1 l.l 1.1 1.2 

18.0 19.1 19.1 18.9 18.8 18.7 18.7 18.9 

13.6 14.8 14.8 14.5 14.5 14.4 14,4 14.5 

4.4 4.3 4.3 4.3 4.3 4.3 4.4 4.4 

13.2 13.3 13.5 13.3 13.2 13.4 13.5 13.7 

7.0 6.7 6.4 6.2 6.0 5.9 5.8 5.7 

1.5 1.5 1.7 2.1 2.5 2.7 2.9 3.1 

21,7 21.6 21.6 21.5 21.7 22.0 22.2 22.4 

17.4 17.2 17.3 17.2 17.3 17.6 17.7 17.8 

4.3 4.3 4.3 4.3 4.4 4.4 4.5 4.6 

-3] -2.4 -2.5 -2.7 -2.9 -3,2 -3.5 -3.6 

-3.8 -2.5 -2.5 -2.7 -2.9 -3.2 -3.3 -3.3 

0.1 -0.1 -0.2 -0.2 

77.7 76.3 74.6 73.4 73.1 73.5 74.2 75.0 

9.7 

6.0 

2.0 

1.3 

19.0 

14.7 

4.4 

14.1 

5.6 

3.2 

22.9 

18.2 

4.7 

-3.8 

-3.5 

-0.3 

76.0 

9.8 8.8 

6.0 6.0 

2.0 2.5 

1.3 1.5 

19.1 18.8 

14.8 14.5 

4.4 4.3 

14.1 13.3 

5.5 6.4 

3.3 1.9 

22.9 21.6 

18.2 17.3 

4.8 4.3 

-3.8 -2.8 

-3.4 -2.8 

-0.4 

77.0 n.a. 

9.3 

6.0 

2.3 

1.3 

18.9 

14_5 

4.3 

13.6 

6.0 

2.5 

22.1 

17.6 

4.5 

-3.3 

-3.1 

-0.1 

n.a. 

Source: Congressional Budget Office. 

Note: *:::: between ~$500 million and zero; n.a. = not applicable; ** = between ~O.05 percent and 0.05 percent 

9 
56 


87610.022

10 rHE III DGET .\\0 EC{)\D:\'lIC O! TWOK: FlSl:>\[. YE\RS 1013 TO 201:\ 

businesses, a1ld state and local governments rime 10 plan 

and adjust rheir behavior. 

The baseline budget outlook has substantially 

[rom th(' that eBO in August 

2012. \ At time, deficits projected under current law 

totaled $2.3 aillion for the 201.-)·-2022 or 

1.1 percent of CDP. They arc nmv triHion larger. 

The majority of the increase in projected deficits stems 

from CI1<1Ctmem of tbe American T;lxpayer Rdief Act of 

2012 (pL 112~240) C~ee Box 1-1). tviost of that effect 

results from reductions in H:vCnlleS stemming hom three 

types of changes: 

II The pennancnt extension of lower tax [-;:ttes few 

income hcloyv ceruin thresholds and other rax 

provisions originally enacted in 2001 and 2003, 

• The permanent limit on the reach of the alternative 

minimum tax U\MT), and 

• The temporary extension of other tax: provisions that 

had expired at the end of2011 or 2012. 

they arc mt:ant to provide a neutral 

policymakers can usc to assess the 

policy decisions. CBO's 

incorporate in 1<n'>', this chapt('r sho"vs 

ho\-v some afh_'ct tht: budget ovcr the 

next 10 years. For example, under eBO's baselinC', funding: for overseas is, milituy 

operations and activities in or other 

countrics---is assumed to continue the 

projection period at the level provided for 201,), \vith 

adjustments for inflation. Such funding has declined in 

recent years, however, so CRO has cons.tructed a policy 

that trend. Cnder that scen~1fio, warcontinue declining through 2015, 

the rate of inf1ation. As a result, 

the total for 2014-2023 period would be 

about 5600 billion below the amoutH.'> projected in the 

haseline, In the other direction, if the automatic spending 

reductions put in place by the Budget Control Act did 

FErlR! ,\In 201,~ 

not lake effect, deficits. would he about 51 trillion higher 

over the projection period. (For more details, see 

"Altenutive Assumptions About Fiscal Policy. 

Key Budgetary Decisions 

Facing Lawmakers in 2013 

By changing some income tax rates and making pennanent changt .. ~s ro the AJ\n~ among other things, the 

American Tlxpayer Relief Act has reduced thc uncertainty surrounding federal u.\cal policy. Nevcrtheless, 

many key budget issUl..'s remain unre.'>olvcd. 

Over the next fcv.: months, tnvmakcrs will ran: three 

significant budgetary d('adlincs: 

• Automatic spending reductions scheduled ro be 

implemented at the beginning of i\'larch; 

• The expiration in late :vLlrch of a continuing 

resolution that provides opcrariol1,tl funding tor 

nllKh of the f;'xlcra! go\,crnrncnt; and 

• rile statutory limit on federal debt, temporarily 

removed, which take~ effect' again in mid-t'day. 

!n addition, lawmakers sri!! face the longer-rerm budget 

issues posed by the large current and projectcd federal 

debt and the implications of rising health care costs and 

rlw a~ing population, 

Automatic Spending Reductions 

The provisions of the Budget Control Act that cstab-

!i~hed automatic procedures to rc~train discretionar:' and 

m~l1ldatory spending arc .\et to take cHeet on ,0,1arch J; 

if fully implemented, they will reduce total ftmding in 

201.3 hy 585 hillion. (The American Taxpayer Relief 

Act delayed the reducrion by two months and reduced 

it by billion.) eBO estimates that, in 20l.3, discretionary funding (which is provided through annual 

appropriations) win decline by $7l hillion and fimding 

fc)!' mandatory programs (\vhich is not suhiect to annual 

appropriations) will he reduced by $14 billion, as a result 

of those procedures. By CB(fs estimate, budgctarr 

resources fi.)l' defense (other dun spending for militaty 

pcr<;onnd) will be cut by around 8 percent across the 

board. and nondefense funding that is subject to the 

automatic redtKTions yvilllw cut by between 5 perccnr 
57 


87610.023

C!\,\!YfEH O\E 

and 6 percent (see Table 1-2 on 

to that estimate, Gls<crcclOnary 

$35 billion and mandatory spending will be by 

$9 billion this year as a direct result of those procedures: 

addirional redactions in outlays attributable to the cuts in 

2013 occur in later years." The deficit 

in part on whcther those cuts are 

are canceled (in whole or in 

or arc replaced with other measures designed to 

the ddlcit. 

arc 

Amom"",,,,,,,,,,, Resolution, 

set funding for 2013 at an annual rate of 

$1.047 [fillion, the sum of the established hy the 

Act (before Relief 

those provided in the 

CBO's projections of discretionary 

be affected tor 2013 and future years. 

Statutory Limit on Federal Debt 

Until recently, the amount of debt that the Deparrmcnt 

of the Treasury could issue to the public and to other 

ar $16.394 tri!lion; that 

2012. At thar 

time, the Treasury began using 'vvhat art· knov·m as 

extraordinary measures for managing cash and borrowing 

in order ro continue funding the operations of the federal 

government. Ln·vmakers have recently suspended the 

4. 

lhe rules for scqUt'su,uion. [(,(1unions in )\'fedica.re 

the momh arin the scquestr.ltion order i~ issued. 

the /()l!()wing 

THE BU)(;ET .\\f) EC():\()MIC OLT!.OOK: FISCAl. YE\RS 2013 TO 202.) 11 

18,2013, and on 

amount 

was suspended (that from early February to 

tf no further anion is taken before May 19, the 

will once again resort to extraordinary measures to allow 

TI:) avoid 

including possibly the debt 

tht' debt ceiling will to be adjusted 

rhose extraordinary measun:s are exhausted later 

in [he year. 

Budgetary Outcomes in 2012 and the 

Outlook for 2013 In fiscal year 2012, the budget defit:it totaled $1.1 trillion-$206 billion less than the shortfall ret:orded in 

2011. ofGDP, the deficit declined from 

8.7 20 II to 7.0 percent in 2012. Under current the budget shortf.'dl will decline again in 2013, 

to $845 billion, or 5.3 percem ofGDP, CBO estimates, 

Revenues 

Federal revenues increased by $147 billion (or 6 

in 2011. and they are projected to $2'59 

(or 11 percent) in 20U. If current 

CRO estimates. revenues in 2013 will 

or 16,9 percent ofCDP, 

CDP recorded in 2012 the highest since 

2008, although still below the PCI" 

cent o[CDP over the past 40 years, 

revenues as a share of GDP for 2013 results 

largely from increases in tax rates for all workers 

and individua! income tax rates for upper incomes. 

In 2012, receipts from corporate income taxes accounted 

f()f a part of the increasc in total revenues, by 

$()1 (or 34 percent). Most of the gain 

from changes in tax rules, a reduction bctween 

2011 and 2012 in the portion in equip~ 

menr that businesses could deduct from their taxes in the 

year those investments were made. Receiprs from individual income taxes rose by $4] billion (or 4 and 

from social insurance taxes rose 

(or percent). Much of those gains 

increases in wages and salaries, which grew by about 

3 last year. Receipts from other sources increased 

by billion, mainly because of higher collections of 

eState and gift taxes and excise taxes. 
58 


87610.024

12 rilE III DGET \\D ECO\O\IlC 01 nOOh.. FlSOL lE.\J{~ 2015 '!O 202.' FEBHUR'l lOLl 

(loxi-i. 

'ih~~~~~Il~:T~P~Y~~R;iiefA~~tof~~~l~~~~_~ 

Extensions of TaxPro"isions 

\Xtlt~ some modifications that affect high-income 

hw ta .. '( 

that 

rates on ordinary incomt'; 

.. An expanded 15 percenr tax: hl\lcket 'and an 

incn:::asc i11 the standiud deduction for married 

cougles; 

• The ('stale and gift- tax rules 

modifications. 

with 

At the end of2012, tax rate.S'()n ordinary JnCOl11c 

fronl lovi~er rates in effect th;K vcar 

(10, 15,25,28, :'3, and 35 ' 

had been in effeer before 2001 (15, 

39,() percent). The new law permaner,,!\! 

the h)wer mtes, with the 

The 1he increaSt': in 1hc 

child credit from to $1,000 pcr child and 

provisions {also c!~acred in 2(01) I~at' 111ade th-c c-redit 

n,£ll1ciabk for more famjlics, BcJ(HC 200 t the credit 

\\"J.$ t{;'fui}ciabie only for fariliJit's WIth thret:: Qr'more 

chilJn.::n, It also ext.ended, rhroug!l 2017, a lower 

earned ltlComc threshold for refundability of the 

chikftax ctedit, 

Continued 
59 


87610.025

CHAPTER 0\1: TlfE Bt DGET :\\D l~CO\O~"1!C OIl'LOOK: nS(;\L \E\RS 20U TO 2013 13 

Effects on the Deficit of the American Taxpayer Relief Act of 2012 

(Billions of dollars) 

ExtensJons of rax Provisions 

Unemployment Compensation -22-8 

Medicare and Other HeBlth Care Programs;! -13 -5 

Other Provisions 

Total Change in the Deficit -329 -354 -311 '340 -371 -405 -416 -448 -482 -514 '1,706 -3,970 

Source: Congressional Budget Office, 

Notes: Negatlve numbers indicate an increase in the def!cit~ positive numbers indicate a decrease in the deficit 

between ~$500 mmlon and zero. 

8, The estimate shown In this table corrects an error in CSO's original cost estimate for the legis!ation, which showed a net cost of 

$1] bUllon, instead of the $1 bi!!ion net cost shown here, over the 

businCSSt'S to "H",,"c""cm 

investments in cquipnlt:m. 

Changes to Other Provisions 

"! 'he new law extended emergency unemployment 

cOfnp,:ns,uiclll fi.Jf a YCJJ", allowing cemlin 

unemployed for rt to 
60 


87610.026

14 rilE Bl Dl;Er ,\\1) EC()\O\llC Ol T!.OOK: FISt>\L YE\RS 20U TO 1015 FEBRlA!n lO!:\ 

Table 1·2. 

eBO's Estimates of Automatic Spending Reductions for 2013 ------- ----- ----- -------------

Defense 

Discretionary 

Mandatory 

Total 

Nondefense 

Discretionary 

Mandatory 

Medicare spending suhject to 2 percent limit 1 

Other 

Tota! 

Source: CongressIOnal Budget Office. 

42.7 

42.7 

28.7 

9.9 

4.0 

42.7 

Percentage 

7.9 

7.8 

7.9 

5.3 

2.0 

5.8 

4.6 

Notes: Budgetary resources subject to sequestratlon include new budget authority, unobligated balances for defense programs, and direct 

spending authority. 

These estimates use CBO's baseline projections for 2013 as a basis for allocating the reductions among categories. However, the 

Office of Management and Budget wil! make the official calculations, using its own numbers; as a result, the actual percentage 

reductions could differ from those shown here by a few tenths of a percentage pOint in either direction. 

* := between zero and $50 million. 

a. The sequestration cannot exceed 2 percent for payments made for individual services covered under Medicare Part A (Hospital Insurance) 

and Part B (Medical Insurance) and monthly contractual payments for Part C (Medicare Advantage plans) and Part D {prescription drug 

benefit plans}. According to the rules for sequestratIOn, reductions in Medicare will begin in the month after the sequestration order is 

issued, thereby delaying some of the effect on outlays until the following fiscal year. 

that revenues will incn:as(' at a 

flster pace, as a result of robU.\f incrt.'<tscs in 

l"\:ccipts from individual income and social insurance 

taxes. from individual income taxes arc anticipared to rise $131 billion {or 12 percenr). Just under 

half of the increase is from changes in tax 

including increases ill income tax rates 

on investment income, both affecting cenain highincome taxpayers, begillning in January 2013. In addition, shifring of incomc··--·such capital gains realizations from srock and orbl'r asset sales, wages and sabrics, 

and j1-om calendar year 20 13 into late 

rate (and in anricinot ultimately 

in 2014, ,A/hen some of the taxes on that 

incol1ll' would have heen paid." The other, slightly larger 

pan of rhe expected gain in 201 j stems from increase;.. in 

\ovages and salaries, capital gains realizations (apart from 

the effects of the challging tax rate's), and retirement and 

other types of income. 

Receipts from social insurance taxes in 201.) arc expected 

to increase by $108 billion (or 13 percent), mainly 

because of the expiration of the 2 pcrCC['''\,IC-I,onlt 

reduction in rh(' employee's 

tax rate that \vas in 

2012. 

Olltlays 

income tax receipts arc estimated to rise by 

(or 4 percent) in 2013 because of an increase in 

[ax rate on domestic economic proflts (the 

arc anticipated to be ahout the same as 

In 2012. federal by $60 billion {or 

bl'c:luse about $}O billion in payments that ordinarhave been made on OctOher 1,2011 (which 

on a weekend), were shifted into Sepfemher 2011 
61 


87610.027

C1IAJYI'EH{)\E 

(and thus into the previou:. fiscal year). Had the "hifl 

not occurred, outlays in fiscal year 2012 \-vould have bc>en 

abollt the same as in fiscal year 2011. That result stands 

in marked contrast to mmt of the 

10 years, federal outlays increased 

from the year before. 

dccal.k; in 7 out of 

than 6 perCell! 

recorded in 2012. A,<' a 

slightly, according to 

estimates, from 22.8 percenr in 20 l2 to 22.2 perceot-a share that is still larger than in any yen hctvveen 

19RG and 200R. 

Mandatory Spending. Spending for mandatory programs 

little in 2012, just O. ') 

howevcr, mandatory 

have risen by 3 percent, or $6.1 billioll. 

UvIandatory outlays grew at an average annual rate of 

abouf 7 percent bet\vccn 2002 and 2011.) Mandarory 

spending (adjustt:d for that shift of payments) is projecrnl 

to increase by 3 percent again in 20 LL 

Tbe Troublcd Asset ReliefTrogmm. The in 

mandatory spending in 2012 was for the /\ssct 

Rdicf Program (TARP). By law, the costs of investmcnts 

made under that art: estimated as the present 

value net outlays, calculated using a disincorF'OfCltCS market risk. The c~timares 

arc adjusted annually to account for an updated valuation 

of the cash flows associated with the program. In 2012, 

the estimated costs of the transacrions made 

by $21 hillion. In 

when a $'58 hillion downward n:vision of previous estimates and $21 billion in new caused the Treasury to record negative outlays of 537 for the 

program. This ycar. CEO the ncr effect of the 

TARP will be to reduce the by $1 ,) billion, 

its shares of AlG stock at 

""' "UL,,,n,, higher than 

That figure 

than the $25 billion net cost recorded fI.)r 20 12. ~ 

7. Prt'sent vaIm' is a sing!...> numlwr tkH expresst\, ,1 OowoCcurrent 

,md rutun: income in terms of an l'll!linlcllt lump 

'i1H11fl'Ccivcd 

TUE m DGET \\0 ECO\O:\llC Ol T!.OOK. FlH:.\t \E\R;-; lOU TO 101:\ 15 

Soci!l! S't'Cur;~v< Social Security oudays grew by $4J hillion 

(or 6 perccnt) in fiscal year 2012. prim;.lrily bt'clusc bcn('-

ficiar!l's received a .).(} percent cost-oF-living adjustment 

in January 2012 (which applied to thrcT-quancrs of the 

flscal there no increase the previous year), In 

addition, rhe number ofpeoplc rcc(iving bend its grew by 

2. ') percellt- That cost~of.living adjustment also boosted 

bcndlfs in the first quarrer offtscal year 2013; thi,~ January's COsHJf.·[iving adjustmellt was sma!!!..'r (1.7 pt.'IU'tlt), 

as is the estimated increase in the number of beneficiaries 

(2.1 percent). All told, out!ay~ are projected to increase by 

the same amount~$4.) billion--~in 2013 as they did in 

2012. 

lvfetliCilre. Net outlays for I'vledi(are (excluding the effects 

of [ht.' shift in the timing of rhe fIrst schcdukd payments 

to hC311h p!:lns from fl.~ca! year 2012 into fiscal year 

2(1/) grew by 3 percent {or Sl() billion) in 2()12~-a 

slower rate of gnwvth than any recorded since 2000, 

;vlcdicarc's outlay~ \vil! incre~lse hy 4 percent (or 

521 billion) in 2013, CBO estimates. (Those amounts 

arc ncr or n..'c('ipts from premiums paid by fhe program's 

hend!ciaril.·s,) 

U1icmplr~ym('nr Compms{ftioll. The largest decline in 

spending in 2012 \vas for unemployment compensation, 

number of people receiving first-time payments of 

regular unemploymenr benefits, w·hich peaked in 2009 

14.4 million, continued to fal! in 2012, rotaling 

8.7 million. As a result, outlays for unemployment· compensation dropped by $26 billion last year, to $93 billion. 

The decline is expected to continue-to billion in 

20 13-as fewer of the long-term llllemplo) t.'d will be in 

sfates that qualify 10 provide the rnaXiJJlUfll flumber of 

\vecks of emergency and extrnded 111lt'mploymenr 

ocndi[s." 

k, CHO now estiJJl:\tes thar the TARP will CO'it $22 hillion 

(L'\c!lldlllg admini,n,uin: co,r,) over it~ lifetime. 

9. 

pbrmiCm rat<' '1lU,t not only cX~·l"cd a ucHain thrl"sho!d hut it 

mll~r h:: to rvu.:1lt ull,'mploymcIH utes in dut SUte. 
62 


87610.028

16 THE BrDGET A,\D ECO.\O:vIlCOnWOK: H~C\t YE\RS lOU TO 202:) HiHRb\RY 2015 

Table 1·3. 

Mandatory Outlays Projected in CBO's Baseline 

(Billions of dollars) 

SoclalSecunty 

Old-Age and Survivors Insurance 

Disability Insurance 

Subtotal 

Health Care Programs 

Medicare" 

Medicaid 

Healthmsurancesubsidles, 

exchanges, and related spendmg 

MERHCF 

Children's Health Insurance Program 

Other 

SubtotalJ 

Income Security 

Supplemental Nutrition Assistance Program 

Supplemental Security Income 

Unemployment compensation 

Earned mcome and child tax credits 

Familysuppod' 

Chtld nutrition 

Foster care 

Miscellaneous tax creditsr

. 

Subtotal 

Federal Civilian and Military Retirement 

ClVlliand 

Military 

Other 

Subtota! 

Veteransf 

Income security 

Otiler 

Subtotal 

Otller Programs 

Agnculture 

Troubled Asset Relief Program 

Higher education 

Deposit insurance 

Otller 

Subtotal 

Total 

Actual, 2014- 2014-

2012 2013 2014 201S 2016 2017 2018 2019 2020 2021 2022 2023 2018 2023 

632 

136 

768 

668 

142 

810 

706 747 

148 155 

854 902 

792 841 894 951 1,013 1,075 1,140 1,209 3,979 9,368 

161 167 173 179 186 195 204 214 804 1,781 ------

953 1,008 1,067 1,130 1,199 1,270 1,344 1,423 4,783 11,149 

551 592 605 627 680 706 741 811 867 928 1,024 1,079 3,360 8,070 

251 265 297 331 372 399 422 449 476 505 536 572 1,821 4,360 

21 42 74 95 106 III 115 122 128 134 339 949 

9 10 10 11 12 13 13 14 15 16 52 124 

13 14 8 6 6 6 6 6 47 75 

25 23 29 26 28 30 32 35 38 109 272 

325 885 ---------- 951 1,049 1,168 1,246 1,314 1,417 1,508 1,608 1,744 1,845 5,727 13,850 

00 ~ 00 ~ ~ m n ~ ~ D 

~ £ ~ ~ ~ W ~ ~ M 06 

~ ~ £ % ~ G ~ % ~ £ 

72 00 ~ 84 ~ ~ 84 D ~ ~ 

~ 3 3 3 3 3 3 3 3 3 

6 n 72 72 n ~ 3 U V ~ 

7 8 

6 

~ ~ B lli B lli m ill m m 

87 89 

49 54 

7 

143 150 

92 94 

56 57 

6 

154 158 

98 101 

63 61 

167 169 

104 108 112 115 

58 64 66 68 

8 9 10 

170 181 187 193 

73 73 392 760 

74 70 289 626 

57 59 227 492 

77 78 417 794 

25 25 m 248 

29 30 117 257 

8 8 36 76 

o 31 31 

342 344 1,633 3,285 

119 122 489 1,065 

75 72 294 638 

10 10 35 83 

204 205 818 1,786 

~ 68 ro 72 81 m ~ ~ ~ 84 92 06 375 801 

13 13 13 13 M M 13 10 V V 10 10 

68 m ~ ffi % 92 00 ~ ~ W ill ~ 

13 n 13 10 10 10 13 10 10 10 10 10 

25 -13 

-19 -18 -22 -20 -12 -3 

57 

82 

47 

48 

-9 -10 -11 -12 -13 -18 

56 54 56 56 54 54 

43 42 51 58 60 56 

-18 -13 -14 -15 

53 53 60 60 

55 60 66 65 

69 157 

444 958 

78 158 

-54 -36 

-54 

277 

254 

-l3l 

558 

556 

Continued 
63 


87610.029

CHAPTER O\"E THE BrDGET A;\D ECO\"OMIC OnLOOK: FISCAl. m"'RS .W15 TO 2025 17 

"-----.----------~-.-.-.-.--.~-"--- .... -.--..... ---------.----~---~ -------- (Billions of dollars) 

Total 

Actual, 2014- 2014-

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2018 2023 

-85 -90 -96 -97 -102 -lll -121 -13l -139 -149 -162 -176 -527 -1,285 

Federal share of federal employees' 

retirement 

Social Security -16 -16 -16 -17 -18 -18 -19 -20 -21 -21 -22 -23 -88 -195 

Military retirement -22 -21 -21 -11 -22 -23 -24 -25 -26 -27 -28 -29 -lll -243 

Civil service retirement and other -30 -29 -30 -31 -32 -33 -34 -35 -37 -38 -40 -41 -159 -351 

Subtotal -67 -66 -67 -69 -71 -74 -77 -80 -83 -86 -89 -93 -358 -789 

Receipts related to natura! resources -13 -IS -14 -14 -IS -14 -IS -19 -]7 -18 -18 -18 -73 -164 

MERHCF -ll -9 -9 -9 -10 -10 -ll -12 -12 -13 -14 -14 -49 -1l4 

Other -33 -25 -23 -29 -32 -34 -30 -31 -31 -32 -27 -27 -148 -295 

Subtotal -209 -205 -209 -219 -230 -243 -255 -273 -282 -298 -310 -328 -1,154 -2,646 

Total 2,031 2,116 2,205 2,342 2,535 2,655 2,768 2,924 3,087 3,263 3,501 3,658 12,504 28,938 

Memorandum: 

Mandatory Spending Excluding 

Offsettmg Receipts 2,240 2,321 2,414 2,560 2,765 2,897 3,022 3,197 3,369 3,561 3,812 3,986 13,659 31,584 

Medicare Spending Net of 

Offsetting Receipts 466 502 509 529 578 596 620 600 728 779 862 903 2,833 6,785 

Spending for Major Health Care Programs 

Net of Offsetting Rewpts9 726 778 840 917 1,033 1,095 1,154 1,246 1,325 1,412 1,532 1,615 5,039 12,169 

Source: Congressional Budget Office. 

Notes: Data on spending for benefit programs in this table generally exclude administrative costs, which are discretionary. 

* = between zero and $500 million; MERHCF Department of Defense Medicare~E!igib!e Retiree Health Care Fund (including 

TRICARE for Life). 

a. Excludes offsetting receipts from premium payments and from payments by states from savings on Medicaid's prescription drug costs. 

b. Includes Temporary Assistance for Needy Families and various programs that involve payments to states for child support enforcement 

and family support, child care entitlements, and research to benefit children. 

c. Includes outlays for the American Opportunity Tax Credit, the first-time homebuyer credit, and other tax credits. 

d. Includes Civil Service, Foreign Service, Coast Guard, and other, smaller retirement programs as well as annuitants' health care benefits. 

e. Income security includes veterans' compensation, pensions, and life insurance programs. Other benefits are primarily education 

subsidies. 

f. Includes Medicare premiums and amounts paid by states from savings on Medicaid's prescription drug costs. 

g. Includes Medicare (net of receipts from premiums), Medicaid, the Children'S Health Insurance Program, and subSidies offered through 

new health insurance e){changes and related spending. 

Medicaid. Medicaid spending also declined in 2012-by 

$24 billion (or 9 percent)-primarily because a temporary increase in the federal share of the program's costs 

expired in June 2011. That increase initially rook effect in 

2009 under the American Recovery and Reinvestment 

Act of 2009 (ARRA, ~L. 111-5) and was exrended in 

modified form through June 2011; it was therefore not in 

place in fiscal year 2012. In 2013, Medicaid outlays will 

increase by $15 billion (or 6 petcent), CBO estimates. 

The Making Work Pay Tax C·redit. This refundable tax 

credit (which expired at the end of December 2010) 
64 


87610.030

18 !'HE Bl'[)GET A\O ECO'O~l!C OlTLOOK: HS(>\L \E<\RS 201) TO 201,~ 

amollnted to 6.2 percent of an eligible individual's earned 

income for tax years 2009 and 2010 (up to a maximum 

of $400 for individuals or $800 for joint filers). Because 

it was refundable, any ponion that exceeded an individual's tax liability was paid to that and recorded as 

in the Because credit 

$14 billion between 

Spending for all other manbillion from 2011 to 2012 

in certain payments). In 

mandatory spending is anticipated to rise 

by about $35 billion (or 8 percent), in part because of 

an increase in spending for agriculture programs 

(£11 billion). 

Discretionary Spending. In tlscal year 2012, rota! discretionary budget authority (that is, the authority provided 

"m"o,",i,mo,n acts to incur financial obligations that 

in immediate or future outlays) dropped 

$23 billion (or 2 percent). tell 

$62 biUion (or 5 percent) in time 

since 1962 that such outlays have falten, The decline was 

between defense and nondefense 

mostly from the waning 

funds provided in ARRA and from a 

for military operations and related activities 

and Iraq. 

In 2013, discretionary budget authority is set to drop by 

another 5'58 hiHioll (or '5 percent) to $1,140 billion, The 

automatic spending reductions pur in by the Budget Control Act will reduce funding billion, and 

on an annualized basis, funding for war-related activities, 

in will fall $27 billion in 2013, 

estimates. offsetting reductions is 

$50 hinion in funding provided in response to Hurricane 

Sandy. Funding for all othcr discretionary programs is 

$10 billion lower than in the Total discretionary outlays will fall by $72 

the current year, eRO projects. 

discretiorlafv budget authority in place for 

rather 

apply 

for the years between 2014 and 10 Currently, the 

amount offunding provided in 2013 for each 

exceeds the amount allowed by the caps-by $6.8 

FEBRl.ARY 201:) 

_for security and $1.0 billion for nonsecurity, eBO 

estimates (see 1-4). 

eBO's Baseline Budget Projections for 

2014 to 2023 

eBO constructs its baseline in accordance with provisions set forth in the Balanced Budget and Emergency 

Deficit Control Act of 1985 and the 

Budget and Control Act For the 

Under those assumptions, CBO 

deficit will continue to shrink 

that the budget 

to the size of the 

economy-from percent of GOP next year to a Io-..v 

01"2.4 percent by 201 '5, In dollar terms, the deficit is projccted w fall roughly by halfbe[ween 20 l3 and 201 '5. 

Beginning in 2016, the deficit is projected to increase 

again both in dollar terms and as a share of the economy, 

measuring 3.8 percent ofCDP by 2023. ror the 2014--

2023 period, revenues and Outlays alike arc projected w 

be above their 40-year averages as a percentage of GDP 

(sec Figure 1-2), 

Under CBO's baseline projections, most of the decline in 

the deficit in the next two years is the result of a projected 

signiflcant rise in n,:venucs, which arc estimated to 

increase by 2') percent between 20] 3 and 201 '5. As a 

share ofGDP, revenues in the baseline rise from 16,9 percent in 2013 to 19,1 percent in 201'5, about 

from in tax rules and from factors 

eBO pro19 percent of 

In CBO's baseline, outlays initially decline 

percentage ofGDI~ from 21.7 

of2l.5 in 2017, and 

trend 

10. 
65 


87610.031

CH,\PTER O\E TilE Bl DGET .\:\1) ECO\O\UC OlTLOOK: FlSC'\L m\&.'.; 20U TO l025 19 

Table 1·4. 

Limits on Discretionary Budget Authority for 2013 

(Millions of dollars) 

Securitt Nonsecurityil 

Caps for 2013 In the Deficit Control Actl

) 684,000 309,000 

Adjustments 

OverseJs contingency operations' 99,941 

Emergencyti 7,015 34,627 

Disaster relief 11,779 

Program integrity! ° ° 483 

Total ll8,735 35,110 

Adjusted Caps for 2013 802.735 394,110 

Budget Authority as Estimated by 

eBO When the Legislation Was Enacted9 809,572 395,133 

Amount by Which Budget I'uthority 

Exceeds the Caps 6,837 1,023 

Memorandum: 

Budget Authority in eBO's Baseline 

Excluding automatic spending reductions 

and reductions to meet the capsS,'1 809,026 409,900 

Automatic spending reductions: -50,828 -20,522 

Reductions to meet the caps -6,837 -1,023 

Total 751,361 388,355 

Source: Congressional Budget Office. 

appropriations. 

c. This category consists of funding for war-related activities in Afyhanistan or for similar activities. 

warrant federal assistance. 

Total 

1,043,000 

99,941 

41,642 

11,779 

483 

153,845 

1,196,845 

1,204,705 

7,860 

1,218,926 

-71,350 

-7,860 

1,139,716 
66 


87610.032

20 TilE Bl [)liEf '\.\]) ECO\()\llC Ol TW{)h" Fl;';C\L )l\HS 201,{ TO 2{125 

Figure 1·2. 

Total Revenues and Outlays 

(Percentage of gross domestic product) 

26 

24 

22 

20 

18 

I 16 II 

14 

o 

FEBHl,\R) 2(J1.{ 

1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 2022 

Source: Congressional Budget Office. 

health care COStS, and a in 

for tedcral subsidies f()f insurance, outlays 

Social S<,,'curity and the federal government\ major health 

carl' programs arc projected to fise suhsuntiaHy relative to 

the 5[1'.e of the over the next 10 years. In addition, growing debt rising interest rates will boost nct 

interest payment". Spending on all other programs-in 

the aggrcgate--is to decline relative to C;OP 

hcrween 2014 2023, primarily because of improving 

economic condition" and the spending !imit"; in current 

law. 

Revenues 

CHO projects that, if current tax laws rem:lin unchangt>d. 

revenues \vi!l risc rdati\"C to GDP on.?r the next rwo years 

and then remain at about 19 percent of C;DP through 

2023< After 201-'5, increases in individual income tax 

receipts relative to CDr will roughly oltse! 

declines in corporate income tax receipts declines in 

remittances from the Federal Reserve as a share of GOI~ 

Individual Income Taxes. eRO projects that, under current bw, individual income rax recejpL~ will rise from 

$1.3 trillion this year to $2. ') ttillion in 2023-01" from 

:.9 percent to 9.8 percent ofCDE The projected 

increas(' in receipts rdative to the economy in CBCYs 

baseline re!1ecrs real (inflation-adjusted) bracket creep, 

the ('conomlc expansion, reccnr and scheduled changes in 

('ax provisions, and orhn [actors. In previous ba,clines. 

eBO had projected that tbose receipts \vCHlld increase to 

a m1lch higher percentage of GOP by the carly part of 

the next decade, hut the American Taxpayer Rc!iefAct's 

pcrmanenr extension of most of the expiring income 

tax reductions has significantly reduced the amount of 

revenue" anricipated Ullt!':r current bw. 

R('fl/ HmcA'Ct Creep. Increase" in rea! income will push 

more income inw higher tax brackets. \vhich boost:. 

rn~'!lU~>S relative to CDr in CB(Y,~ projections by 

0,9 percentage points over the next decade. II 

FCOflomic RCNlllfl)'- eRO expects that the economic 

expansion and reb ted t:Ktor, \vll1 cause taxable inromt.'s 

(0 ri"e faster than GDP, boosting individual income tax 

revenue:. as a share ofCDP by about 0.4 percentage 

points oyer the next decade; most of that effect witl occur 

by 2017. C:enain components of taxable income--

including \-vages and salarit"s, capital gains re,dizations, 

interest income, and proprietors' income-declined as a 

:.hare ofGDP over the past several years. eRO expects 

that, as the economy recover", such income will rebound 

more quickly than the economy as a \vho!e, increasing 

1I. 
67 


87610.033

CH\PTEI{ O\J 

revenues as <1 percentage of(;1)E (For more dl..,tail, see 

"Projections ofIncomc" in Chapter 2.) 

(f.1ttnge,' in Ttlx: Provisiolls. Several recent and scheduled 

(-lunges in tax rules will, on net. increase individual 

income tax revenues as a shan: ofGDP by 0.2 percentage 

points, CHO projects. Most significant arc tax rates that 

apply to high-income individuals, which increased in 

January 2013 both because the American 'T:npaycr Relief 

Act did not extend the lower tax rates for tho.<,e taxpayers 

and because a nnv surtax on inn~srl1l('nt income, enacted 

in the Affordable Care Act, takes dfect in 2013. 1.: In 

addition, for certain taxpayers, the 

American Taxpayer reinstated jimitJtions on 

the use of personal and itemized deductions. 

eBO expects that those \vil! increase revenues as 

a percentage ofGDP in fiscal year 2013 and wi!! raise 

reYenues even more, rdative ro Gnp, in 2014, when they 

are first in effect for a full fiscal year. That impact persists 

through the next decade in eno's basdine projections.. 

Other File/ors. CBO estimates tbat other [lClors \vi1l 

increase individual income rax revenues, measured as 

a share ofGDI~ by 0.'5 pcrcenr,lgc poinrs. Tho~e [lefOrS 

include growth in taxahle distributions from 

[aX-Ge[enrCCl rerirclnCl1t accounts (such as indiyidual 

tetirement accounts and 401 (k) plans) as the population 

ages. CRO also expects that wages and salaties of higherincome taxpayers \vill grow fa5>ter than those of other 

ta.xpayers, boosting average i(lX rates. 

Social Insurance T~lxes. eBO expects that, under current 

law, receipts from socia! insurance taxes (which arc 

(kdicated tn funding Medicare, Social Security, other 

rerirement programs, ,md unemploYfllc.'nt bene~lrs) will 

edge up from 5.9 percent ofGDP this year to 6.l 

in 2014, and then remain at abom 6.0 percent 

thert.'afrcr. The principal source of the initial ill crease in 

revenues rda! ive to GDP is the expiration of rhe payroll 

tax cur that "vas in eft-ect in calendar years 2011 and 

2012, The t.'mployee's share ofth(, tax was reduced hy 

2 percentage points (from 6.2 percent of wages to 

The Afl-o[cbh!c (:,lfC An wmpri:'lC$ the l\uil'llt Protection ,md 

}\fronLthk(:arl'r\cr(PI" 111·148) 

(!~L 111-1 ")2) ,wd, in the c,J~l' or !hi~ docutwctlt. the dltu~ of 

whscqutnt rda(cd ludici,ll dc~i5ion.~, <,t,l(urory dungt,>, and 

admini,tratin:: ,(uiom. 

TttEm D{jET ,\\1) EcmO\llC ot 1100K: FbC\L YE\RS 2015 TO 2025 21 

percent) for those years, reducing receipts in fiscal 

years 2011 through 2013. 

Social insurance receipts will remain stable as a pcrccntofGDP after 20H, eBO rdb.:tin)2; the 

ofa increase in wages and salaries relative to GDP anJ a [wojected Jecrease in socia! 

insurance receipts relative to wages and salaries. 

CBO expects fhat wages and salaries. which have 

declined as ,1 share of Gnp since 2009 as they 

aUy over the past fcw decades, \vi11 grow faster than 

economy oycr the next 10 although remaining 

below their average share in reet'nt decades. 

Social imurance receipts, howewr, arc expected ro decline 

relative to wages and salaries became a growing ~hare of 

c.unings is w be above the taxahle maximum 

amount ror Security payroll taxes. (That amount, 

cU1Tc'ntly $113,700, is indexed [0 the gr()'wlh of average 

wages.) In addition, CEO expeCts rl'ceipts from 

unemploymcnt insurance taxes, which include ~tate 

unemployment raxes, to decline 10 more levels in 

coming years; those taxes have been higher normal 

in recent years as s[ate$ have raised rheir tax rates and tax 

bases to replenish unemployment insurance trust funds. 

COrpOr'dte Income Taxes. Under current law, 

from corporate income taxes will climb sharply 

to GDP ovcr the next several years, CRO projects-from 

1.6 percent this year to 2. '5 in 2015 and 2.6 percent in 2016 and declining to 2.0 percent 

of GDP by 20L~, about the average of the past 40 years. 

The average tax rate on domestic ecollomic profits has 

bccn low by historical standards for the 

changes to the tax code, 

businesses to accelerate their 

C<jUiplllCllt J1un:hascs, hav(' contribun:<L eBO 

that the scheduled expiration under current law 

and certain other [ax provisions, such as the research and 

experimentation tax credit, \viU raise corporate income 

rax receipts as a share of(;[)P by about 0.4 percentage 

over rh(> next two years. (~BO e'(peers that other 

COIIUII.Hllllle to the low average tax rate on domessuch as deductions for bad debts 

high by historical standards), will 

gradually dissipare as the economy recovers, boosting 

revenues, measured as a shan~ ofGDP byahout 

O. ') percentage points by 201 S. 
68 


87610.034

22 I'lll: m [)U"T \\0 rCO\{)\lIC 01 11001\. I<I~C\! )!.\HS 2n! \ TO 

Hctwcl'n 201"' J!ld cOrpODfl' tllcorne ux rVl\'J!'t;, 

wi]! decline by OJ; pcrCC1W1gC points ()rC;Dl~ eBO pwfl.'Jucing rho,>\.' l'l'o:il)[S to 2,0 pn,'cnr nfCOP ill 

2023. That ckl'linc ~tClm largc1r from ~111 c:.:pcct("d drop 

in ckl1l1e,Q1C economic profir\ relative t\) (;1)j~ \\hilh in 

[(lnt ['cslll,\ from the burden of c\lrpOratl' inh'fe,q 

payments, dcprcciar!()l1 on lht, hq~~n st;Kk ofhm.inns 

c<lpit,]!' :1lld Sro\l.·th in th<.' ~h,lrc of incol\w going to labor. 

Earnings ofthe federal Reserve System. Income l)rnduccd by the nrinu:. ;ldi\'itil\~ of the Fdcra! t\cscn'c 

Systvm. minus dw coStS nf t'-\'lwnting th:lt income :tnd 

the operation,,>, i~ rcmincd to the Trl'<l"w) 

aJld countcd reveflUC lI,e 5nTr,d thc 

,I.\Sct holding:::. through significant pllrdusc~ orTn:<l~L1ry 

~md mon[:a~e-bad~l'(l ~cntritil's i~.\un{ it:' 

,'vhe, Freddie \bc and Cinnie Those 

,k'riom C,U!,--cJ remilt;lu<.'('S from till" !;edcral R~'~(,IYC ro 

climh from 0.2 pCrll'llt o(Cf)P in 200<) to ,1hoUl (j,,) pcro((;l)P hom .2010 throuGh 20] where they 

,''\p,~dcd to remain in 201.\, 

CBU open.., those v.trning.., to t'dg\' ill 20 He ,wd 

:~Ol ,), lO-lbout OJ) pCIYCnr ()(:Dl~ }:Cdcrdl 

Resenc funlwr increase" its holdings of rrcaSll!'\' anJ 

lllOrtgasc-bdrkcd :'l'n!ri[ic~> lk,vond 20] ,;, (~B() e:\IXY1S 

r~'lllin,\1l((') from the I:<.,deral Rc;.,crvc to dcclin(\ CIBing w 

'!('I'O lX'l\\'('cn 20 t G ,md 2020. 'Tiut drop rdkl't,', 

expected s,lks o(assds h:'!ill' h:dcral Rl'\CfYC :t, tilt' cconomy SI"\)I,\') 10 nC,H pntcfHial, \\I1I(h \\'oHLl gcnl'rdll' 

caplt,lllosscs ,l~ imnt'q n\c~ ri~c. /\ho c~pcucd i,~ elll 

in thv l~'dn,ll (llllds \\ hieh wuuld ,h,uV1: 

hnOc.l tht' h:dcra! Re~c[\'l"~ 

of (kpmilOr:' insritulJOm. illtCl'l.'\t 

:tmicip,Hcd after 20 l ") would initially haH' a limit~'d 

dkel. on c~Hnillg,~ from thc held by the cClltral 

hank hecause it \\lHlld O!l!~' p\tdually pur..;h:l~e 11\.'\\ 

Sl'l'uritic,> ~:aming rhe higher yields, 

In CB()'s iv<;clinc projn'lion~) the Fedl'ral RCSt:T\-C hegins 

dwr,:,d'tn, ~ru\\'ins to 0.2 lwrn.'nt ol' CDP by 202.-), 

ahout 1 ih' ,1\U,lgC in the dl'(;l(k (rorn 2001 through }O 1 O. 

(J)() l'"\pee1" lh.lt SC\'CP] C\ctor~ wi!! (()nlrihull' to tbe 

il" tT,l~C in t'<.'milLUl(c), includill?, thv end Or:1SS<.'t 

and th"ir 3SSt'H,·i:w.:d losses, J reduction in pay-

\in rl'\\T\'l') Edl b;lCk to n101"l' normal 

lc\'l'b, Jnd ,1 gradual inCr("lS~' ill th' share of the pon{()lio 

uJn:.iqing ofhighcr~yic!ding \ccuritic~ ,l~ tlll' poni()jin 

bc~im to gro\\' again, 

Receipts: from Other Sources. Tlw rl'd~'nt gOHTnntL'nt 

from 

cu~tom~ dlltic~, :uld mt~cdLllleom k'\ ie" (:1H.) 

proicn~ fbat receipt, from tbn'le )ourccs \\'ill ri:::.~' from 

1,0 pn'Cl'IHot'CDP .;013 and 201410 percvmnf 

(;1)P in .:O! ,), Illdin!y ,l~ ,\ n:m!t <ll1d 

Act. 

RnTml<.'~ froln OTher )ources ~'dgc dO'wnward in CnO\ 

proi,-'uiom to 1.1 pnn:nl ot· (1)P :lt1er 20! 7, mmdy 

h~'CllN' imprmcd fU<.'l cHlcicnry of car, <1l1d trt1ck~ {:::. 

e;;pt'ct<.'d to reduce fcc.erpl\ fwm l'.\ci"c 

llllb. 

Outlays 

rhl' l)ctl,'ll C()!11roi /\,'t n.'quirl's CH()\ proj<.,ctioJl," !(l! 

(1w:.t mand:HOf)' program:. to b~' made in kecpinl:! \Vilh 

thc :ls~utllptinn th:tt 1-1\\'5 cOl1tinue unch:tngcd. 

'j'hu:-" (:l1()'s h.lsdinc proicc{ion~ f()l" m~U1datof:' pn) 

gnms r.:lklt lhv ,lUtnOl,l1ic t'llf()l'(('rl\cnl prolcdllfC'> oj 

th' Hudl:!t'l (:onrro! ,.Vt and \':\p,'('\('d rhallg<'~ in rlw 

n'ollumy, d.:mographic~, ,lnd other ftctor\, rnr djs~ 

crl'tion;lry ~pl'lldillg, CBO\ b,'\<.'lin~' incorporatc:, tbe 

Clf'\ plll in place h;: thc BudGcf ('onrrnl ,wd "n.-oU!lb 

(or further rl'ductiom in \lKh ~pcndin.s tlul .HC )d)('dukd to on ur under the ']ut{)!ll:llic enr()rCCD1Cllr 

prorcdUH:~, ()o tbat ha\i), tot,a1 outlay.~ arc projc( tcd to 

dedinc ,~jighdy !O (;I)P bctween 201 ~f ,mtl 2017 

and then to rhrough 2025 ~ ",l\'cngillg 

pncl'lll o\l'f the decadt', ~jighd:; ,lhow [he 

remittance) to th(' Il'c<l)Hr; again in 202.1lh,H incre.l~c 1":; 
69 


87610.035

Cll,\PTER O:\E rilE Bl D(JET A:\D ECO\O,\llC ()[ TWOK: FISC\LYI'~\I{S 201.1 TO 202.) 23 

Figure 1·3. 

Projected Spending in Major Budget Categories - - ------------- .... -.. _.. -----~----- -----------------------

(Percentage of gross domestic product) 

o , _____ ______ ____ , ____ __ " ___ , ___ ._" ___ '_ ____ _c_. _____ J __ " _______ " ______ __ "_" 

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 

Source: Congressional Budget Office. 

a. Includes Medicare (net of receipts from premiums), Medicaid, the Children's Health Insurance Program, and subsidies offered through 

new health insurance exchanges and related spending. 

b. Other than mandatory spending for major health care programs and Socia! Security. 

21.0 percent ofGDP that has bl'en the average for the 

past 40 years. Ii> 

In CBO:" baseline, three major categories 

increasing rdative to the size of the economy, 

in the lam'r pan of the lO-year period: 

• Under current law, outlay~ for Social Security will 

total 5.1 percent of (;DP this year and stay near that 

percentage it)r the next ~ew years bur reach 1.5 percent 

ofCDP by 2023. 

• Oudays for the major health care programsMedicare (net of receipts from prcm.iums), Medicaid, 

202.1. 

the Children's Health Insurance Program (CHIP), and 

suhsidies offered through new health insurance 

exchanges and rdated spending-vvill soon be even 

greater than outlays for Social Security. Spending for 

majot health programs wiH he nearly 5 percent of 

GDP in 2013, ,wd such spending is projected to grmv 

rapidly when provisions of the Affordahle Care An 

arc fully implemenwd by midJecade, reaching 

6.2 perc{'nt ofGDP in 2023. 

• Ner inren:st is currently equal ro 1.4 percent of GDI~ 

but, in eno's baseline, rising interest rates push that 

total ro 3.3 percent ofGDP in 2023, 

By the end of the projection period, those three growing 

carcgories of spending will be the three largest in the 

budget (see Figure 1-3). Under current law, over the next 

10 years, all other broad categories of spending-·for 

defen:.c and nondefense discretionary programs as well as 

for orher mandatory programs-are projected to decline 

relative to CDP. 
70 


87610.036

24 TilE IWD(;ET -\\D ECO\OMIC OlTLOOK: FlSC\LYE\RS 10l.i. TO 101.1 

Mandatory Spending. Between 20J 4 and 2020, mandatory spending (net of offsetting which reduce 

outlays) is to remain about 

and as the ('arc of growth in MediClrc 

up. Social Security outlays, \vhich are 

to account for almost one-founh of the government's spending in 2014, an.' projected to remain near 

5.0 percent ofCDP in most years through 2018 and then 

climb in the to reach 5.5 percent of GOP 

in 2023. Medicare (net of receipts from prc-miums) in CBO's remains around 3.0 pc-re-em of 

GDP throllgh 20] 9 and then grows to 3, ') percent by 

2023. 

j'viulictlid and Other Hralth Under current 

share of COP over the next 10 years, from 1.8 percent in 

2014 to 2.2 percent in 2023, by CEO's estimate. That 

rise is attributable in part to increases in the cost 

of Medicaid's bcndlts per 

bet that 

eligibility criteria), along with related spending, is 

jeered to increase from 0.1 percent of GDP in to 

0,5 percent I ° years from now. 1

• 

and 

measures that have provided 

on ;II! mandatory 

and the m,ljor 

as temporary 

Fl~B1U \In ZO 13 

l>iscretionary Spending. In eBO's baseline projections, 

most appropriations bctwcen 2014 and 2021 are assumed 

to be constrained the and auromatic 

reductions put in by Budget Act. 

the final two years~2022 and 2023--discretionary 

cov('1"('d by the caps is asslllTled to grow from the 

at the rate of inHation, consistent with the 

statutory rules governing thc baseline. fl.)f warrelated activities and fOf somc mher purposcs not constrained by the caps and is generally assumed to grm·y 

with inflation from the amount appropriated for 20 I} 

(sec Table 1-4 on page 19 for the amount of such 

adjustments), ;~ 

be iF appropriations gre,v at 

the rail' aud how those amounts arc aBected 

by the imposition of the caps and the automatic 

spending reductions [har arc to reduce those 

caps. As a result of the and auromatic reductions, 

projected in the h)I· the 2014-2023 

period is $1.5 trillion less than the amount that 

would be 

inflation 

18. 

to reduce dH:ir out-of-pocket costs; d1O'>C 

~Ub!)ldie~ MC dd~.,>ifkd cnrir(.'l~· ,\~ ouda~·~. 
71 


87610.037

CltWfERO\E 

budget authority will fall by $17 billion (or l.5 percent) 

from 2013 to 2014, CBO esrimares. That reduction 

reflects a full year's implementation of the automatic 

spending reductions in 2014, compared with the sma!ler 

reductions currently in effect for 2013 as a result of the 

American "r:lXpayer Relief Act. 

After 2014, the result! ng caps will limit growth in budget 

authority for most discretionary programs. Under the 

assumption rhat the maximum amounts allowed hy the 

caps are appropriated (and that funding fCJr war-related 

activities and emergencies grcnvs at the rate of inflation), 

budget authority in the baseline grows by an averagc of 

2.4 percent annually. Discretionary outlays are projected 

to grow more slowly-at an average rate or 2.2 percent 

per year from 2015 through 2023 (which is less than half 

of the projected growth rate of nominal GDP). Projected 

outlays during those years grow more slowly than budget 

authority because they also reflect, with a lag, the reductions in funding in years before 2014. With funding as 

assumed in the baseline. discretionary outlays would fall 

to 5.5 percent ofGDP by 2023, more than 3 percentage 

points helow their average from 1973 to 20 12. Specifi~ 

cally. defense outlays in 2023 would equal 2.8 percent of 

CDI~ compared with a 40-year average of 4.7 percent, 

and nondefense outlays in 2023 would equal 2.7 percC'nt 

of GDP, compared with a 40-year average of 4.0 percent. 

Net Interest. The increase in debt (in dollar terms), along 

with an anticipated substantial rise in interest rates as 

the economy strengthens, is expected to sharply boost 

interest on the deht. eBO projects that, under 

current the government's yearly net interest spending 

will double as a share ofGDP~from 1.5 percent in 2014 

to .).3 percent in 2023, a percentage that has been 

exceeded only once in the past 50 years. 

Federal Debt Held by the Public 

Debt held by the public consists rnosrly of securities 

that the Treasury issues to raise cash ro fund the federal 

activities and to payoff its maturing 

19 The amount the Treasury borrows by selling 

securities (net of the amount of maruring securities that it 

redi.~ems) is influenced primarily by the annual budget 

deficit. However, several factors-collectively labeled 

other means of financing and not directly included in 

19. 

TIlE Bt DGET A\D ECO\OMICotTLOOK: FISCAL n:ARS .W15 TO 2025 25 

budget totals-also affect the government's need to borrow from the public. Among them arc reductions (or 

increases) in the government's cash balance and in the 

cash flows associated with federal credit programs (such 

as those related to student loans and mortgage guarantees) because only the subsidy costs of those programs 

(calculated on a present-value basis) are reHected in the 

budget deficit. 

CBO projects that Treasury borrO\ving will be $1 04 bjl~ 

lion more than the projected budget deficit in fiscal year 

2013, mainly to finance student loans. Each year fi'om 

2014 to 202.3, borrowing by the Treasury is expected to 

exceed the amount of the deficit, mostly because of the 

ne.'ed to provide financ,ing for student loans and other 

cn.'Jit programs. CBO projects that the govcrnment will 

need to borrow $76 billion more per year, on average, 

during that period dIan the budget deficits would 

suggest. 

After accounting for all of the government's borrowing 

needs under currcm law, eBO projects that debt held hy 

the public will increase from 73 percell[ of GDP at the 

end of fls<.:al year 2012 to 76 percent this year and 78 percent in 2014. Under the assumptions that govern CBO's 

haseline, debt will fall to a low of73 percent in 2018 and 

then rise for the remainder of the projection period, measuring 77 percent ofGDP at the end of2023 (sec 

Table 1-6 on page 2H). 

Along such a path, federal debt held by the public will 

equal a greater percentage of GDP than in any year 

bct\ve{>n 19'51 and 2012 and will be hI' above the average 

of39 percent over tht> 1973-"2012 period. Moreover, it 

will be on an upward trend by the end of the decade. 

Debt that is high by historical standards and heading 

higher will have significant consequences for the budget 

and the economy: 

• The nation's net interest costs will be very high (after 

interest rates return fO more normal levels) and rising. 

Highet costs for lme1'est eventually will require the 

government to raise taxes, reduce benefits and services, 

or undertake some combination of those twn actions. 

• National saving will be held down, leading to more 

horwwing from abroad and less domestic investment, 

which in turn will decrease income in the United 

States relative to what it would be otherwise. 
72 


87610.038

26 TUE Bl DGET ,\'D ECO:-"OMICOl TLOOK: F!~C\l, YE\RS lOU TO lOU FEBRL\RY 2()!:i 

Table 1·5. 

Discretionary Spending Projected in eBO's Baseline 

(Billions of dollars) 

Total, 

2014-

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2023 

Budget Authority 

Defense 

Increase discretionary appropriations for 2013 

subject to the caps at the rate of Inflation" 569 584 600 617 635 653 671 689 0,3. 0.3. 

Reduction to meet the caps ·18 ·23 ·27 ·32 ·37 -41 ·45 n.a. n.a. n.a. 

552 566 577 590 603 616 630 644 n.3. n.a. n.a. 

·55 ·55 ·55 ·55 ·55 ·55 ·55 ·55 n.a. 

Caps with automatic spendmg reductionsD 497 5ll 522 535 548 561 575 589 o.a. n.a. 

Adjustments to the caps 

War~relatedspendjng 90 92 94 96 99 101 103 105 n.3. n.a. n.a. 

Emergency designation n.a. n.a. n.a. 

Subtotal, Adjustments 90 92 94 96 99 101 !O3 106 n.3. n.a. 

Total, Defensec 588 603 617 632 647 662 679 695 713 731 6,566 

Nondefense 

Increase discretionary appropriations for 2013 

subject to the caps at the rate of inflation~ 522 536 552 568 587 605 622 639 

Reduction to meet the caps ·16 ·16 ·22 ·27 ·34 ·39 -44 ·49 n.<J. 0.3. n.a. 

Caps established by the Budget Control Act 506 520 530 541 553 566 578 590 n.3. n.a. n.a. 

A\ltomatic spendmg reductions b ·37 ·37 ·36 ·36 ·35 ·34 ·33 ·32 0.3. n.a. o.a. 

CDPswithautomatic spendingreductionsb %9 483 494 505 518 532 545 558 n.a. n.3. o.a. 

Adjustments to the caps 

II 12 12 12 13 13 13 14 n.a. n.3. n.a. 

12 12 II 9 9 10 10 n.a. n.3. 

Emergency designation 42 43 44 44 45 46 47 48 n.8. 0.3. 

Program mtegrity 1 

Subtotal, Adjustments 66 67 67 66 68 69 71 73 

Total, Nondefensec 535 550 560 571 586 600 616 631 647 663 5,960 

All Defense and Nondefense Budget Authority 

Increase discretionary appropriatIOns for 2013 

subj€ctto the caps at the rate of infiationJ 1,091 1,120 1,152 1,185 1,222 1,258 1,293 1,328 n.a. n.a. n.a. 

Reduction to meet the caps ·33 ·34 ·45 ·54 ·66 ·76 ·85 ·94 n.3. n.o. n.a. - - - Caps established by the Budget Control Act 1,058 1,086 1,107 I,m 1,156 1,182 1,208 1,234 

Automatic spending reductions Q ·92 ·91 ·91 ·91 ·90 ·89 ·88 ·87 o.a. o.a. n.a. 

Caps with automatic spending reductionsG 966 995 1,016 1,040 1,066 1,093 1,120 1,147 n.a. n.3, n,a. 

Adjustments to tile caps 156 159 161 163 167 170 174 178 0.3. 11.3. n.a. 

Total Discretionary Budget AuthorityC 1,122 1,154 1,177 1,203 1,233 1,263 1,295 1,326 1,359 1,394 12,525 

--------------------------------------------------------------- Continued 

• Policymakers' ability to usc tax and spending policies • The likelihood of a fiscal crisis will be higher. During 

to respond to unexpected challenges, sllch as cco- such a crisis, investors would lose so much confidence 

nomic do\.ynturns, natura! disasters, or financial crises its budget that 

will be constrained, As a result, unexpected events funds at 

could have worse effects on the economy and people's 

well-being than they would otherwise. 
73 


87610.039

CHAPTER OXE THE BrJX;{rl' A~D ECONOMIC OHI.OOK: FISCAL YEARS 2() 15 TO 2(M3 27 

Total, 

2014-

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2023 

Outlays 

Defense 

Increase discretionary appropriations for 2013 

at the rateoT inflation" 577 577 593 604 615 637 655 673 n.a. n.a. n.a. 

-12 -15 -20 -24 -29 -34 -38 -42 n.a. Ita. na. 

Outlays under the caps 565 562 573 579 586 603 617 630 o.a. n.a. n.a. 

Automatic spending reductionsfl -47 -52 -53 -54 -54 -54 -54 -54 n.a. It3. 0.3. 

Outlays under the caps with automatic spending reductionsb 518 510 520 525 532 549 563 576 0.3. n.3. n.a. Adjustments to the caps 

75 86 92 94 96 98 101 103 0.3. n.a. n.a. 

n.3. n.a. n.a. 

75 86 92 94 96 99 101 103 n.a. n.3. n.a. 

Total, Defense' 593 597 611 619 628 648 663 679 702 714 6,455 

Nondefense 

Increase discretionary appropriations for 2013 

593 606 607 621 637 655 673 691 o.a. n.a. n.a. 

-9 -]4 -19 -24 -31 -38 -43 -49 n.a. n.a. n.a. 

Outlays under the caps 583 592 588 596 606 618 630 642 o.a. n.a. n.3. 

Automatic spending reductionsG -29 -34 -35 -36 -35 -35 -34 -33 n.a. n.a. n.a. 

Outlays under the caps with automatic spending reductions!) 555 559 553 561 571 583 596 610 n.a. n.a. n,a. 

Adjustments to the caps 

9 10 11 12 12 12 13 n,a. n.a, n.a. 

8 9 10 10 10 10 10 n.a. n.a. n.a. 

17 25 32 37 40 42 44 n.C!. n.a. n.a. 

1 1 1 1 1 1 n.a. n.a. n.a. 

22 34 45 54 59 62 65 67 n.a. n.a. n.a. 

Total, Nondefensec 577 593 597 614 630 645 661 677 693 710 6,397 

AI! Defense and Nondefense Outlays 

Increase d!Scretionary appropnations for 2013 

subject to the caps at the rate of inflation3 1,169 1,184 1,200 1,224 1,253 1,292 1,328 1,364 

Reduction to meet the caps -21 -29 -39 -49 -60 -71 -81 -91 n.a. !t(t n.a. 

Outlays under the caps 1,148 1,154 1,161 1,176 1,192 1,221 1,246 1,273 n.a. n.a. n.a. 

Automatic spending reductions~ -75 -85 -89 -90 -90 -89 -88 -87 n.a. n.a. n.a. 

spendingreductionsb 1,073 1,069 1,072 1,086 n.a. n.a. n.a. 

97 12D 136 148 n.a. n.a. n.a. 

Total Discretionary Outlays~' 1,170 1,189 1,209 1,233 1,257 1,293 1,324 1,356 1,396 1,424 12,852 

Source: Congressional Budget Office. 

Note: n.a. = not applicable; * between zero and $500 million. 

a. Funding for overseas contingency operations, emergencies, disaster relief, and certain program integrity initiatives (which identify and reduce 

overpayments in certain benefit programs) is not constrained by the statutory caps established by the Budget Contra! Act of 2011. Such caps were 

specified through 2021; CSO has extrapolated the totals for 2022 and 2023 on the basis of its projected rate of inflation. 

b_ Automatic spending reductions are slated to further reduce the caps for 2014 through 2021. 

'- Secause the caps on discretionary appropriations do not extend beyond 2021, CBO has extrapolated the totals for 2022 and 2023 on the basis of 

its projections of inflation. 

d_ Under the Balanced Budget and Emergency Deficit Control Act of 1985 (as amended), the limits on discretionary budget authority can be raised to 

reflect funding for disaster relief. However, the total increase in the cap in any year for that reason can be no more than the average funding for 

disaster relief over the previous 10 years (excluding the highest and lowest amounts) plus any amount by which the prior year's appropriation 

was below the maximum allowable cap adjustment for that year. In CSO's baseline, such funding exceeds the average, beginning in 2017; that 

adjustment is included in the totals shown for disaster relief. 
74 


87610.040

28 TIlE In DGET ,\\0 ECO\OyllCO! TLOOK: FISC\!, YE\f{S 201.1 TO 202:\ FE})HL,\HY 2015 

Table 1·6. 

Federal Debt Projected in eBO's Baseline 

(Billions of dollars) 

Actual, 

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 

Debt Held by the Public at the 

Beginning of the Year 10,128 11,280 12,229 12,937 13,462 14,025 14,642 15,316 16,092 16,957 17,876 18,902 

Ctlanges III Debt Held by the Public 

DefICit ~ 00 ill rn m ill ~ m m ~ ~ m Other means offinancing 

Tota! 

62 104 93 95 87 82 69 66 66 65 69 64 

1,152 949 708 525 563 617 674 776 865 919 1,026 1,041 

Debt Held by the Public at the 

End of the Year 11,280 12,229 12,937 13,462 14,025 14,642 15,316 16,092 16,957 17,876 18,902 19,944 

Memorandum: 

Debt Held by the Public at the End of 

the Year (As a percentage of GOP) 725 76.3 77.7 76.3 74.6 73.4 73.1 73.5 74.2 75.0 76.0 77.0 

Debt Held by the Public Excluding 

Fillancial Assets] 

In billions of dollars 10,392 11,243 11,833 12,241 12,695 13.211 l3,794 14,482 15,259 16,091 17,024 17,977 

As J percentage of GOP 66.8 70.1 7l.l 69.4 67.6 66.2 65.9 66.2 66.8 67.5 68.5 69.4 

Gross Federal Debtb 

Debt Subject to Limite 

16,048 17,068 17,886 18,501 19,166 19,938 20,793 21,736 22,754 23,810 24,937 26,079 

16,027 17,047 17,864 18,479 19,143 19,915 20,769 21,711 22,729 23,784 24,911 26,052 

Source: Congressional Budget Office. 

Note: GDP = gross domestic product. 

a. Subtracts from debt held by the pub He the value of outstanding student loans and other credit transactions, financial assets (such as 

preferred stock) purchased from institutions partldpating in the Troubled Asset Relief Program, cash balances, and other financial 

instruments. 

b. Comprises federal debt held by the public plus Treasury securities held by federal trust funds and other government accounts. 

c. The amount of federal debt that is subject to the overall limit set in law. Debt subject to limit differs from gross federal debt because 

most debt issued by agencies other than the Treasury and the Federal Financing Bank is excluded from the debt limit. The debt limit was 

most recently set at $16.4 trillion but has recently been suspended through May 18, 2013. 

Those consequences would be exacerbated if federal debt 

exceeded the amounrs projected in CBCYs baseline, as it 

would if certain deficit-reducing policies that are scheduled. to take effect were instead reversed without being 

replaced by other policies with similar budgetary effects. 

Those consequences could be mitigated, howev~r, if policies were enacted that reduced f('>derai debt relative to 

GDP during the coming decade and beyond. 

Other measures of the federal government's financial 

position are sometimes used. 

('xc/luiillgjinrlJlcial fH)WS subtracts from 

the governmenr's finaI1cidl a~si.'ts, such as student loans. 

Under the assumptions for CBO's ba:-.dine, that measure 

"viII he smaller than debt held by the public alone but will 

vary roughly in line with it. 

Gross }friend debt consists of debt held by the public and 

deht issued to government accounts (for example, the 

Social Sccurity trust funds). The latter type of debt does 

nor directly affcct the economy and has 110 net impact on 

the budget. Under current law, debt held by the puhlic is 

expected to increase by more than percent between 

2012 and 2023, and debt held by governmenr accounts is 

expected to rise by nearly 30 percent. As a result, gross 

federal debt is projected to reach $26.1 trillion at the end 

of 2023. A similar measure, debl subject to limit, is the 

amount of debt that is subjccr to the statutory limit on 
75 


87610.041

C1L\PTER O.\E 

federal horrowing; it includes virtually all 

dfbt. Under the assumptions baseline, 

the projects lhat 

$2(d at the end of 2023. 

Cbanges in CBO's Baseline Since Angus! 2012 

billion to its estimate of the deficit in 2013 and a 

total of $4.6 trillion to its baseline projection of the 

cumulative deficit from 2013 through 2022 (scc 

Appendix A). enacted in the interim led eBO 

to boost 

(including service); almost all of that increasc stems 

from the enactment of the American "ElXpayer Relief Act 

early in January. Also included in that amount is additiot~al emergen<c)' spending. As mandated by law, the 

baseline the that amounts equal 

to the $41 in emergency in the 

wake of Hurricane Sandy are 

\vith adjustments for inflation; 

abom $340 billion to outlays in the 

Uncertainty in Budget Projections Even if federal laws remained unchanged for the next 

decade, actual would differ from 

CBO's baseline 

changes in economic conditions and in a host 

h.tctors that affect federal spending and revcnues. 

economic 

forecasts 

depend on the 

for the coming decade. 

such variables as inrerest rates, inflation, 

the growth of rcal GDE Discrepancies between those 

forecasrs and actHal economic outcomes can result in 

between baseline hudget prnjecoutcomes. For instance, eno:" baseline economic anticipates that the interest 

rate on 3-month Treasury bi!ls~which has hovered near 

zero for the past several years-will climb to 4 percent by 

the end of 2017; by that the rate on I O-year Treasury notes is also to rise from its current level of 

around 2 percent. r<ltes on all types of Treasury 

securities were 1 or lowet each 

year from 2014 other economic 

variables were unchanged, cumulative outlays projected 

TIlE Bl1X;ET A:'II) ECO'\{).YtICOl,'!'LOOK: FISCAL )l:\HS 201:\ TO 202:; 29 

for [he 

the additional costs of 

or !O\wr for that period. 

The impact of the Affordable Care Act is another source 

of great To estimate the effects of the act's 

broad changes to nation's health care and health 

insurance systems, eRO and the staff of the Joint 

Committee on Taxation OCT) have made 

concernillg an array of technical, and economic factors, some of which involve programs and 

institutions (such as the health insurance exchanges) that 

do not yet exist. 

Projections of revenues also are quite sensitive to uncertJimy about economic and technical factors. Revenues 

on [Oral amounts of wages and salaries, corporate 

and other income, all part of CBO:~ economic 

if the growth of real GDP and 

incomes \""ere percentage point lower 

than in CBO's baseline projections, rcvenues 

lower than in the baseline by roughly 

$275 billion over the period. 

in addition, forecasting the amount of reycnues that the 

will collect from taxpayers fot a given quanof incomes included in the economic projections 

technical assumptions about the distribution 

about many aspects behavior. 

CIaxpayers' hehavior, for the 

amount of deductions and people receive and 

how much incomc in the form of capital gains they rcalize from selling assets.) If CBO's judgments about such 

behavior and actual outcomes differ, the effect on 

revenues em be significant. 

Even small deviarions can have a substantial 

impact on deficits. For example. if revenues projected f()l" 2023 were too high by 5 percent (that is, if 

average annual growth during the coming decade was 
76 


87610.042

30 TI!E Bl DGET .\\D ECO\{)\'l!C OlTLO()K: nSC\L )E\RS WI) TO 202.1 

less than eBO estimates) 

mandatory programs were roo 

for that year would be about 

greater [han the $978 billion in CH(),s ba~{> 

line~or '5.4 percent orCnI~ rarhn than 3.8 per(enr. 

Outcomes could differ in the other direction as welL 

Alternative Assumptions 

About Fiscal Policy eBO's baseline budget projections-which ,Ire conof law-are 

intcnded to sho\',; what happen to f('dcoi 

ing, revenues, and deficits if currem laws 

remained Clearly, future 

lead [0 markedly budget outcomes. Mon.:over, 

although the American Taxpayer Relief Act has reduced 

the number of changes to tax policic:. that are scheduled 

fO take effect under current L1'.v, ~ome changes 

,vere 

maint.lined instead. 

so that current policie~ were 

To assist policytnakers and who may hold difK'ring views about the most 

to consider possible 

estimated the efFects on projections of some altcrnative assumptions about future' policies (sec T,blc 

The discllssion belm-\' f'ocu:,es on how those 

\vould changes 

also ,vould projections or the costs of servicing 

the federal debt (shown separately in the tahle). 

Military and Diplomatic Operations in 

Afghanistan and Other War-Related Activities 

CEO's projections of discretionary ..,pending for tht' next 

10 years include outlays for milit:lf)' and diplomatic operations in t\Jghanisran and for other overseas 

operations. Tilt.' are based on budget 

ity provided for in 2012 and in prior 

year:" the $100 billion in authority ror 

2013 (the annualized amount provided in currcm 

resolurion), and the $1.1 trillion that is 

to bt.' appropriated over the 2014-2022 period 

{under the .1ssumption that this year's funding wi!! he 

adjusted t()r anticipated inflation}. 

FEBRl ,my 201) 

contingency oper.1tions--in or other coun~ 

cvemually [han the amounts in the 

baseline numher of deployed troops and the pace of 

operarions diminish over time. Thus, CBO has formuhued a hudget' scenario that assnrnes <l reduction in the 

deployment ofU,S, f()fces abroad for milinfY actions and 

a concomitant reduction in diplomatic operations and 

foreign aid. other scenarios-some costing more 

and :'OOll' arc possibk'. 

activities 

estimates. 

numher 

afief. (Tho:.c numbers could repn'seflt various allocations 

of hHTl'S in differenr places around the world.) Under 

that :,ccnario, and that the relared for 

overseas L'(llltingency opcrarions included in the baseline. 

Emergency Funding for Disaster Relief 

Recently, lawmakers provided $')0 billion in disasrer relief 

in rc:.ponse to Hurricane Sandy. The portion of such 

funding declared all (S41 billion) 

is not constrained by the caps 

governing haseline projenions, is assumed provided 

each with adiusrrncnts f(H inflation, in eBO's baseline. 

future year:., dlScrCIIO"""" 

lo\ver between 2014 

Other Discretionary Spending 

Policymakers could vary discretionary 

in 

ways from the allloums projected in the fot 

if none of tht, constraints on discretionary 

i"",lnn",,,,,d and iF appropriations 

2023 at the same rare as 

afrer 20 I ,1, discretionary spending would be about 
77 


87610.043

C!!:\vrmO\I: 

$1."5 trillion higher t{)f th<lt IkTiod dUll it is in the base·· 

line. I( by contrast, bwmakcrs kept appropriations con· 

strained hy the in 20 i 3 at tht' same Ilominallevd 

through 202.) fix \l1{' hi!ljol1 n-dlh> 

rion that will re-"ult from the autom,nic enforcement procedures set in the Budget Contrnl Act), total discretion, 

ary outlays \VOlIIJ be .'5829 billion lower f(Jr the period 

from 2014 through 2025. l;nder (har scenario (somerinKS called a free'le in regular tOfal 

discretionary .:.pending vl/onlJ from percent of 

(;DP in fiscal yeJr 2013 to percent in 201.); by comparison, the lowest share f()r discretionary spending in 

any year since 1962 (rhe earliest I~)f which such data 

have bl'cn reported) \\'",tS 6.2 percem in 1999. 

Medicare's Payments to Physicians 

Under current Lnv, f(.)J" Medicare is constrained 

by a rate-~cfting system 

ra(e~that has exisred t()I" .<.en.'ral years to 

physicians rccciyc for their scrvi\..\."~. If till' systcm is 

allowed to operate as cttrl"l'ntl,\" suuctul\,d, physici,ms' fees 

wil! be reduced hy' about 2') percent (1) January 20 [4 and 

\vil! incrcase by ~!llaH <l1l10UtHS in sub.<,equcnr year:-., eBO 

projects. lC instead, lawmakers override those ~chcdlllcd 

reductions-a.~ they have year since 2003~~spc!ld~ 

ing on fv1edicare migbt bt' greater than the amounts 

projected in eBO\; baseline. For example, holding payment rate." through 2023 at the levels they are nmv \vould 

raise Outlays For :vfcdiclH' (nvt ofpr{>miums paid by benefIciaries) by S 14 billion in 2014 and about $] ,18 hiUion 

(or about percent) between 20J 'f and 2023. ') The 

efFect on l'vfc.dicare (and on the deficit) 

change '\vou!d depcnd on vvhelher !;l\vmakers the 

cflc'cts of the chang~" as they oftcn have done in th~' past, 

"vith other changes to reduce defIcits. 

currellt kvcb. thereby reducing the' l'stimMed n)SI or rotrining 

the pa~'lllcnr Ll\l". 

TilE Bl O(;ET .\\0 ECO.\o\llC O! TI.OOI\: FlSC,\!. 'lE\HS 20!.-\ TO 2025 31 

Automatic Enforcement Procedures 

The Budget Control Act put in place automatic rrocc~ 

dmes to reduce discH.'tionary and mandatory spending 

fhat arc now scheduled to tab: dl:Cct ill March 2013 and 

continue through 2021. If full), implemented, those procedures \vill require equal reductions (in dollar terms) in 

defcn-;e and llonddcns{' spending. For 2013, the reducrions <lfe to he achievrd by automatically (".locding, or 

sequestering. a portion of the hudgetar:' resources r(H 

most discrctionary progr,lnlS as well as t()f ~onH: 

and activities that gelH.'f<ttc mandatory spending. For 

[he period from 20! 4 through 2021, the automatic procedures lower the caps on discretionary budget authority 

specified in the Budgt't Conrrol Act and irnpose seqllestr,ltion for ::'Olllt' mand;nory spl'nding. IClawmakers chose 

to prevt'nt those <1uromaric cuts each year without lTI<1king other changes tlut redw.:cd spending by oflsctting 

,U1101111t::.. spending \vouJd be $42 billion higher in 2013 

and $995 billion (or about 2 percent) higher over the 

2014-2023 period than is projected in CB(),s current 

ba~t:lilll". "ItHai discrcLionary olltb~'s v·;ould be 58()9 billion (or ().B percent) higher, and m,Hldawry outlays 

would be S 126 billion (or 0.4 percent) bigher. '1 

Rcyenues 

Although the American Taxpayer Relief Act permanently 

extended several provisions that suhstanrially afTcctl'd 

reVl'!ltl(',\, a host ofothl'r tax provisions~~man}' of which 

haH' heen extended rcpeatcdly·--··are still scheduled to 

expire over the next decade (sec Box I-Ion page 12). if 

all of tho~c provisions \Vt'n: permanently extended, CRO 

and J( ~T Cqitnatl~, revenues: \vonld he lower-and, 

although a much smaller (,ffeel, outlays t()!" refundable 

credits would be higher·-by a total of about $1.0 trillion 

over the 20 I '1-202,::; period. Ivlost of" tho:.(' lax proyi,~ions 

arc scheduled to expire at the end of20t3. They include 

a provision allO\ving htlSincsscs to immediately deduct 

')0 pel"CI..'nt of I1l'\\' invesrments in equipment, \vhicb JeT 

include new hudg,:! 

prof!;r,Ull~, and dir~cr 
78 


87610.044

32 T!IE BLDGET .\\D ECO\O.\lICOI TWO!\: FISCAL n:,\RS 2015 TO 202.1 fEBHL\RY 2015 

Table 1·7. 

Budgetary Effects of Selected Policy Alternatives Not Included in CBO's Baseline 

(Billions of dollars) 

Total 

2014- 2014-

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2018 2023 

Policy Alternatives That Affect Discretionary Outlays 

Reduce the Number of Troops Deployed for Overseas 

Contingency Operations to 45,000 by 20152 

Effect on the defiCit 16 60 64 67 69 71 73 74 228 582 

Debt service II 15 19 23 28 14 11l 

Funding for 

Effect on the deflCl( 18 26 33 38 41 43 45 47 88 302 

Debt servICe 1 3 5 7 9 14 51 

Increase Regular Discretionary Appropriations at the 

Rate of Inflatlond 

Effect on the defiCit\' -38 -97 -1l5 -128 -139 -150 -160 -169 -178 -186 -193 -628 -1,514 

Debt service -1 -2 -6 -13 -24 -31 -41 -51 -63 -74 -45 -306 

Fi"eeze Regular Discretionary Appropriations at the 

2013 Amountf 

Effect on the defied:) -12 19 41 63 88 115 141 171 203 no 829 

Debt service 12 18 26 35 !O3 

Policy Alternative That Affects Mandatory Outlays 

Payment Rates for Physicians at the 

Effect on the deficif -14 -16 -13 -12 -12 -13 -14 -14 -15 -16 -67 -138 

Debt service -1 -1 -2 -3 -4 -5 -6 -7 -5 -29 

Policy Alternative That Affects Both Discretionary and Mandatory Outlays 

Remove the Effect of the Automatic Enforcement 

Procedures Specified in the Budget Control Act'! 

Effect on the deflcit'~ -42 -89 -99 -103 -104 ·105 -104 -104 -104 -94 -89 -500 -995 

Debt service -1 -1 -11 -19 -25 -31 -38 -45 -51 -38 -228 

- - -------------------- --------------------- - Continued 

Sources: Congressional Budget Qfflce; staff of the Joint Committee on Taxation. 

Notes: Negative numbers indicate an increase in the deficit; positive numbers indicate a decrease in the deficit. 

between -$500 miillon and $500 miBlon. 

a. For this alternative, CSO does not extrapolate the $100 billion in budget authority for military operations, diplomatic activities, and 

foreign aid in Afghanistan and other countries provided for 2013. Rather, the alternative incorporates the assumption that, as the number 

of troops falls to about 45,000 by 2015, funding for overseas contingency operations declines as well, to $70 billion in 2014, $51 billion 

in 2015, and then to an average of about $45 billion per year from 2016 on-for a total of $482 billion over the 2014-2023 period. 

[Note corrected on February 5, 2013, after initial release] 

b. Excludes debt service. 

c. For this alternative, CSD does not extrapolate the $41 billion in budget authority provided for relief and recovery from Hurricane Sandy 

that was designated as an emergency requirement in the Disaster Relief Appropriations Act, 2013. That act also provided $5 billion in 

funding designated as disaster funding (as defined in the Budget Control Act of 2011) and $3 billion that was not designated as 

emergency funding; both types of funding are extrapolated in CBO's baseline, subject to constraints set in the Budget Control Act. 

d. These estimates reflect the assumption that appropriations will not be constrained by caps and other provisions of the Budget Control Act 

and will instead grow at the rate of inflation from their 2013 level. Discretionary funding related to federal personnel is inflated using the 

employment cost index for wages and salaries; other discretionary funding is adjusted using the gross domestic product price index. 
79 


87610.045

C!t\PTER O,E TIlE m-DGH A\D ECO\O.\lICOl TI.OOK: FISCAt YEARS 2015 TO 2025 33 

" ------~--.. 

(Billions of dollars) 

~ 

2014- 2014-

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2018 2023 

Policy Alternative That Affects the Tax Codell 

Extend Expiring Tax ProvIsions' 

Effect on the deficitD "58 "98 .'l9 "83 "81 "102 "103 "108 "114 "120 "408 "954 

Debt service "1 <I .'l "15 "19 "25 "32 "38 "46 "28 "188 

Policy Alternative That Affects Spending and Revenues 

Changes in Deficits from the Alternative Fiscal Scenarid 

Effect on the deficitb A2 "16tl "212 "205 "199 "198 "219 "221 "226 "222 "225 "975 

Debt service "2 "2 "10 "21 "36 "47 "60 "74 "89 "104 "71 

Memorandum: 

119 112 106 106 106 108 ]]0 113 116 119 121 539 1,118 

Deficit in CBO's Baseline "845 "616 "430 <176 "535 "605 "710 "798 "854 "957 "978 "2,661 "6,958 

Deficit Under the Alternative Fiscal Scenario "887 "778 "<544 "691 "755 "839 W6 "1,080 "1,154 "1,268 "1,307 "3,707 "9,492 

e. This alternative reflects the assumption that appropriations for 2013 that are constrained by the caps, minus an estimated reduction of 

$71 billion resulting from the automatic enforcement procedures for this year, wit! total $978 billion, Such appropriations would generally 

be frozen at the 2013 level through 2023, 

1. Medicare's current payment rates for physicians' services are scheduled to drop by 25 percent on January I, 2014, and will increase by 

small amounts in subsequent years. In this alternative, payment rates are assumed to continue at their current level through 2023. 

g. The Budget Control Act specified that if lawmakers did not enact legislation originating from the Joint Select Committee on Deficit 

Reduction that would reduce projected deficits by at least $1.2 tri!i1on, automatic procedures would go into effect to reduce both 

discretionary and mandatory spending during the 2013-2021 period. Such automatic reductions in spending would take the form of 

equal cuts (in dollar terms) in funding for defense and nondefense programs in 2013 through 2021. The American Taxpayer Relief Act of 

2012 subsequently reduced the amount of savings required in 2013 by $24 billion. For 2013, those reductions would be achieved by 

automatically canceling a portion of the budgetary resources (in an action known as sequestration) for most discretionary programs 

and for some programs and activities that generate mandatory spending. For the 2014-2021 period, the automatic procedures lower the 

caps on discretionary budget authority specified in the Budget Control Act and impose sequestration for some mandatory spending, The 

budgetary effects of this option cannot be combined with those of any of the alternatives that affect discretionary spending other than 

the one to reduce the number of troops deployed for overseas contingency operations. 

h. The estimates are mainly from the staff of the Joint Committee on Taxation and are preliminary. 

These estimates reflect the impact of extending about 75 provisions, Nearly all of those provisions have been extended previously; some, 

such as the research and experimentation tax credit, multiple times, 

In The Budget and Economic Outlook: Fiscal Vears 2012 to 2022(January 2012), www,cbo.gov/publlcation/42905, and the update to that 

report in August 2012, CBO presented an alternative fiscal scenario that incorporated the assumptions that all expiring tax provisions 

(other than the payroll tax reduction in effect in calendar years 2011 and 2012) were extended; the alternative minimum tax was indexed 

for inflation after 2011; Medicare's payment rates for physicians' services were held constant at the 2012 level; and the automatic 

spending reductions required by the Budget Control Act, which were set to take effect in January 2013, would not occur, The American 

Taxpayer Relief Act permanently extended many provisions slated to expire at the end of December 2012 and indexed the alternative 

minimum tax for inflation; therefore, the remaining components of the alternative fiscal scenario consist of holding constant the Medicare 

payment rates (which are now scheduled to fall In January 2014), undoing the automatic spending reductions (which were reduced by 

$24 billion and postponed until March 1, 2013), and extending certain tax provisions, 
80 


87610.046

34 THE H\'[)GET ,\\1) ECO\O:\1!COl'1l00K: fiSCAL YE\HSLO!:\ TO L02:\ 

estimates accounts for ahout $0,3 trillion of the hudgetary cffecrs all (he provisions. The budgetary 

cosr of extending all tax provisions increases starring in 2019, because the American Taxpayer Relief Act 

extended through 2017 certain provisions affecting 

refundable tax credits. Exrending (hose provisions 'would 

increase outlays for refundable credits and redlKe revennes by a rotal of about $]40 billion over the 2018~2023 

period, mostly starting in 2019 because payments for 

refundable credits are typically made a year after the 

appliclbk tax year. 

An Alternative Fiscal Scenario 

an alternative fiscal 

<me! FC()1lolllic Outlook,- Fiswl Ye'ars 2011 to 

{fln/dte to the Budget lind .tco!!omic (Jut/ook: Fiswl 

Jed!"J lOll to ]022, the assumptions that all 

tax provisions than the payroll tax reduction in in calendar years 2011 and 2012) were 

extended; the AMT was indexed for inHation after 2011; 

Medicare's payment rates for physicians' services 'vere 

held constant at the 2012 level; and the automatic spendreductions required by the Budget Control Act, 

were set to take effect in January 2013, vl/Ouid 

not occur. 

FEI3Rl,\RY 2015 

The American Taxpayer Relief Act extended many of (he 

provisions stared to at rhe end of December 2012 

and indexed the infhdon. As a result, many 

components of the alternative fiscal scenario (including 

many with the largest budgetary effects) have now 

been made permanent. One prominent component~ 

,he extension of tbe lowet tax tates on the income of 

higher-income people originally enacted in 2001 and 

2003-was not included in the legislation. The remainconstant Medicare's 

tax provisions. 

If !a\vmakers were to make those 

and if other changes in policies with 

budget deficits were not enacted, deficits 

the amounts shown in CBO's 

for 

lion (including debt-service costs) to yield cumulative 

deficits of $9.5 trillion. Debt held by the public would 

reach 87 percent ofGDP by the end of 2023, (he largest 

sban: since 1947. Under that scenario, revenues from 

2014 to 2023 would average 18.5 percent ofGDP 

(slightly above their 40-year average of 17.9 

and outlays would 22.9 percent 

their 40-year average percent). 
81 


87610.047

The Economic Outlook 

Ye Congressional Budger Office (CBO) expects 

that', under current laws governing taxes and spending, 

economic activity \vill expand slowly in 2013 but will 

increase more rapidly in 2014. As measured by the 

change from the fourth of the previous year, real 

(inflation-adjusted) gross product (GDP) is 

projected to increase by 1.4 percent this year and by 

5.4 percent next year. With economic growth subdued 

uIltii2014, CBO forecasts that the unemployment ratC' 

will remain high---above 7V2 percent through next year. If 

that occurs, 2014 wiH be the sixth consecutive year with 

unemployment of the labor fon .. -(', 

the longest period 

past 70 years. eBO projects the high number of 

unemployed workers and the large amount of other 

unused resources in the economy will help to the 

rate of inflation (as measured by the price index 

personal consumption expenditures, or peE) below 

2 percent during this year and next and that interest 

rates will stay quite low as well. 

That pattern of slow in 2013 and then quickening growth in 2014 a combination of a gradual 

improvement in underlying economic factors and the 

tightening of federal fiscal policy that is scheduled to 

occur this year. The eHects of the housing and financial 

crisis will continue to fade, eBO expects: An upswing in 

housing construction (alheit from a very low level), 

real estate and stock prices, and 

credit will help to spur a virtuous cycle 

employment, income, consnmer spending, 

investment over the next few years. However, the federal 

fiscal policy specified by current law will represent a drag 

on economic activity this year. 

eno estimates that economic growth in 20 J 3 would be 

roughly 1 V2 percentage points h1Ster than the agency now 

projects if not for the fiscal tightening. About l1/i percentage points of that effect come from the automatic 

reductions in federal spending described in Chapter 1, 

the expiration of the cut in payroll tax rates, and the 

increase in tax rates on income above certain thresholds; 

the spending changes and the combined tax changes 

account for about equal portions. The remaining Vi percentage point comes from other, smaller changes in 

spending alld taxes. Ifpolicymakers modified the tax and 

spending policies in current law, rheir actions could have 

significant for economic growth. For 

instance, less tightening this year would lead to 

stronger growth in 2013 but, if not accompanied by 

sufficient additional tightening in later years, would also 

restrain real output and income in the middk of the 

decade and beyond o\'i'ing to higher federal deoLI 

Although CRO faster economic growth after 

this year, Olltput is to remain below its potential (or 

maximum sustainable) level until2017-almost a deCIde 

after the recession starred in December 2007. CBO estimates that real GDP in the fourth quarter of2012 was 

below its potential level by about ')1/2 percent; that gap is 

only modestly smaller than the gap (of about 7Vl percent) 

that existed at the end of the recession in mid-2009 

because grmvth in output since then has been only 

slighrly faster, on average, than growth in pOtential output (sec 2-1). \'{lith such a large gap between 

aerual potential output persisting for so the 

cumulative loss of ourpur relative ro the potential between 2007 and 2017 will be equivalent ro nearly 

half of the output prodlKed last year. 

Consistem with the forecast that output will be growing 

rapidly enough between 2014 and 2017 to close the output gap, the unemployment rate is projected to fall from 

about 7V2 percent at the end of 2014 to about 5V2 percent 

at the end of 20 17. The interest rafe on three-month 

L 
82 


87610.048

36 TilE !irDGET ,-\\1) HX)\O.\l!C orTLOOI\: nSC\!, YEARS lOl:\ TO 2015 

Figure 2·1. 

GDP and Potential GDP 

(Trillions of 2005 dollars) 

20 

18 

16 

14 

12 

10 

o "IL' __ --'-__ 

2000 2004 2008 2012 2016 2020 2024 

Sources: Congressional Budget Office; Department of Commerce, 

Bureau of Economlc Analysis. 

Notes: Potentia! gross domestic product (GDP) is eso's estimate of 

the maximum sustainable level of output of the economy. 

Data are quarterly. Actual data are plotted through the third 

quarter of 2012. Projections are plotted through the fourth 

quarter of 2023. 

Treasury bills is forecast to remain low through 201'5 and 

then rise considerahly through 2017 as the economy 

strengthens; the interest rate on lO-year Treasury flores is 

projected to risc st("ldily through 2017. 

Beyond 2017, CBO's economic forecast is based on the 

assumption that real CDP \vitl grow at the same rate as 

porentia! GDI~ because the does not attempt to 

the of fluctuations in the 

cycle so into future. Under that assumption, the average growth of real GDP in CBO's projec~ 

the 2019-2023 

bahy-hoorn gcncf<ulon and an end to the 

lot!12-stan,dol2 increase in the labor force participation of 

In the unemployment rate in eBO's 

falls to '5.2 percent by the end of 202J, and 

holds steady at 2 percent between 2019 and 

2023. The interest rate on three-month Treasury bills stabilizes at 4.0 percent in the 20 19~202) period, and the 

rate on 1 O-year Treasury notes stabilizes at S.2 percent. 

FEBRL\RY 2015 

Since the end of the recession, the path of recovery has 

been difficult to predict, and outcomes in future years 

w'ill no doubt hold as well. developments 

apart from changes in taxes 

and spending-such as in the pace 

of economic abroad-could calise economi..: 

outcomes to substantia!!y from those CBO has 

projected. 

for 2013 dif2012 forecast. 

(Public Law 

a significant amoum of the fiscal 

tightening that haa heen scheduled to take effect in 

January 2013. (for a more detailed examination of that 

see Box I-I in Chapter L) As a result, eRO 

no projects that real GDP wiU decline this 

Hmvever, CBO's current t{)[' the of real 

GDP in 2015 is slill COIlSlCler'lblv 

Chip consensus (which is based on 50 privatesector r()recasrs) and the Fcdnal Reserve's Open 

Market Committee. Those differences probably stem in 

large part from differing assumptions about the federal 

government's future tax and spending policies. 

The Economy in 2012 The economy expanded modestly in 2012, continuing 

the slow growth seen since the recession ended in June 

2009, and the rate continued to decline.-' 

). For a diSClt~<;ion of the CCOllOlnk exp<m~ion since the end of the 

OHlce, 
83 


87610.049

CllWTERT\\O 

the dCllund For good" and services appeared to gain some 

momentum in 2012, wh!(-h will support economic 

forward. The labor market improved 

in 2012, it remains weak-prim:1rily 

and serytu:s, and thus 

bmincss('s' need to hire workers, has been 

gw\ving slowly. In addition, inflation in consumer prices 

cased. dml bOlh short~ and long .. tcnn imerc"t rates :,tayed 

very low. 

Ecollomic Growth 

On the ha"is of information available when eBO 

completed its economic projections in mid-January. 

rhl' agency l'stimared dnt r(',d G I) P illlTe,lsed by 1. ') pcr~ 

cent in 2012, a" measured by rht.' from the fourth 

and businesse;.. remained gULlrded. 

invcstl1l1'11t continued to 

purchases hy federal, state, 

$clW sma!k'l" (kdine;.. than ill 20 J 1, 

increased sliglldy. 

Consumer Spcnding. Real spending on consumer 

and services---"which repre<;cnt$ about two-thirds 

spending in the by an estimated 

1.9 percent last year, about "a me incrcasc a:. in 2011. 

recendy been bolslen:d by gains 

in nc! \vorth. reflecting prices, 

imprown1Cnt in the stock market. and 

debt. Ho\\'\.:'vcr. comillllcd 

WE B! DGET \\0 ECO\O\lIC 0[11001'1. FlSC\t H~\RS 2015 TO 2025 37 

taxe) 

as \\'cl1 as 

Business Inyestmcnt. Real busincss fixed invesrmentin nonresidential strllCtlln:.~. 

grc\v much more ~Iowl>' last year in lhe 

years: by an estimated 3.3 percent in 2012. 

orlO.2 pcn:enr in 2011 and perccnt in 2010. 

slowdown in 2012 reflected busines)t.< 

tur~>s. 

em adjust their purchases of equipment and sofr.varc 

more rapidly dun their spending on strtlctur<.:s. 

Residential Investment. In 2012, residential investment 

gre\'v rapidly as in the housing market gaincd 

traction. Rca! investment rose 1 S.4 pt'ro.:Ht 

last year. in eBO's estimation, up steeply 3.9 

cent in 201 l-thc first anllual increase since 200') 

2-2). Housing investment is still kw,c 

sundard". hO\vevcr, and the corltn:bllt,on 

inn:,',tmcnt to CDP growth remains small bccausl' the 

sector accounts for ollly a minor fraction of output recent expansion 

panlya respOllse [() the continued in the number 

of vacant housing units, {()Howing sharp increases in that 

numher before and during the' rece:'tsion, to the 

\Try low level of consrruction in 

orvacam housing units in excess 

l'XpccH.'d under norrn;ll economic conditions ft,!! to 

1.2 million, or 0.9 perceJlt of rhe toral :.tock, in the third 

of 2012. down frotn a 01'2.9 mi!1ion ill the 

quarter of lOng. Also housing construction was <-In improved outlook for house whick in 

CBCYs estimates, climbed by ).5 percenr the fourth 

quarter of 2011 to the f(1Urth quarh.>r of 20 12. 

GOYCnUllcnt,,' Purchases. Purchases by federal. state, and 

local governments (as measured 

(~onHlH.'r("c's national Income 

adjusted to remove the dten" 

aCCollnts and 

ldl in 

2012 btu by much less than in 2011. Purchases 

ft.'(-!.eral gO\Trnment nlgcd down by 0.7 percent b.st 
84 


87610.050

38 TIlE Bt"D(;I:T A\D ECO:-'0.\1IC OnlOOK: FISC\!. fEARS lOU TO 1023 

Figure 2·2. 

Real Residential Investment 

(Percentage change) 

20 

10 

-10 

-20 

2000 2002 2004 2006 2008 2010 2012 

Sources: Congressional Budget Office; Department of Commerce, 

Bureau of Economic Analysis. 

Notes: Rea! residential investment consists of spending on 

residential construction, improvements to eXisting housing, 

mobile homes, and real estate brokers' commissions, 

adjusted to remove the effects of inflation. 

Data are annual and are plotted through 2012. The value 

for 2012 reflects CBO's estimate for the fourth quarter< 

Percentage changes are measured between the fourth 

quarters of successive years. 

(as measured on a tOLlfftl-m.arrer-to-tOlIflCI-GlI< 

ba~is), 

stronger gnnvth in tax revenues. 

~et Exports. International trade added a small amollnt to 

the of real CDP in 2012, in CRO\ estimation. 

since 

since 2009 and making 

goods tess price-competitive in f()reign markets. 

FEURl,\I{Y 101:) 

The Labor Market 

The labor matket cxperienced modest gains last year, hur 

a .<.ubstantial amount of slack remains in that market: 

to CliO's cstimates, employment in the fourth 

quarter \vas more than 6Yl million less than it 

\voldd have been if the economy had heen operating at irs 

maximum sustainable leveL 

"",·",,,i,,,,,,,,>,,, rate fell from 8.7 percem in the last 

that was slightly faster than the 

COP during 2011 and 2012_ (A 

bet\veen actual and potemial CDP 

tends to reduce unemployment rate, although that 

reduction usually occurs with some delay and is spread 

Much of the remainder of that 

reflects an unwinding of the factors that 

large increases in unemploYl1lt<nr 

in 2008 and 2009, when firms teduced 

>,>n"I",-""',,, by lHore rhan would have been expected on 

of rhe decline in CDP. Those facrors include 

rcars of an even (leeper recession than actually occurred 

and the effects of resrrined :wailabilit)' of credit.; 

In CBCYs view, about 1 percenrage point of the net rise of 

2.R perce mage points in the unemployment rate that 

occurred between Decemher 2007 (the peak of the previous economic expansion) and Decemher 2012 reflects 

structural factors-slich as mismat(;hcs lx:twecn 

ers and the erosion of workers' 

\-vith the recession but (hat arc not direcrly 

demand. Such structural facto the hisrorically high share of 

uncmpioymcll1 accounted f()r hy tbe long-term unCillpeople \vho have been seeking \vork for more 

26 conseclltive wecks. b That share has topped 

!\,sociation f()f Busines\ 

ton. Va., March 26, 2012), ""wJed""[",.en',_g";/""",,,,'e,,,,; .,pt'jX hihern:mkc20 120.".26<l.htm. 

6. tor further di~cus~ion ofsrrunural unemployment and the wt'ak 
85 


87610.051

CHAPTEn TWO TilE BU)(iEr V"f) ECO"O\lIC Ol TWOK: FISCAL YEARS ltH5 TO l025 39 

Figure 2·3. 

Long-Term Unemployment ~---~~~~--~"--"-~"~---~~ ---."~~~~~ 

(Percent) 

50 

40 

30 

20 

10 

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 

Sources: Congressional Budget Office; Department of Labor, Bureau of Labor Statistics. 

Notes: Data show the percentage of unemployed U,S. workers who have been unemployed for longer than 26 consecutive weeks. 

Data are annual and are plotted through 2012. 

40 percent for the past three years (see Figure 2-3), far 

higher than in any other three~year period since World 

War II. CBO expects that share to remain high for the 

next few years. 

The unemployment rate during the past several years 

would have been even higher if participation in the labor 

force had not declined so much over that period. (The 

rate of participation in the Iahor force describes the share 

of the civilian noninstitutionalizcd population age 16 or 

older that is either working or actively seeking work.) Parricipation fell from 66.0 percent in 2007 to 63.7 

in 2012, an unusually large decrease over such 

period. About 1.3 pcrccmage points of that decrease 

reflects the movemenr ofthe baby-boom generation into 

retirement (the oldest members of that group turned 

65 in 2011), and about 0.3 percentage points can be 

directly attributed to the devated ratc of unemployment. 

The factors contributing to the remaining 0.7 

points arc unclear but may include an 

response to the protracted weakness in the labor 

The growth of labor compensation (the combination of 

wages and benefits that workers receive) picked up a bit 

in 2012 bur continued to be resrrained by the weak 

demand for lahor. Real labor compensation grew by 

1.6 percent in 2012, in CBO's estimation, mostly 

from increases in the number of workers; real labor 

by only 02 percent. 

cmDlc,vrr.ent and wages in 

recent years, toral labor compensation at the end of 

2012 was slightly below its value in late 2007, just before 

the stan of the recent recession. 

Inflation and Interest Rates 

lnflatiol1 moderated in 2012, and interest rates remained 

low. By CBO's estimates, consumer prices, measured by 

the price index for personal consumption expenditures, 

increased by 1. '5 percent last year (as measured on <I 

fourth-qu:lrter-to-founh-quarter basis), compared with 

an increase of 2.5 percent in 2011. That moderation is 

largely attributable to smaller increases in prices for 

gasoline and food. The core peE price index-which 

excludes food and prices---also increased by 

1."5 percent in 2012, a !ittle from 1.7 percent in 

20 I L Other measures, the consumer price index for all 

urban consumers (CPI-U) and its core version, increased 

by 1.9 percent last year. (Rates tor the CPI-U differ from 

those for the peE price index because of the methods 

used to calculate those indexes and the larger role of 

housing rents in the CPI-U.) Since the recession began 

in December 2007, overall inflation has averaged 

P(:E price index grew by 1. "i percent last year. 
86 


87610.052

40 TIlE HI D(;ET ,\\/) EC{)\O\l!C Ol TLOOl\: F1SC.\L YEWS 20U TO 2025 

1.7 relTl'nt a year according to the peE price index and 

1.9 percent according to the CPI~U. 

Interest rates remained lmv in 2012. Short~rerm interest 

ratcs were near lCro. <tnd longcr~tcrm rares declined ro 

extremely 1m,\" levels in the flrst half of 20 12 and stayed 

unusually low thereafter. Those low rares rcfleC( several 

!:lcrors: 

• Investors' expectations that U.S. output \\,111 be below 

its potential for a few years; 

• InveHors' concerns about banking and fiscal problems 

in Europe; and 

• Ongoing efforts by monetary policymakers to keep 

short~ and long~term interest rates 100v, using the traditional and nontraditional policy actions employed 

since th .. ' recession, 

That last [letor includcs the Federal Reserve's announcemcnt in late 2012 th:n it intends to keep its target for the 

federal funds rate (the interest rate on overnight lending 

amon~ banks that the Federal Reserye Jdjusrs to conduct 

monetary policy) near zero until labor market conditions 

improve or intlation riscs notably, and to continue 

purchasing long:~term Treasur;.' securities and 

mong<lgc-hacked secllrities.~ 

The Economic Outlook for 

2013 to 2018 

CBC),s economic outlook builds on the indications of a 

""'n,,,h,',,;,wcconomy in 2012, bur CBO that 

slow!y in 2013 because righrening by rhe govcrnment that is scheduled to 

occur under current law. The agency's projections show 

the economy grO\ving morc strongly after this year and 

I) For tbcu~~ions of rhe !'nkr,ll ReocrYt:\ l1ontr.ldition.ll policy 

anions of the past few YC.H\ and their dTeC\s on 

An'ind "mlw",,,,,,nl<y 

E1\\'Jt;: :md Chri~topher]. 

QU.H1titJtin: Ll~int:," RClJi('I(" reder,ll Re"crw Bank of 

')J-R8, 

FEBRUR) 2013 

returning: to it" potenriallevel in 2017. The anticipated 

,mtlro','Ctr'Cllt in the economy oyer the next few years 

the flding: effects of rhe housing and fln,mcial 

cri"j", which have held down spending on housing, 

consumer goods and services, and business structures, 

equipment, and soft\vare. If some or all of the fiscal tight~ 

ening scheduled to occur undcr currcnt law \ovas remnvcd, 

the additional federal spending, lower tax revenueS, or 

both \vmIld cause ourpur to he greater and unemployment lower in the next few rears than eso projccrs. 

Howeyer, unless sLlff-!ciem additional tightening was 

imposed later, output and income would be restrained 

in the middle or the coming decade ,ll1d beyond by 

higher federal debt. 

The Economic Outlook for 2013 

l:nder current law, real CDr> will increase by 1.4 percent 

in 2013 after grO\ving by an estimated 1.9 percent in 

2012, CBO projects (see hgure 2-4 and 'Elble 2~l). Con~ 

sistent with that slow the unemployment rate is 

expected to edge up its 7.8 percent reading: at the 

end of last year to 8.0 percent in the fourth quarter oftbi.~ 

year. Tht' rate or intlation (as measured by the peE price 

index) is estimated ro decline to 1.3 percent th;" ye:u 

(compared with 1.5 pncem in 2012), hrgdyas a consequence of declining energy prices. In eBO's forecast, 

interest rates stay very lov\i this year; the rate on 3-month 

'!reasury bills hovers near zero, ~ll1d the fate on IO~year 

Treasury notl's remains under pen:enr, 

Economic is projected to slow in 2013 primarily 

became fisc.11 tightening. Federd! spending on 

goods and services drops in CBO's proj('c~ 

tions, primarily as a result automatic spending 

reductions specified in current law. (Those reductions 

were ,dated to begin in January of this year but were 

delayed unril March by the American "bxpaycr Relief 

An,) Changes in tax rules ate also expected to curtail 

growth in 2013. The 2 percentage~point cm in the payroll tax thar first went into eHect in January 2011 expired 

in January 20l3, as did some reductions in tax rates 

inally ellacted in rhe Economic Gwwth and "ElX 

Reconciliation Act of2001 WL 107-16) and the Jobs 

and (;rowth 'E1X Relief Reconciliation Act 0[2003 

(Et. I 08~27). reduce after~tax income 

for many people, which constrain the growth of con~ 

sumer spending. That slowdown. in rum, \'lill restrain 

overall growth in output and employment this year. 
87 


87610.053

CHAPTER'I'\\'O Tim BU>GHT A,"·m ECO.\OMIC Ol'llOOK: FISC,\L WARS 20U TO 202:\ 41 

Figure 2·4. 

Actual Values and CBO's Projections of Key Economic Indicators 

Real GDP Unemployment Rate 

(Percentage change) (Percent) 

6 12 

10 

2004 2008 2012 2016 2020 

Inflation Interest Rates 

(Percentage change in prices) (Percent) 

4 7 

o L_L~ ___ L.L_L __ L._~_L .. L.~. __ .".L .. '._..LL, __ ' 

2000 2004 2008 2012 2016 2020 2000 2004 2008 2012 2016 2020 

Sources: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis; Department of Labor, Bureau of Labor 

Statistics; Federa! Reserve. 

Notes: Real gross domestic product (GDP) is the output of the economy adjusted to remove the effects of inflation. 

The unemployment rate is a measure of the number of jobless people who are available for work and are actively seeking jobs, 

expressed as a percentage of the labor force. 

The overall inflation rate is based on the price index for personal consumption expenditures; the core rate excludes prices for food 

and energy. 

Data are annua! and are plotted through 2023. Forecast values for 2013 are !abeled. 

For real GDP and inflation, actual data are plotted through 2011; the values for 2012 ref!ect CSO's estimates for the fourth quarter and 

do not incorporate data recently released by the Department of Commerce and the Department of Labor. Percentage changes are 

measured between the fourth quarters of successive years. 

For the unemployment rate and interest rates, actual data are plotted through 2012. 
88 


87610.054

42 I'm: Bl Dl;rr ,\.\0 FCO.\O\1!C Ol TLOOh.: F/SC\L \U!{S 2015 TO 2025 nmm ~\RY 201;} 

Table 2·1. 

CBO's Economic Projections for Calendar Years 2012 to 2023 

Estimated, 

Fourth Quarter to Fourth Quarter (Percentage change) 

Gross Domestic Product 

Real 1.9 1.4 3.4 3.6 2.2 

NOl)linoi 3.7 2.9 53 5.7 43 

Inflation 

PCE price index 1.5 1.3 1.8 1.9 2.0 

COfe PCE pnce index 1 1.5 1.5 1.9 2.0 2.0 

Consumer price index!) 1.9 • 2.0 2.2 2.3 

Core consumer pnce index" 1.9 L8 2.0 2.2 2.3 

GDP pnce Index 1.8 1.5 1.9 2.1 2.0 

Employment Cost Tndexd 19 2.2 33 4.0 3.6 

Fourth Quarter level (Percent) 

Unemployment Rate 7.8 8.0 7.6 5.5 5.21 

Year to Year (Percentage change) 

Gross Domestic Product 

Real 2.3 1.4 2.6 3.7 2.3 

Nominal 4.1 2.9 4.4 5.9 4.3 

InflatIOn 

peE price index 1.7 1.3 1.7 1.9 2.0 

Core peE pnce mdexJ 1.7 1.3 1.8 2.0 2.0 

Consumer pnce indexb 2.1 1.6 1.9 2.2 2.3 

Core consumer price indexCl 2.1c 1.7 2.0 2.2 2.3 

GOP price index 1.8 1.5 1.8 2.1 2.0 

Employment Cost Index' 1.8 2.1 2.9 4.0 3.6 

Calendar Year Average 

Unemployment Rate (Percent) 8.1 ' 7.9 7.8 6.1 5.4 

Payroll Employment (Monthly change, in thousands) 157 ' 105 182 171 75 

Interest Rates (Percent) 

fllree-month Treasury bills 0.1 0.1 0.2 2.2 4.0 

Ten-year Treasury notes 1.8 " 2.1 2.7 4.5 5.2 

Tax Bases (Percentage of GDP) 

Wages and salaries 44.1 43.5 43.9 44.2 44.9 

Domest!c economic profits 9.6 9.3 9.7 9.7 7.7 

Source: Congressional Budget Office. (Actual values for 2012 are from Department of Labor, Bureau of Labor Statistics; Federal Reserve.) 

Notes: Economic projections for each year from 2012 to 2023 appear in Appendix B. 

The numbers shown here do not reflect the values for GDP and related series released by the Commerce Department's Bureau of 

Economic Analysis on January 30 and the values released by the labor Department's Bureau of labor Statistics for the employment 

cost index on January 31 and for payroll employment on February L 

PCE "" personal consumption expenditures; GDP "" gross domestic product. 

a. Excludes prices for food and energy. 

b. The consumer price index for all urban consumers. 

c. Actual value for 2012. 

d. The employment cost index for 11\13geS and salaries of workers in private industry. 

e. Value for 2018. 

1. Value for 2023. 
89 


87610.055

CHAPTER TWO 

If all of the fiscal tightening stili embodied in current law 

for 2013 was removed, growth in real GDP would he 

about P/2 percenrage points higher this year rhan eRO 

currently projects.1) About 1 w percentage points of that 

effect comes from the automatic reductions in federal 

spending described in Chapter 1, the expiration of the 

cut in payroll tax rates, and rhe increase in marginal tax 

rates on higher income; the spending changes and the 

combined tax changes account for about equal portions. 

(The changes have a smaller budgetary impact 

than tax but they affect GDP by a larger 

amount per dollar of budgetary cost.) The remaining 

lA, percentage point comes from other, smaller 

in spending and taxes. Even if all of the scheduled 

tightening in 2013 was removed, the economy would 

remain below its potentiallcvcl and the unemployment 

rate \"lould remain high for some time, CBO estimates. 

Gathering strength in some sectors will 

omy growing despite the fiscal 

CBO projects. For example, investment is 

expected to continue to imptove, and increases in house 

prices and stock prices wilt boost households' \vcalth. 

CBO anticipates that consumer spending will moderately, increasing aggregate demand. As a business 

ilwesnnenr will rise, helping to spur additional hiring and 

further holstering the wealth of households. Continued 

easing of credit conditions will also suppOrt spending by 

households and businesses. 

The Economic Outlook for 2014 to 2018 

The growth of real GDP will pick up considerably beginning in 2014, CBO after economic activity 

adjusts to this year's tightening. In CRO's projections, economic growth is 3.4 percent in 2014 and 

averages 3.6 percent per year in 2015 through 2018 

(sec Table 2-1). That growth closes the gap between 

actual and potential CDP by 20 l7. As a result of that 

stronger economic growth, the unemployment rate in 

CBO's forecast tails from 8.0 percent in the fourth quarter of 20 13 to 6.8 percent in the fourth quaner of 2015 

and then declines gradually to 5.5 percent in the t()urth 

quarterof2018. 

THE HmGET ,\~D ECO\OMIC OnlOOK: l!!SCAI. 'tE\RS 2013 TO 2025 43 

The quickening of economic growth in 2014 reflects 

CRO's projections of continued improvements in 

households' income and wealth and in credit markets. 

be supported by faster growth in 

\"lages and result of more robust employment 

growth) and by continued gains in household wealth, 

owing to persistent increases in house prices and stock 

prices. Stronger demand for goods and services by households, in turn, will encourage businesses to undertake 

investments in structures and equipment as well as (0 

engage in further hiring. Greater availability of credit will 

also support consumer spending and business investment. in addition, CBO expects that increased spending 

by federal, state, and local governments will add a small 

amount to overall demand after 2013. In contrast, net 

exports arc likely to decline for much of the 2014-20] 8 

period while growth in the United States outpaces growth 

among its major trading partners. 

From 2014 through 2018, CBO projects, the rate of 

inflation as measured by the PCE price index and its 

corresponding core index will rise slowly and then remain 

at 2 percent. eRO expects the CPI-U and its core 

version to increase a litde more rapidly than their PCE 

counterparts. 

As economic growth and financial markets improve 

domestically and abroad, CEO anticipates, short-term 

and long-term interest rates will rise. In CEO's forecast, 

monetary po!icymakers begin raising the federal funds 

rate in early 2016 and selling assets from the Federal 

Reserve's securities portfolio later in that year. In addition, CEO projects that as the effects of the financial crisis and recession EH1c, and as economics in Europe 

improve, demand for risk-free U.S. Treasury securities 

will decline to a more normal level as demand for other 

assets increases. Finally, an improvement in economic 

growth will raise the demand for credit, putting upward 

pressure on interest rates more broadly. All told, the interest rate on 3-month Treasury bills in CEO's projection 

climbs from 0.1 percent in the fourth quarter of2013 

to 4.0 percent in the fourth quarter of2018 (see 

Figure 2-4). Over the same period, the rate on 10-year 

Ireasury notes is projected to increase from 2.3 percent to 

5.2 percent. 

Some Uncertainties in the Economic Outlook 

Economic forecasts are 

tainty surrounding CBO's 

uncertain, but the uncerfor rhe next several 
90 


87610.056

44 TI!E Bl D(;ET \\1) ECO\O.\llC Ol TLOOK: FlSC\L )[\RS 2015 TO 2023 

years is especially great because the curre!1( business cycle 

has been UllUSU:ll in 3. vJ.riety of ways. HI Follovving tht.' 

agency's usual eRO nmstfllctcd its forecast to 

lie in the of the distribution of possible outcomes 

~or [be cconO!l1~' given the t!s ... -al policies that art.' 

embodied in current law. 

Even if no signit!canr ,Ire made to fiscal policy, 

actual outcomes wil! lltl(lollhtedlv diH-'{:r from eRO's 

economic projections for various reasons. For example, 

the economy could grow consider,lb!y f~lster [h,m CBO 

has forecast ifexpons are as a result of more 

robust economic grO\vrh than the 

jeered. Such an increase in exports could 

growTh ofemploY!l1eJ1t and boo~t U.S. bw.int.'s~es' 

and software, 

to a c;;clc 

hiring, and income generation. 

Outcomes that arc \vorse than those in eRC),,, f(lreclst 

by 

of an increase in uncertainry or 

ability of credit owing to disruptions in markets), then investmcnt and hiring could remain weak. 

Th,n OU[COfnC could trigger a dO\vIHUrn in COllSUIlH:r 

.HHI stall the recovery in the housing markec 

could, in turn, reinr()rcc the wl'akne.~s in investmcm and hiring by businesses. 

The Economic Outlook for 

2019 to 2023 For the second half of the 

attempt to predict cyclical 

hut ,lssomes imtead that CDP ,xiII equal its maximum sustainable leveL Thus, CBO's assessment of [he 

outlook {or output and income for 201910 2023 

depends on projections of trends in the ractor~ of production [hat underlie potential output: the size of the labor 

force, [he srock of producti\'(.' capital, and the productivity of those factors. CB(Y~ projections of [hose [rends 

! {) For di,,<.u~~jOtb of ltlll1."ll.d f,.'<lllln.>~ of (ill: ",lrrent bmin'i'" (yck, 

(:ol1 bl'O.'!>\iOfMl BlId~l:l ()(1-"I(':, !hi' Bllf(zn {/Iu! 

2(]1!), 

l'EBlu,un 2015 

reflect the negative dTeu:, of the recession of 2007-2000 

and the ensuing :,low recovery as well as the impact of 

fi:,ca! policy under Cllrrem law. The projections through 

2023 further rdlect the expectation thar rhe Federal 

Reserv(' will kccp inflation In"v ,1I1d stable. 

Potential Output 

Potential CDP is projected to grO\v at an ,lvcragc annual 

rate of 2.3 perc('nt hef\veen 2019 and 202,), substalltially 

below the average rate :,incc 19'50 of .1.3 percem {sec 

fable 2~2)' Tlut e:,timare is mainly a IT9.Jlr of slower projected growth in the potential1abor force (the lahor /()rce 

adjusted fc)r variations omed by the bminc:,~ c),(l('). That 

growth j:, expected to decline from it:, 1. 'j percent average 

annllal rate since 1950 to a o. ') percent average annual 

fate during the coming decade, mostly owing to the 

retirement of the baby~boom generation and;1I1 end to 

the long~standing increase in the labor !-<w:e participation 

of women. i

: For the llonf:mll business sector, which 

makt's up rhe hulk of the economy, (:BO also expects tht-' 

growth of c!piu! ~crvict's (tbe /low of services available 

from tbe stock of capital as:,cts, ~uch as equipment and 

stnICfllrC)) to be slower oyer the coming declde than it 

has been, on average, since 19')0, primarily reHeering [he 

:,Iower growth of the labor force but also grearn tCdcral 

borrowing as a share ofCDE Similarly, CBO <lmicipates 

that [he growth of potential total factor productivity (the 

poremia! dliciency in producing goods and <;crvices--

:,pn:ifically, the average rcal Output per unit of input from 

bbor and capilal services combined, adjusted tor vari,l-

(ions cm~t:d by the busines:, cycle) '>vill be slower as well. 

CBO's projections rt)r grmvth of all three Elcrors that 

underlie potential output have heell damp('l1eJ hy the 

recent rece,,~ion and the ensuing ~lovv recovcry. In 

particular, CBO estimates the following: 

• Persistent long-term unemployment wil1lcad some 

worker" to leave the \vorkforce earlier than rhey would 

ba\T othcrwi~e and \villerode the skills of other 

workers, making it harder for them to find work in 

the coming years; 

1 I \\;'ith [h.n p,lCC oi'gnmrh in Ill" bhor I()l'l~' ,lIlt!" ';l<""dy 

UIll:1l1ploYllwnt r;n,", (T\() I'l'oil'n ... dut l'tllplo:'IJ1':1l[ 

will inul;.\'c by '7'),oon month during 2019-2023 pniod. 

,d~{) \wl! b('bw it, 
91 


87610.057

CI! \VIII{ TWO TilE IWDGET ,\\1) ECO'\O:\'I1C O[ TLOOK: FISCAL )E\RS 2015 TO 20B 45 

Table 2·2. 

Key Assumptions in CBO's Projection of Potential GDP - .. - --- ------------

(By calendar year, in percent) 

Projected Average 

Average Annual Growth Annual Growth 

Total, Total, 

1950- 1974- 1982- 1991- 2002- 1950- 2013- 2019- 2013-

1973 1981 1990 2001 2012 2012 2018 2023 2023 

Overall Economy 

Potential GDP 3.9 3.3 3.1 3.1 2.2 3.3 2.2 2.3 2.2 

Potentia! labor Force L6 2.5 L6 1.3 0.8 L5 0.6 0.5 0.5 

Potentia! labor Productivltya 2.3 0.8 1.5 1.8 1.4 1.7 1.6 L8 1.7 

Nonfarm Business Sector 

Potential GDP 4.0 3.6 3.2 3.5 2.5 3.5 2.6 2.6 2.6 

Potential Hours Worked 1.4 2.4 1.6 1.2 0.5 1.3 0.5 0.5 0.5 

Capital Services 3.8 4.3 4.1 4.7 2.3 3.8 3.3 3.3 3.3 

Potential TFP 1.9 0.7 0.9 1.3 1.4 1.4 L2 1.3 1.3 

Potentia! TFP excluding adjustments 1.9 0.7 0.9 1.2 1.3 1.4 1.3 1.3 1.3 

Adjustments to TFP {Percentage pOints)D 0 0 0.1 0.2 

Contributions to the Growth of 

Potential GOP (Percentage pomts) 

Potential hours v{orked 0.9 1.7 1.1 0.8 0.3 0.9 0.3 0.4 0.3 

Capital input L2 1.3 1.2 1.4 0.7 1.1 LO 1.0 LO 

Potential TFP L9 0.7 0.9 1.3 L4 1.4 1.2 1.3 1.3 

Total ContributIOns 4.0 3.6 3.2 3.5 2.5 3.5 2.6 2.6 2.6 

Potential labor Productivity" 2.6 1.2 L6 2.3 2.0 2.1 2.1 2.1 2.1 

Source: Congressional Budget Office. 

Notes: Potential GOP is the maximum sustainable level of output in the economy. 

GOP gross domestic product; TFP ;::: total factor productivity; * :::: between zero and 0.05 percentage points; 

between ~O.05 percentage points and zero. 

a. The ratio of potential GDP to the potential labor force. 

b. The adjustments reflect CBO's estimates of the effect of the unusually rapid growth 01 TFP between 2001 and 2003 and the effect of the 

2007-2009 recession on potential TFf? 

c. The estimated trend in the ratio of potential GDP to potentia! hours worked in the nonfarm business sector . 

• The cumulative effect of the projected rehound in 

investment over the next decade wil! nor entirely make 

up for the investment lost during the recession; and 

• Growth ill total factor productivity has been held 

dmvn as the recession and slow recovery have delayed 

the reallocation of workers to their most productive 

uses, slowed the rate at which \",orkers gain new skills 

as [echnologies evolve, and lowered spending by 

hu!:>int-'sses on research and development. 

Combining those effects, CRO estimates that potential 

output will be about I Yl percent lower in 2023 than it 

would have been without the recession and slow recovery; 

each of the three factors accounts for about one-third of 

the reduction,12 

12. 
92 


87610.058

46 TIlE BLJ)(jET ;\\1} ECO\O.\llC ot TLOOK: FlSC.\L YEARS 2015 TO 202,1 

Figure 2-5. 

Labor Income 

(Percentage of gross domestic income) 

65 

Sources: Congressional Budget Office; Department of Commerce, 

8ureau of Economic Analysis. 

Notes: labor income is defined as the sum of the compensation 

of employees and C80's estimate of the labor share of 

proprietors' income. Gross domestic income is the sum of all 

income earned in the production of gross domestic product. 

Data are annuaL Actual data are plotted through 2011. The 

value for 2012 reflects CBO's estimate for the fourth quarter< 

Projections are plotted through 2023, 

Unemployment, Inflation, and Interest Rates 

In CBO's projections, the rare inches 

down from 5.'5 at the to 5.2 percent 

by 202,). matches the decline over that same 

period in the agency's estimace of the natura! rate of 

u!1t:mploylllt:nt (tht: rate arising from all sources 

fluctuations in aggrt:gate demand). eso the face in 

erosion of their 

perception that their absence 

from the job is an indication of their 

workers-\vill gradually diminish bur not 

disappear by 202.); as a result, the natural rate 

during the 2019-202.) period 

Both inflation aIld core inflation as measured by the peE 

announced 

tion as measured by the 

infbslightly 

FEBRURr 2015 

higher.) eso foreosrs that the interest rates on 3-month 

Treasury bills and 1 O-year Treasury nOtes will average 

4.0 percent and 5.2 percent, for the period. 

Tho.)e rates are consistent with 

alllong inreres[ rates, inflation, federal borrowing, and 

flCtors that underlie the growth of potential GOP. In particular, the fate on 1 O-year Treasury notes adjusted for 

inHarion is to about 3 percent from 2019 

[() 2023, than its historical average pribecame CBO forecasts a higher-than-average ratio 

debt to GDP during that period. 

Projections of Income Economic activity and federal tax revenues depend not 

only on the amOllnt of total income in the economy bur 

also on ho\-\' that income is divided among its constirucnr 

parts: wages and salaries, domestic et.~onomic protlts, 

prietors' income, interest and dividend income, and 

categories. CBO forecasts various of income by 

their shares of total mcome 

principle, CDI 

are tracked as income; in they dif ... 

of difEcultics in measuring quantities.) 

Labor income has fallen as a share ofGDI during the economic recovery, continuing ilS previous downward trend 

(sec Figure 2-5).1;\ eBO estimates that labor's share aver59.4 percent in the fourth quarter of2012, down 

61.0 percem in the second 0[2009 (at the 

end of rhe recession). ~hlCh 

attributed to in 

COlmpOlH,ms of 

decline tarly in recoveries and rise bu.'!". In CBO's projections, lahor income faster than GDI over the next 

to 61.0 percent in 2023~still 
93 


87610.059

CHAPTER TWO 

below its average of abollt 61 V2 percent in recent decades. 

That increase stems from faster in real hourly 

labor which up during the first' half 

period in response to demand 

for and then remains years 

of the period, when it is to the growth of 

labor cause growth in labor income to 

of other types of income. 

Domestic economic CBO estimates, were 

9.7 percent ofGDI 2012 and will decline 

share ofGDl in 2013 as the economy slows a 

that profits' share will then rise through 2016 

falling again thereafter-to ahout 7.3 percent in 

2023-because of the burden of corporate interest 

payments, depreciation on larger stock of business 

capital, and growth in labor income. 

Comparison with Other Economic 

Projections 

CEO's current economic r()recast differs in some 

tam respects from the forecast it issued in August 

The forecast also diHers in various ways from the Blue 

consensus forecast published 

Reserve's forecasts 

2012 meeting of the Federal 

and from 

Decemher 

inyentoric~. D01llc'>tic economic profits exdude certain income 

ofli.S.-bascd multinational corporations that is derived (rom fi)reign sources, !l1O.'i{ of which doe~ not generate corporate income 

l,1X r!.'cejpt~ in lhe Unir"d States. 

THE BrnGET ,\\D ECO\OMIC OnlOOK: FISC\L H\ARS ZOU TO 202.1 47 

tightening that had been scheduled to take effect in January 2013. However, the American Relief Act 

removed part of that fiscal 

growth in real GDP in 2013 

1 % points. That along with betterrh'lH,mec",,! ne">'s about the economy, led cno to 

revise upward its projected growth rate for real GDP this 

year. 

In contrast, CBO has revised dmvnward irs projection of 

the level of porenrial GDP in 2022, the last year of 

CRO's previous by roughly 0.5 percent. That 

change primarily data revisions that reduced historical estimates of capital services and, in turn, cno's 

projection of those services. In addition, CRO estimates 

that greater federal borrowing under current law relative 

ro the path in CEO's previous projections would reduce 

the size of the capita! stock. That reduction would occur 

because, by CBO's estimates, federal borrowing would 

rake up a larger share of the saving potentially available 

for investment. Consistem with that fedand smaller capiral stock, 

projection imeH's1 rate on 1 O-ycar Treasury notes 

in the latter part of the projection period ro 5.2 percent 

from 5.0 percent in the previous projection. 

CRO forecasts a weaker economy in the ncar term-with 

lower GDP growth in 201.:3 and a rate of unemover the next few is forecast by 

Blue Chip consensus or the Federal Reserve (see 

Table 2-4). Those differences in forecasts probably resulr 

from a variety of factors, including the economic data 

availahle whE'11 the forecasts were completed, the models 

used by the forecasters, and varying about 

future federal taxes and spending. In a number 

of other forecasters report that they expect lawmakers to 

postpone somt' of til(' ncar-term fiscal 

ing, whereas CBO's forecast, on current law, 

not include such expectations. 
94 


87610.060

48 TIlE HI m;ET ,\\1) ECO\O.\llC OlllOOh: F1SC\L Y[·\RS 20[5 TO 2025 FEBHt.\R) 2015 

Table 2·3. 

Comparison of CBO's Current and Previous Economic Projections for 

Calendar Years 2012 to 2022 

Estimated, 

Fourth Quarter to Fourth Quarter (Percentage change) 

Real GOP 

February 2013 1.9 14 3.4 3.6 2.2 

August 2012 2.1 ·0.5 4.4 3.9 2.3 

Nominal GDP 

februory 2013 3.7 2.9 5.3 5.7 4.3 

August 2012 3.9 0.8 6.0 5.9 4.4 

peE Price Index 

February 2013 1.5 1.3 1.8 1.9 2.0 

August 2012 1.4 1.4 1.7 1.9 2.0 

Consumer Price Index;' 

February 2013 1.9 " 1.5 2.0 2.2 2.3 

August 2012 !.3 1.6 1.9 2.2 2.3 

GDP Price Index 

February 2013 1.8 1.5 1.9 2.1 2.0 

August 2012 1.8 1.4 1.6 1.9 2.0 

Employment Cost Indext 

February 2013 1.9 2.2 3.3 4.0 3.6 

August 2012 2.6 2.4 3.4 4.4 3.7 

Reul Potent,al GOP 

February 2013 1.7 1.8 2.0 2.4 2.2 

August 2012 1.7 1.6 1.9 2.4 2.3 

Calendar Year Average 

Unemployment Rate (Percent) 

february 2013 8.1 b 7.9 7.8 6.1 5.4 

August 2012 8.2 8.8 8.7 6.5 5.4 

Interest Rates (Percent) 

Three-month Treasury bills 

February 2013 0.1 b 0.1 0.2 2.2 4.0 

August 2012 0.1 0.1 0.2 2.2 3.8 

Ten-year Treasury notes 

February 2013 1.8 b 2.1 2.7 4.5 5.2 

August 2012 1.8 1.8 2.4 4.0 5.0 

Tax Bases (Percentage ofGDP) 

Wages and salanes 

February 2013 44.1 43.5 43.9 44.2 44.9 

August 2012 44.1 44.0 44.1 44.7 45.4 

Domestic economic profits 

february 2013 9.6 9.3 9.7 9.7 7.9 

2012 10.4 9.0 9A 9.3 7.6 

Source: Congressional Budget Office. (Actual values for 2012 are from Department of Labor, Bureau of Labor Statistics: Federal Reserve.) 

Notes: 

GDP gross domestic product; peE =: persona! consumption expenditures. 

a. The consumer price index for all urban consumers 

b. Actual value for 2012. 

c. The employment cost index for wages and salaries of workers in private industry. 
95 


87610.061

C!!.\PfEH 1\\0 TIlE Bt'DGET X\D ECO\OMIC (ll TWOK: FISCAL YEARS 201:1 TO 202:1 49 

Table 2·4. 

Comparison of Economic Projections by CBO, the Blue Chip Consensus, and the 

Federal Reserve 

(By calendar year) 

Estimated, 

2012 2013 2014 2015 longer Runa 

Fourth Quarter to Fourth QUarter (Percentage Change) 

Real GDP 

eso 1.9 IA 3.4 4.4 2.2 

Blue Chip 1.9 2.2 2.8 0.3, 0.3. 

Federal Reserve 

Range 1.6 to 2.0 2.0 to 3.2 2.8 to 4.0 2.5 to 4.2 2.2 to 3.0 

Central tendency 1.7 to 1.8 2.3 to 3.0 3.0 to 3.5 3.0 to 3.7 2.3 to 2.5 

PCE Price Index 

eso 1.5 1.3 1.8 1.9 2.0 

Federal Reserve 

Range 1.6 to 1.8 1.3 to 2.0 1.4 to 2.2 1.5 to 2.2 2.0 

Central tendency 1.6 to 1.7 1.3 to 2.0 1.5 to 2.0 1.7 to 2.0 2.0 

Core PCE Price Index)} 

eso 1.5 1.5 1.9 1.9 2.0 

Federal Reserve 

Range 1.6 to 1.8 1.5 to 2.0 1.5 to 2.0 1.7 to 2.2 l1.a. 

Central tendency 1.6 to 1.7 1.6 to 1.9 1.6 to 2.0 1.8 to 2.0 n.3. 

Consumer Price Indel 

eBO 1.9 (] 1.5 2.0 2.1 2.3 

Bille Chip 1.9 1.9 2.2 n.8. n.3. 

GOP Price Index 

CBO 1.8 1.5 1.9 2.1 2.0 

Blue Chip 2.0 1.8 2.0 0.3. n.3. 

----------------------------- --------------------------------- Continued 
96 


87610.062

50 THE BtDGET A\D ECO;\O.\UC OLTI.OOK: FlSC'\L YEARS 2015 TO 202.1 FEBRUARY 2015 

(By calendar year) 

Estimated, 

2012 2013 2014 2015 Longer Runa 

Fourth Quarter level (Percent) 

Unemployment Rate 

eBO 7.8 d 8.0 7.6 6.8 5.2 

Blue Chip 7.8 d 7.5 7.0 o.a. n.a. 

Federal Reserve 

Range 7.7 to 8.0 6.9 to 7.8 6.1 to 7.4 5.7 to 6.8 5.0 to 6.0 

Central tendency 7.8 to 7.9 7.4 to 7.7 6.8 to 7.3 6.0 to 6.6 5.2 to 6.0 

Interest Rates 

Three-month Treasury bills 

(SO 0.1 d 0.1 0.2 0.3 4.0 

Blue Chip 0.1 d 0.1 0.3 n.a. n.a. 

Ten-year Treasury notes 

eBO L7 d 2.3 2.9 3.B 5.2 

Blue Chip 1.7 d 2.2 2.7 n.3. n.3. 

Sources: Congressional Budget Office; Aspen Publishers, Blue Chip Economic Jl1dicators{January 10, 2013); Board of Governors of the 

Federal Reserve System, "Economic Projections of Federal Reserve Board Members and Federa! Reserve Bank Presidents, 

December 2012" (December 12, 2012), www.federalreserve.gov/monetarypoiicy/files/fomcprojtab!20121212.pdf; Department of 

Labor, Bureau of Labor Statistics; Federa! Reserve. 

Notes; The Blue Chip consensus is the average of about 50 forecasts by private-sector economists> The range of estimates from the Federal 

Reserve reflects the forecasts of the members of the Board of Governors and the presidents of the Federal Reserve Banks. The central 

tendency is that range without the three highest and three !owest projections. 

The Blue Chip consensus does not provide forecasts of the PCE or core PCE price indexes. The Federal Reserve does not provide 

forecasts of the consumer price index, the GDP price index, or interest rates. 

Estimated values for GDP and related series do not reflect the values for the fourth Quarter of 2012 released by the Commerce 

Department's Bureau of Economic Analysis on January 30. 

GDP = gross domestic product; 0.3. not applicable; peE persona! consumption expenditures. 

a. For CBO, values are for 2023. For the Federal Reserve, values represent assessments of the fate to which each variable wou!d be expected 

to converge under appropriate monetary policy and in the absence of further shocks to the economy. 

b. Excludes prices for food and energy. 

c. The consumer price index for all urban consumers. 

d, Actual value for 2012. 
97 


87610.063

Changes in CBO's Baseline Since August 2012 

Te Congressional Budget Office (CBO) anticipares 

that in the absence of further legislation affccting 

spending and revenues, the deficit for 2013 will be 

$845 billion, or $204 billion more than the agency 

projected in August, when it released its previous set of 

baseline budgetary projections (sec Table A-I), 1 CBO 

now estimates that the cumulative deficit over the 2013-

2022 period, under current law, will be $6.8 trillion, 

which is $4,6 trillion more than it projected in August. 

The enactment oflegislarion, most notably the American 

Taxpayer Relief Act of 20 12 (Public Law 112-240), 

boosted the cumulative deficit by an e;;;rimatcd $4.7 trillion; together, changes in the economic outlook and 

other, technical, changes of [set $129 billion of that 

increase. (For a description of the American Taxpayer 

Relief Act, see Box 1-1 in Chapter 1.) 

For 2013, CBO estimates, revenues will be $204 billion 

less and outlays $1 billion lower than it had previously 

projected. Enactment of the American Taxpayer Relief 

Act v.fill reduce revenues by an estimated $280 billion; 

that reduction is partially of£"et by increases in projected 

1. 

revenues because of economic and technical changes. The 

small drop in estimated outlays for the current year is 

the net result of nearly offsetting changes: reductions for 

technical reasons in CBO's estimates of both discretionary and mandatory spending ($S8 billion), mostly offset 

by an estimated increase in mandatory outlays resulting 

from recent legislation ($41 billion), and other, smaller 

increases ($16 billion). 

For the 2013-2022 period, the change in deficits is 

dominated by a projected reduction in individual income 

tax receipts stemming from provisions in the American 

Taxpayer Relief Act; by itself, that reduction results 

in a projected increase of $3.2 trillion in the cumulative 

deficit over the] O-year period (excluding added debtservice costs). In all, revenues for that period are now 

projected to be about 9 percent less and outlays are projected to be about 2 percent less than the amounts CRO 

projected in Augusr 2012. 

The changes in eBO's baseline include updates to the 

agency's projections of the budgetary effects of provisions 

in the Affordable Care Act that involve health insurance 

coverage.:'. Although several components of its estimates 

have changed since August, the difference in the net 

budgetary impact for the 2013-2022 period is less than 

$500 million. 

Legislative Changes 

Legislation enacted since the agency prepared its August 

baseline has had a substantial impact on CRO's estimates 

(P.L. 11l-152) and, in the case of this document, the effects of 

subsequent related judicial decisions, statutory changes, and 

administrative actions. 
98 


87610.064

52 nlE m DGET \\D n:o\o.\lIc Ol TLOOI\' nSUL )E,\HS 201 i TO 21l2~ FEBm ,\In 201:' 

Table A·1. 

C~all~ges in CBO'~ BaseH~!r~jections of the Defic!!~Since~August 2012 

(Billions of dollars) 

2013 2014 2015 2016 2017 2018 2019 2020 2021 

Deficit in CBO's August 2012 Baseline ~641 ~387 ~213 ~ 186 ~ 123 ~79 ~130 ~142 ~144 - 213 -1,549 - 2,258 

legislative Changes 

·224 -258 -254 -304 -330 -379 -410 -443 -l,317 -3,232 

Corporate II1cometJ}(8s ·15 9 4 2 -1 -2 -52 -54 

Soclai II1surance taxes -] -1 -1 -] -1 -] -2 -5 

Othel -30 -36 -39 -41 -45 -48 -51 -124 -34S ---~~-

AU Changes in Revenues -280 -299 -275 -305 -337 -367 -393 -426 -461 - 497 -1,495 - 3,639 

Changes If) Outiays 

Mandatory 

Refundable tax credits 0 36 37 37 23 23 23 23 148 277 

Unernploymentcompensallon 22 8 0 0 0 0 0 0 0 30 30 

Medicare 13 -3 -3 -3 -] -] 8 5 

Other 0 1 4 -4 II 7 

Subtotal 3] 36 22 22 18 319 

Discretionary -8 -] 10 ]1 -8 35 

Debt service 7 20 42 96 122 153 185 703 

All Changes in Outlays 50 45 34 52 82 116 126 153 185 213 264 1,057 

Total legislative Changes" -330 -344 -309 -358 -419 -483 -519 -579 -645 -710 -1,760 -4,696 

Economic Changes 

Changes In Revenues 

Individual mcome taxes 20 32 J4 29 24 10 -3 -'1 139 142 

Corporate Income tJxes -13 -I -5 9 12 II 10 7 -11 3] 

SOCli:l! msurancctaxes 4 -9 -15 -19 -20 -19 -16 -5 -94 

Olliel 1 -I 3 ] I 1 1 5 II 

All Changes in Revenues 13 39 30 22 24 9 -7 -13 -15 -13 128 90 

Changes In Outlays 

Mandatory 

S11!dentloans 21 35 

SocIJ1Secunty '1 -3 20 ]9 

Other -4 -5 -9 

Subtotal II 10 -1 32 50 

DiscretIOnary -I -1 -I -2 ·2 -1 -11 

Net IIlterest 

Debt service -I -I -I 2 -3 

Other 8 14 JI JI JO 28 28 37 186 

Subtotal 31 33 192 

All Changes in Outlays 16 19 22 38 35 33 31 29 65 231 

Tota! Economic Changes~ 12 31 15 -29 -42 -46 -46 -42 63 -141 

----------------------------------------------- - ---------Continued 
99 


87610.065

:WPE\D!X \ TilE BlD(iET \\1) ECO\O\l!C otTl.OOh: FlSC\L )E\HS 2015 ro 2025 53 

(8illions of dollars) 

Total 

2013- 2013-

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2017 2022 

Technical Changes 

43 38 411 37 21 15 -2 -8 179 172 

Corporate Income taxes 21 10 4 2 8 10 II 10 10 10 44 95 

Soc tal Insurance taxes -9 -3 -5 -8 -lJ -16 -17 -19 -21 -25 -38 -136 

Other 8 10 37 16 -21 -42 -48 -61 -47 -22 60 -]60 

All Changes in Revenues 63 55 76 57 -5 -33 -50 -72 -67 -51 245 -29 

Changes in Outlays 

Mandatory 

Medicaid -2 -9 -ll -10 -16 -24 -31 -38 -44 -52 -48 -236 

Medicare -6 -9 -9 -9 -10 -11 -15 -18 -29 -42 -137 

5 8 12 12 11 13 13 12 13 45 108 

-29 -1 -1 -1 -2 -3 -6 -30 -44 

Other 1 -8 -1 -3 5 8 4 2 1 4 -6 lJ 

Subtotal -31 -19 -ll -10 -10 -18 -30 -43 -56 -69 -81 -296 

Discretionary -27 -15 -3 -8 -4 -56 -47 

Net interest 

Debt service -7 -17 -18 -23 -22 -17 5 -91 

other 10 14 15 24 27 25 32 137 

Subtotal 13 12 "3 -2 -3 5 "7 37 45 

All Changes in Outlays -52 -30 -1 -7 -10 -19 -31 -40 -49 -60 -100 -298 

Total Technical Changes3 114 84 78 64 -14 -20 -32 -19 345 269 

All Changes 

Total Effect on the Deficit" -204 -229 -217 -290 -412 -526 -580 -656 -710 -744 -1,352 -4,568 

Deficit in CBO's February 2013 Baseline -845 -616 -430 -476 -535 -605 -710 -798 -854 -957 -2,901 -6,825 

Memorandum: 

Effects on the Deficit" 

Changes In revenues -204 -206 -168 -226 -318 -391 -450 -511 -543 -561 -3,577 

Changes In outlays 1 -23 -49 -64 -94 -135 -130 -146 -167 -183 -990 

Source: Congressional Budget Office. 

Note: * ::: between ~$500 million and $500 mjl!jon. 

a, Negative numbers indicate an increase in the deficit; positive numbers indicate a decrease in the deficit 

of revenues and outlays. itself, the American Taxpayer Changes to Projections of Revenues 

Relief Act boosted deficits by $4.0 trillion, Becausc of the American "I~txpayer Relief Act (and other 

excluding debt-service COStS (see Box 1-1 in 1), legislation that 'will have much smaller effects on the 

As a result of that and other new laws, CRO has budget), CBO has significantly reduced its projections its estimate of the defIcit by 53.31 billion for 20 l3 and by of revenues for the next decade. Specifically, the agency $4.7 trillion (including debt service) for the 2013-2022 

period. lowered its projections of revenues by $280 billion for 

2013 and by an additional $3.4 trillion for the 2014-

2022 period, \vhieh is in accord with estimates made hy 
100 


87610.066

54 TIlE Bl"DGET ,\\D ECO:\O~I1CO! TLOOK: FISCAL n:·\I~:S 1013 1'0 2023 

the staff of the Joint Commirtec on Taxation (JCT). (The 

act also will result in a SO.3 trillion increase in 

refundable tax credits, according to JeT's for 

The act's most signiflcant effects in receipts from 

individual income taxes: CBO its 

those revenues by $224 billion for 2013 

lion for the 2013--2022 period. The law 

extended several provisions that 

been set to expire on December 2012. Most of those 

enacted in the Economic 

Ke<:onCll!atH)n Act of 200 1 and 

the Jobs and Growth -[IX Relief Reconciliation A(( of 

2003 and were then extended for two in December 

2010. (The American Taxpayer did not extend 

several expiring tax provisions that to the income 

of high-income taxpayers, law also will 

reduce revenues from individual income taxes because it 

Furthermore, the American Taxpayer Relief A(( modified 

laws concerning estate and gift taxes, extending most feacurL'S that were in effect in 2012 but the [Op tax 

rate by '5 percentage points, to 40 the 

top rate under prior law \'I/as 

cent and the amount 

rise after 2012, eBO 

revenues from corporate income 

for rhe 2015-2022 period; rhe 

2013. The effects stemmed 

S100 of provisions that allow businesses to 

deductions f()f the cost equipment and a 

rum-year extension of a host tax credits and 

deductions. 

Changes to Projections of Outlays 

Since August, CEO has raised the amount it estimates 

for outlays in fiscal year 2013 by 551 billion because of 

legislative actions that arc projcC[cd to boost mandatory 

oudays by $41 billion and discretionary Ollflays by 

$9 billion. For rhe 2013-2022 period, 

to be $1.0 trillion (or 

delJH,crvicc costs to 

legislation and increased outlays for refundable 

tJX credits. 

F[BRURY 20 J 3 

American Taxpayer 

S309 billion in 2013-2022 

period. (That [Otal docs not 

of eliminating a of this year's automatic spending 

reductions: of that effect is classified as discrctionspending in the baseline.) Most of that incre<lse 

billion) is the resulr of additional for certain refundable tax credits (which are in thc 

as oudays). Among other provisions, the la"\v also 

emergency unemployment cornD<Cl,,,,,i()J1 

(-which CEO estimates will hoost 

over the 2013-2014 and 

scheduled cuts in 

Discretionary Spending. 

increased its baseline projections 

iog by S9 hillion fi:)r 2013 and by $3'5 billion 

2013-2022 period. Those increases arise mainly from the 

baseline's funding provided in 

JDI)ro.)!"i,tions in 

In January, the Disaster 2013 

(EL. 113-2), provided about in discrerionary 

authority for relief and recovery from Hurricane 

iv'iost of that amount, ,541 billion, was designated 

has been extrapolated fully in 

also provided $ 5 billion in fundfor disaster rdief(as ddlned in the Budget 

and $3 hill ion that was not 

eithcr as emergency funding or for disaster 

amollnts are extrapolated in CEO's baseline hur are subto constraints imposed by the Control Act in 

Overall, the additional and 

exrrapola.:ion of rhose snp'plcme.ml apf)[olmatlo." 

$330 hillion to 

crcrionary outlays for the 2013· 2022 period. 

As a result of the Continuing Appropriations Resolution, 

2013 (EL. ] 12-17'5), enacted in Septemher 20] 2, 

funding for overseas contingency operations in 2013 is 

3. 
101 


87610.067

WPE\DlX 1, 

$27 billion less than the amount that had been projected 

in the previoLls baseline (that amount was equal to the 

20 12 appropriation, adjusted for inflation). EX>tra[lOhltil1lg 

that smaller amount of funding reduces the projection 

oudays f(H the 2013~2022 period by $277 billion. 

The American Taxpayer Relief Act also altered the automatic enforcement procedun:s established in the Budget 

Control Act that require reductions in 2013 fnr discreand mandatory The law ddayed the 

implementation two months and 

the amount of the reduction required for 2015 

a total of $24 billion, most of it in the.' category of 

"l'hat change boosted CBO's 

baseline projection by 522 billion 

fC)f the 2013--2022 period. (That increase was offser by 

certain other to revenues and spending that were 

made by the acd changes stemming from the 

amount offunding provided in resolution 

reduce discretionary outlays in rhe baseline about 

$40 billion berween 2013 and 2022. 

Economic Changes eBO's btest economic forecast incorporates updated 

projections of gross domes ric product, thc unemployment rate, intcrest rates, inflation, and other economic 

variables that affect federal outlays and revenues (sec 

Chapter 2). Those have led CRO to trim its 

of the for 2013 

its projection of rhe deficit for the 

2013-2022 period by $14l billion, mostly because of the 

increased cost of interest on the debt. 

Changes to Projections of Revenues 

Revisions ro C130's economic foreca.~t caused the agency 

August, revenues arc nmv 

greater for the first 

2013 to 2018, but 

period. 

S 13 billion for 

For the first half of the period, CBO increased its 

tions of personal income-including wages and 

interest income, and proprietors' inconH:~in parr 

because of the enactment of the American 

RdiefAct and its removal of much of the 

scheduled under prior law. All else 

changes in income imply higher 

mE m DGET ,\\0 ECO\OM!C OlTLOOK: FISCAL )IAR"> 20!.-) TO 2025 55 

income taxes and social insurance taxes. The effects on 

social insurance revenues were largely of[<;ct, however, hy 

an estimated reduction in from state unemploymem taxes 6vhich are as federal revenues): CBO 

expects that balances in state unemployment trust 

funds will states to reduce their unemployment 

taxes. 

CBO projects lower wages and salaries for the second half 

of the period, which would also reduce the amounts it 

anticipates in revenues from individual income and social 

insurance taxes, But the estimates of receipts 

from individual income taxes changed little since 

August bt'cause reductions in wages and salaries have 

been oHset by increases in imerest income and proprietors' income. CEO increased the amount it projects for 

from income taxes to reflect an anticicorporate profits. 

Changes to Projections of Outlays 

Revisions to CBO's economic forecast 

to increase its estimates of outlays 

them by $1 billion f()f the current year 

(or 0.5 percent) for the 2013-2022 

The change for the 1 O-year period is mostly the 

result of higher projected imerest rates. 

Net Interest. Economic revisions to CBO's projections 

for net interest have twO componems: the 

in the projections of interest 

rates and inHation and on the "M"mnwnc" 

borrowing that result from the impact 

changes on revenues and non interest outlays. Overall, 

C130 projects lhat in the economic forecast will 

result in outlays for net over the 20 13~2022 

period that are $192 billion than the amoum it 

estimated in August. Almost of [hat change SIems 

from CBO's updated projections of interest rates and 

inflation. which in turn have resulted in estimates of nct 

interest that arc $186 billion than they were in 

August. CBO now intcrest rates fen most 

securities throughout 2013~2022 period. Upward 

revisions to il1lerest rates for securities with a maturity of 

less than one year from 1 basis point (0 45 basis 

points for that For securities with a maturity of 

two years or more, upward revisions range from 1 basis 

point to 58 basis points for the same period. 

1.5 jx:rccnt i~ 50 basis poinrs. 
102 


87610.068

56 WE Bl DGET ,\.\\) ECO\O'1!C Ol TLOOI\: FiSCAl. m\l~s 2()1.) TO 202.'l 

Mandatory Spending. Updates to its economic forecast 

caused CBO to raise its estimates of mandatory outlays 

tor the currcnr year by 52 billion and for the 2013~2022 

period by 550 billion. 

Student Loans. Consistcllt with the procedures set forth in 

th(' F('(kral Credit Rdorm Act of 1990, annual outlays 

for the student loan program represent the cost!) of the 

subsidi('s providl"d by the govcrnmenr. Those COStS arc 

measun:d as the present value of the future Gbh flows 

associated with ne\v fccieralloans disbursed each year, calculated using the Department of the Treasury's borrowing 

rares to discount those cash flows.' In updating its economic f()recas[, CEO raised its estimate of those fates for 

the 2013~2022 period. With higher discount rates, the 

estimated present value of future cash fl<wvs associated 

with srudenr loans decreases (that is, such cash tlows arc 

discounted more). Because those future ca:oh nows will be 

income to the government (in the form of loan repayments, interest payments, and default recoveries), eRn 

now anticipat{.~s that net OlUlayS tor student loans over 

the 2015-2022 period will be $35 billion higher than it 

projected in August. (On balance, CBO estimates thar 

the student loan program produces net negative subsidies 

under the Federal Credit Reform Act's present-value 

methodology; the revised, higher discount rates produce 

lower estimates of net negative subsidies.) 

,)·ociai Seturit),. Because of changes in the economic forecast, CBO increased by S J 9 billion the amount it projects 

that the government will spend for Social Security over 

the 2013-2022 period. The COst-or-living adjustment of 

percenr that Socia! Security benefIciaries received in 

January 2013 is 0,6 percentage points higher than CBO 

anricipated in August. Projected cost-of-living adjustments for the 20 14~2022 period are only slightly 

different from the amOllnts in the August forecast. Those 

challges boost the agt'ncy's estimates ofhenefit payments 

f(w the period by $.19 billion. In contrast, revisions to 

CBO's projections of the grmvth in \vagt's and salaries 

(which affect initial benef'!ts) result in estimates ofhenefit 

amounts that are lower by about 520 billion ben,v('en 

2013 ,wd 2022. 

fEBRl.\ln 2015 

Technical Changes Technical to CBO'" estimates of revenues and 

otltla\'s~-ma( is, revisions thar do not stem from legislation or changes in economic resulted 

in a llet decrease of $115 billion in 

curnuLnive defkit tc)r 201.1 through 2022. 

Changes to Projections of Outlays 

As a re!)ult of technical revisions (0 eHO's 

the has reduced its estimate 

$')2 for 201.1 and by 5299 billion (or 

f()r the 2013-2022 pt'fiod.' e110 made 

reductions in its estimates of discretionary mandatory spending for the current in contTa!)t, f()f tlw 

2013~2022 period, most 

for mandatory programs (most 

Medicare, and veterans' programs). 

Mandatory Spending. Technical revisions related to manprograms have reduced the amounts projected for 

in the current year by S31 billion, 

of an increase in estimated receipts to the 

Treasury's transactions with Fannie Mae and Freddie 

Mac. For the 20 1.1~2022 as a whole, technical 

'WIUSll!llCI1tS, largely to ,\;ledicaid and Medicare, 

rhe net arnount projected for mandatory !)pending 

by 5297 billion. 

/V!"dimid and Jvfedicare. In recent hcalrh care 

much more both narionall)' 

programs than historical rates \vould 

have indicated. (h)r exampic, in 2012, federal spending 

ft.)]" Medicare and Medicaid \vas about:; percent below 

the amount that eBO had projected in March 2010.) In 

response to that s!mvdown, over the past several 

CBO has made a series of downward technical 

menrs to its of spending f()f 

Medicare. tbe March 2010 baseline to the current 

baseline, such technical revisions have lowered estimates 

of' federal for the two programs in 2020 by 

each program. 

billion for ,vledicarc and by 

or by roughly 1') percenr for 

Spending projections also have been afl-ccted by 

action-most notably as a result of the 

Care AC[-~l!1d by updated cconomic f(He-

«i!)tS. From 2010 to the those other of 

rcyisions boosted the of outlay~ for 
103 


87610.069

,\PPE\"DlXA 

and Medicaid in 2020 by $72 billion, or about '5 percent, 

(The Affordable Care Act also created new subsidies f()r 

some people to purchase health insurance 

exchanges, adding $11 5 billion to the estimate 

outlays for health care in 2020, according to 

CBO's current PH')"""'''.' 

For the 2013-2022 period, technical changes to estimates 

for the Medicaid program have reduced for 

hy $236 hillion (or 5.5 

estimates in August 2012. 

of Medicaid outlays rdated [() 

factors amounted only to $3 The revisions reflect 

both lower anticipated enrollment in Medicaid and lower 

expected costS per person, CBO now estimates that 

enrollrnent in 2022, for example, will be about 84 million, compared with the 85 million it projected last 

Although CBO that more will 

in Medicaid for first time 

Affordable Care Act's expansion of the program, the 

projection of the number of people who would 

covered by Medicaid in the absence of that 

act has declined by a greater amount, Lower estimated 

Medicaid enrollment among those other groups is, in 

the result of improvements in CBO's methods for 

the number of people with insurance. More 

people are now expected to have insurance through other 

sources (primarily employers), in lower projected enrollment in Medicaid. In fewer 

are now expected to enrol! in the Supplemental 

Income program, and because people who are enrolled in 

that program automatically qualifY for Medicaid, that 

chang(~ in turn reduces the projected number or !vledicaid 

enrollees, 

CBO's current baseline also shows lower spending per 

person in the Medicaid than was shown in 

August, 

the 

w be lower than those ofless healthy aduhs. Because 

of those and other factors, CBO now estimates that 

Medicaid's spending per person in 2020 will be about 

6 percent lower than it projected in August. (For a discussion, see "Baseline Changes Related to Insurance Coverage Undet the Affordable Care Act.") 

TilE BenGET A;';J) ECO;.;()MIC OnLOOK: FISC\!. m"\RS lOU TO 2025 57 

Por Medicare, CBO has reduced its 

for Medicare by $1:37 billion 2 percent) for 

reasons, mostly because of updated data on 

actual spending for 2012, the third consecutive year in 

which spending was lower than CRO had 

projected. In past CBO had to reflect 

the slowing growth in spending for Part A 

(Hospital Insurance) and Part B (Medical Insurance); the 

largest dowmvatd revision in the current baseline is for 

spending for Medicare's Pan D (prescription drugs).(, 

COInpensation and Pemiom, CBO increased its 

baseline for veterans' disahility henefits and 

compensation by $108 billion (or 16 percent) over the 

2013-2022 period to reflect substantial recent growth in 

average benefit payments (the average benefit increased 

by 8 percent in 2012) and in the number of people added 

to the disability compensation rolls (there was a 4 percent 

increase in 2012). 

Fannie Mae and Freddie Mac. CBO considers the activition, in contrast, considers the two entities to be outside 

the federal government for budgetary purposes and 

records cash transactions between the Treasury and Fannie Mae and Freddie Mac as federal outlays or receipts (in 

CRO's view, those are intragovernmemal transactions), 

To provide CBO's best estimate of what the 11-easury 

will ultimately report as the federal deficit for 2013, its 

current baseline indudes an estimate of those net cash 

transactions for fiscal year 2013. That figure is $29 billion lower than CRO's August estimate, mostly reflecting 

a shift to a cash-basis estimate for the current year (following the Administration's budgetary treatment for the 

along with an administrative change 

Federal Housing Finance Agency and 

Department) that now requires the two entities to convey their quarterly profits to the Treasury 

rather than paying dividends on outstanding senior preferred stock. CBO's 2012 baseline showed an 

of about $13 billion for 

6. 
104 


87610.070

58 TlIE BlDGET "\.\D ECO~O\UC Ol TLOOK: F1~C\1. H~t\RS ~015 TO 2O~5 

the activirit's of Fannie Mae and Freddie Mac in 2013; in 

the currcm baseline, CBO shows cash recclprs-~tllat is, 

negative biHion (on the 

Y'vbe and 

rc!eases), 

For 2014 through 2022, CBO's baseline fo!1ows tbe 

the 

on a 

fair-value b,ls!s, rdlecrillg tht' marker risk associated with 

the two entit!.::s. For the period, eHO 

now estimates tbose subsidit's cost the goq:rnment 53') billion, about S 15 billion less than it 

in August. Mosr of the reduction is rhe result 

increa~e in the fees for nc\\' loans and guarantees 

thar hnnie Mac trt'ddie Mac implemented at rh(' 

end of2012. 

Discretionary Spending. Technical adjustmcnts to 

CB(Ys projections for several programs 

have resulted in a net decrease of $27 in Otaby:; 

estimated t{)r 2013, The 

portion 

Net Interest. As a result of technical updates, eBO's 

estimates of ouda:,s for nct interest have increased by 

$5 billion for 2013 and billion for the 2013--2022 

period. The increase f()[ coming decade is mainly 

attributable to in eBO's estimates or the mix of 

securities that issue, offset partially by a 

service stemming from 

rechnical changes in other areas of the budget. 

Tb cover the increase in projected deficits relative to those 

in the August baseline, eBO expects the Treasury to 

boost and 111f.latiOn-ptl)(e(:tcu 

FEBRl ,\RY Wt5 

for government st'curities 

Savings Plan for federal 

projected intereM receipts from accounts 

a,').MKiated with the government's credit programs.-

Changes to Projections of Revenues 

Relative to its eBO increased its 

$63 hillion (or 

for 2013 and by S 188 billion percent) for 

But it has reduced its projections 

or rcyenue" t{)f period hy $280 billion (or 

I percem). 

O\'CI" the 2013~2016 period. increases in revenues from 

individual income tax~s and remittances from the rederal 

Reserve fO the Treasury accounted for most of the techniaHcns eBO's forecasts It)r revenues beyond the next fe'\\' 

years. 

CBO also increased the amount it projects will be 

made in remittances from the i"ederal Reserve for the 

The change reflects expected 

purchases by the central bank. it also is a 

result of nev-· modeling that indicates that recent actions 

by the federal Re!>CfVC to increase the maturity of 

of Treasury securities will result in 

earnings than previously expected. remittances are om,v projected to average about $95 billion per 

year during that period. 

Ovcr the 2017-2022 period, decreases in projected revenues from social insurance taxes and remittances from 

the Federal Reserve account for most of the technical 

revisions. CBO reduced irs estimate of receipts from 
105 


87610.071

\I'PL\DI.\\ 

,,>ociat imuranlc taxe:, throughout the proje,ction 

pcriod~and by larger amount;, later in pcriod~ 

mO'!tiv because reL'Cnt tax rerums show a smollkr amount 

- covered hy Social Security than CBO estimated, 

and agency expects that to persist in coming 

years, For the period as thos(.' reductions 

amounted to about 1 percent of lhe receipts previously 

projected (rom those taxes, 

CBO reduced its projcctions of remittances from the 

Federal Re.'.erve for the second half of the IO-ycar period, 

fcn several reasons, The most signiflcltH is that the centra! 

bank i;, now expectcd to acquire more ;,ccuririe;, in the 

,~h(lft term; the Federal Reserve is to ,\hrink the 

Slit..' ofits portfolio later in the by selling assetS, 

and bccause intere:,t rate'! are projected to be higher at 

that point, those sales \vi1l invoke caplt<lllos:.es. CHO 

lhat the yield on rill' l"ederal 

or 

relativdy low' interest rates by ;,hifting its port/(J!in to 

longer-term securities. 

Baseline Changes Related to 

Insurance Coverage Under the 

Affordable Care Act In conjunction w'ith JC'L eBO has updated its 

2012 estimatL' of the budgetary impact of the 

or the AII<-lI"l1able Care Act that arc rL'Llred 10 

imurano..' (:.ec Table A-2).~ 

period is 

new estimate reflects reccIH 

legislative, regulatory, and administrative actions along 

with economic and technical changes made since the 

previous eqim<ltL' was published," '-

In C:B() and JeT projected the net cost or 

the provisions that l"O!KLTn health imurancc at 

$1, 16'5 billion tCl[ til<.' 2013--2022 period; that amount 

remain.'> c:,sentially unch,lI1ged. For the 2013-202.1 

period (Overed by the current projection:. (one 

beyond the prn'iollS ones), the estimarcd cost 

H. 

'i. 

rcgul.Hio!)', ;lI1d 

201.') h~ tht: 

;ll1d! lutl\,111 Sen'jet:" 

thi,rqlOrt()11 

WE Hl fj(;ET .\\D ECO\O:\l!C Oi TLOO": FlSC\L \E\HS 20!5 TO 101,", 59 

provisions is $1329 hillio!1.1l\ The most importo CBl..Y~ estimates include the following: 

• Lower tax rates under the American 

"Enpaycr Act reduce the tax benefit associated 

with employment-based health insurance and w'ililead. 

to a greater reduction in such ,lIld 

enrollment in insurance exchanges 

estimated by CBO and JCT, 

n.,,, ... ,,,,,,,,, or j'-fealth and Human Snvice~ has 

pn:viom projections, 

increase in rhe estim~lt(' number of people who 

will be enrolled in Iv1edicaid dnd a small reduction ill 

the estimate ofdll' number who will be covered 

through tilt' exchanges, 

• eno and JCT have slightly reduced their estimates of 

the rates at which '\-yill enroll in the insurance 

a:. the expansion of coverage 

is process that had already becll 

anticipated to occur gradually. That change reflects 

the agencies' judgmi..'lH about a combination of 

factors, including the readiness of exchanges to 

a broad array of new insurance options, the 

of st<lre !'v1cdicaid 

hased coverage and more \vho [han 

in the previou~ projections. eBO and JeT project 

that rhme factors will wane in importance over the 

In the current projection, 

m()~{ I'C,tlll (,~finl.ltc ()ethe hudgcur\' 

oCC (:ollwc\<,imul Budgn ()mc~" Itt:cr to 

through the 

ro 24 million 

I I.R. 6()7<), tile Rq)(,",li of 
106 


87610.072

60 TILE BLDGET ,-\,\[) ECO\()MIC Ol TLOOK: F!S(~\L ):E\RS lOU TO 102.1 FEBRURY 20 U 

TableA-2. 

Comparison of CBO's Estimates of the Effects of Insurance Coverage Provisions 

in the Affordable Care Act 

Medicaid and CHIP 

Employment-BasedJ 

Nongroup and OtherO 

Insurance Exchanges 

Uninsuredc 

Medicaid and CHIP Outlays 

Exchange Subsidies and Related Spending! 

Small-Employer Tax Credits9 

Gross Cost of Coverage Provisions 

Penalty Payments by Uninsured Individuals 

Penalty Payments by Employersg 

Excise Tax on High-Premium Insurance Plansg 

Other Effects on Tax Revenues and Outlaysll 

Net Cost of Coverage Provisions 

August 2012 Baseline February 2013 Baseline Difference 

Changes in Insurance Coverage in 2022 

(Millions of nonelderly people, by calendar year) 

11 12 1 

-4 -7 -4 

-3 -4 -1 

25 

-30 

26 

-27 

10-Year Effects on the Federal Deficit, Fiscal Years 2013 to 2022d,e 

(Billions of dollars) 

~ ~ ~ 

1,015 

22 

1,680 

-55 

-117 

-Ill 

-231 

1,165 

1,047 32 

23 

1,620 -60 

-45 II 

-no -13 

-102 

-178 53 

1,165 

Sources: Congressional Budget Office; staff of the Joint Committee on Taxation. 

Notes: The Affordable Care Act comprises the Patient Protection and Affordable Care Act and the health care provisions of the Health Care 

and Education Reconcillation Act of 2010 and, in the case of this document, the effects of subsequent related judicial decisions, 

statutory changes, and administrative actions. 

CHIP Children's Health InSurance Program; * between zero and 500,000 people; ** :::: between zero and $500 mHilon, 

a. The change in employment-based coverage is the net result of projected increases in and losses of offers of health insurance from 

employers and projected changes in enrollment by workers and their families. 

b, The effects are almost entirely for nongroup coverage; "other" includes Medicare, 

c. The count of uninsured people includes unauthorized immigrants as well as people who are eligible for but not enrolled in Medicaid, 

d. Excludes effects on the deficit of other provisions of the act that are not related to coverage, which in the aggregate reduce deficits. Also 

excludes federal administrative costs subject to appropriation. CBO has previously estimated that the Internal Revenue Service will need 

to spend between $5 billion and $10 billion over 10 years to implement the Affordable Care Act and that the Department of Health and 

Human Services and other federal agencies also will have to spend $5 bilHon to $10 biHion over that period. In addition, the Affordable 

Care Act included explicit authoriZations for spending on a variety of grant and other programs; that funding is also subject to future 

appropriation action. 

e. Negative numbers indicate a decrease in the deficit; positive numbers indicate an increase in the deficit. 

f. Indudes spending for high-risk pools, premium review activities, loans to consumer-operated and -oriented plans, and grants to states 

for the establishment of exchanges. 

g. These effects on the deficit include the associated effects of changes in taxable compensation on revenues. 

h. The efiects are almost entirely on revenues. 
107 


87610.073

WPE\DlXA 

Medicaid rises from 8 

in 2016. 

• CRO and JCT have revised their projections of 

insurance coverage in the absence of the act. In later 

years, that revision shows a larger numher of people 

with employment-based coverage and a smaller 

numher without insurance, compared with earlier 

projections. 

• CRO has refined its projections of people's income 

so that slightly more tax filers and their dependents 

are now expected to have income that will qualify 

them for subsidies through the exchanges and for 

enrollment in Medicaid, resulting in a larger reduction 

in employment-based coverage in response to changes 

made by the act than previously had been estimated. 

• CBO has revised its analysis of the health status of 

newly eligible Medicaid enrollees; they now are 

expected to be healthier and therefore to require less 

cosrly care than CRO had previously projected, 

Lower Projected Costs for Medicaid and the 

Children's Health Insurance Program 

On net, CBO and JCT project that the Afh)rdable Care 

Act will increase the number of people enrolled in 

Medicaid by 12 million in 2022, rarher than by the 

11 million estimated in August 2012. Despite the difference, the costs for Medicaid and the Children's Health 

Insurance Program are ro be $93 billion (or 

14 percent) below the projection for the 2013-

2022 period, for several reasons: the revised assessment 

of the health status of newly eligible enrollees, reductions 

in the projected cost of Medicaid's benefits generally in 

response to the recent slowdown in the growth of 

Medicaid's spending, and a revised projection that boosts 

the proportion of children (whose health care generally 

COStS less than that for adults) among the people expected 

to enroll in Medicaid as a result of the act. 

Higher Enrollment in and Subsidies for 

Coverage Through Exchanges 

CRO and JCT's estimate of the costs of subsidies for 

insurance obtained through the exchanges and for related 

the 2013-2022 period is now $32 billion 

about 3 percent) higher than it \vas in August, mostly 

because of higher projected enrollment in the exchanges. 

Lower marginal tax rates under the American Taxpayer 

Relief Act will reduce the relative attractiveness of 

TilE Bl'DGET ASO EC{)\OM!COlllOOK: HSCALYb\RS 20L, TO 202,) 61 

employment-based insurance for low-income workers 

and for their eBO and JCT anticipate that 

the change in ta." increase the number of people 

who shift out of employment-based coverage as a result of 

the Affordable Care Act by 2 million to 3 million people, 

many of whom to obtain insurance through 

the exchanges. other technical changes decreased 

projected enrollment in the exchanges. All told, CBO 

and JCT now project that 26 million people will be 

enrolled in the insurance exchanges in 2022, about 

500,000 more than estimated in the August 2012 report. 

l'ewer People with Employment-Based Coverage 

In 2022, by CBO and Jcr's estimate, 7 million fewer 

people will have employment-based health insurance as a 

result of the Affordable Care Act; in August, that figure 

was estimated to be about 4 million people, The 

revision is the net effect of several considerations, with 

the largest facror being the reduction in marginal tax 

rates, which reduces the tax benefits associated with 

health insurance provided by employers. The increased 

movement our of employment-based coverage also 

reflects revisions to eBO's projections of income over 

time and higher projections of employment-based coverage in the absence of the Affordable Care Acr. 

Reductions in employment-based health insurance coverage boost federal tax revenues because they increase the 

proportion of compensation received by workers that is 

taxable, (That effcct is included in Table A-2 in the line 

labeled "Other Effects on Tax Revenues and Outlays.") 

Although a greater reduction in the number of people 

with employment-based coverage is expected, the projected increase in revenues from in the taxability 

of compensation is now $53 billion for the 2013-

2022 period than was projected in August because of the 

lower tax rates enacted in the American Taxpayer Relief 

Act and because of other technical changes. 

CRO and JCT have raised their estimate of revenues that 

will corne from penalties paid by employers, by $13 billion for the 2013-2022 period, because fewer businesses 

are now expected to offer insurance coverage than had 

been estimatcd in August. Penalties arising from the individual mandate are projected to be $11 billion lower than 

expected in August because, on the basis of revised 

income projections, more people who remain uninsured 

are expected either to be exempt from the penalry or to 

pay a smaller penalty based on a flat rate instead of one 

based on a percentage of income. 
108 


87610.074

CBO's Economic Projections for 2013 to 2023 

Ye tables in this appendix on the information in Chapter 2 by showing the Budget 

Office's (CBO's) economic projections hom 

20U to 2023 (by calendar in Table B-l by fiscal 

year in -lable B-2). CBO nOt forecast cyclical fluctuations in its projections f()[ years afrer 2018. Instead, the 

values shown in the tables for 20 19 to 2023 

CBO's assessment of the eff('ct of economic and 

demographic trends in the medium term but do not 

reHect an attempt to f{Jrecasr the frequency or size of 

fluctuations in the business cycle. 
109 


87610.075

64 TIlE BlW;ET ,\\{) ECO\O~lIC O! TLOOh: FISCAL \EmS 101:$ TO 102.~ rEBRLARY 20 U 

Table 8·1. 

CBO's Economic Projections, by Calendar Year ------~~-~-----~-~~---~--. -,--

Estimated, 

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 

Year to Year (Percentage change) 

Real GDP 2.3 1.4 2.6 4.1 4.4 3.8 2.6 2.4 2.3 2.2 2.2 2.2 

Nominal GOP 4.1 2.9 4.4 6.2 6.6 6.0 4.7 4.5 4.4 4.3 4.3 4.2 

peE Price Index 1.7 1.3 1.7 1.9 1.9 1.9 2.0 2.0 2.0 2.0 2.0 2.0 

Core peE Price Index~ 1.7 1.3 1.8 1.9 1.9 2.0 2.0 2.0 2.0 2.0 2.0 2.0 

Consumer Price Indexi

) 2.1 c 1.6 1.9 2.1 2.1 2.2 2.3 2.3 2.3 2.3 2.3 2.3 

Core Consumer Price IndexJ 2.1 ' 1.7 2.0 2.1 2.2 2.3 2.3 2.3 2.3 2.3 2.3 2.3 

GDP Price Index 1.8 1.5 1.8 2.0 2.1 2.1 2.1 2.0 2.1 2.0 2.0 2.0 

Employment Cost Indexd 1.8 2.1 2.9 3.9 4.0 4.2 4.0 3.8 3.7 3.6 3.6 3.5 

Calendar Year Average 

Unemployment Rate (Percent) 8.1' 7.9 7.8 7.1 6.3 5.6 5.5 5.5 5.4 5.4 5.3 5.3 

Payroll Employment 

(Monthly change, in thousands) 157 ' 105 182 222 220 153 88 86 82 80 66 62 

Interest Rates (Percent) 

Three-month Treasury bills 0.1 c 0.1 0.2 0.2 1.5 3.4 4.0 4.0 4.0 4.0 4.0 4.0 

Ten-year Treasury notes 1.8 c 2.1 2.7 3.5 4.3 5.0 5.2 5.2 5.2 5.2 5.2 5.2 

Tax Bases (Percentage of GDP) 

Wages and salaries 44.1 43.5 43.9 44.0 44.1 44.2 44.5 44.6 44.8 44.9 45.1 45.2 

Domestic economic profits 9.6 9.3 9.7 9.9 10.2 9.8 9.0 8.4 8.0 7.7 7.5 7.2 

Tax Bases (Billions of dollars) 

Wages and salanes 6,916 7,029 7,397 7,876 8,410 8,946 9,414 9,872 10,343 10,827 11,326 11,835 

Domestic economic profits 1,509 1,506 1,629 1,782 1,944 1,973 1,913 1,863 1,847 1,858 1,876 1,893 

Nominal GDP (Billions of dollars) 15.692 16,149 16,863 17.913 19,087 20.224 21,178 22,129 23,099 24,093 25,117 26,180 

Source: Congressional Budget Office. (Actual values for 2012 are from Department of Labor, Bureau of Labor Statistics; Federal Reserve.) 

Notes: The numbers shown here do not reflect the values for GDP and related series released by the Commerce Department's Bureau of 

Economic Analysis on January 30 and the values released by the Labor Department's Bureau of labor Statistics for the employment 

cost index on January 31 and for payroll employment on February l. 

GDP gross domestic product; peE = personal consumption expenditures. 

a. Excludes prices for food and energy. 

b. The consumer price index for all urban consumers. 

c. Actual value for 2012. 

d. The employment cost index for wages and salaries of workers in private industry. 
110 


87610.076

,\PPE\fHXB TilE BrD(lET ,\\1) ECO\OMlC OI,TLOOK: FISCAL )EmS .Wl) TO 2()25 65 

Table B·2. 

CBO's Economic Projections, by Fiscal Year 

Actual, 

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 

Year to Year (Percentage change) 

Real GDP 2.3 1.5 2.1 3.9 4.4 4.0 2.8 2.4 2.3 2.2 2.2 2.2 

Nominal GOP 4.2 3.1 3.8 5.9 6.6 6.2 4.9 4.5 4.4 4.3 4.3 4.2 

peE Price Index 2.0 1.3 1.5 1.9 1.9 1.9 2.0 2.0 2.0 2.0 2.0 2.0 

Core peE Price IndexJ 1.8 1.3 1.7 1.9 1.9 2.0 2.0 2.0 2.0 2.0 2.0 2.0 

Consumer Price Indexb 2.4 L7 1.7 2.1 2.1 2.2 2.3 2.3 2.3 2.3 2.3 2.3 

Core Consumer Price IndexJ 2.2 L7 1.9 2.1 2.1 2.2 2.3 2.3 2.3 2.3 2.3 2.3 

GOP Price Index 1.8 1.5 1.7 2.0 2.1 2.1 2.1 2.1 2.0 2.1 2.0 2.0 

Employment Cost Indext 1.8 2.0 2.6 3.7 4.0 4.1 4.1 3.9 3.7 3.6 3.6 3.6 

Fiscal Year Average 

Unemployment Rate (Percent) 8.3 7.9 7.9 7.3 6.5 5.7 5.5 5.5 5.4 5.4 5.3 5.3 

Payroll Employment 

(Monthly change, in thousands) 157 no 156 224 223 183 91 84 84 80 70 63 

Interest Rates (Percent) 

Three-month Treasury bills 0.1 0.1 0.1 0.2 1.0 2.9 4.0 4.0 4.0 4.0 4.0 4.0 

Ten-year Treasury notes 1.9 1.9 2.5 3.2 4.1 4.9 5.2 5.2 5.2 5.2 5.2 5.2 

Tax Bases (Percentage of GOP) 

Wages and salaries 43.8 43.7 43.9 43.9 44.0 44.2 44.4 44.6 44.7 44.9 45.1 45.2 

Domestic economic profits 9.7 9.4 9.5 9.9 10.2 9.9 9.2 8.6 8.1 7.8 7.5 7.3 

Tax Bases (Billions of dollars) 

Wages and salaries 6,812 7,014 7,300 7,748 8,274 8,818 9,300 9,757 10,224 10,704 n,201 n,707 

Domestic economic profits 1,506 1,503 1,589 1,742 1,913 1,978 1,929 1,873 1,847 1,854 1,871 1,890 

Nominal GDP (Billions of dollars) 15,549 16,034 16,646 17,632 18,792 19,959 20,943 21,890 22,854 23,842 24,858 25,910 

Source: Congressional Budget Office. (Actua! values for 2012 are from Department of Commerce, Bureau of Economic Analysis; Department 

of Labor, Bureau of Labor Statistics; Federal Reserve.) 

Note: GDP gross domestic product; PCE == personal consumption expenditures. 

a. Excludes prices for food and energy. 

b. The consumer price index for all urban consumers. 

c. The employment cost index for wages and salaries of workers in private industry. 
111 


87610.077

FEBHl.,\I{Y 2(}!5 I'm m DCET ,\:\]) ECO\()\HC Ol TLOO!\.: FlSC\!' )E\I{S 20!:\ TO 2()2,) 67 

List of Tables and Figures 

Tables 

s~ 1. eBO's Baseline Budget Projections 

S-2. CBO's Economic Projections for Calendar Years 2012 to 2023 

1-1. eBO's Basdine Budgct Projections 

1-2, CBO's Esrimatcs ot'Auromatic Spending Reductions for 2013 14 

1-3. Mandatory Outlay's Projected in eno's Baselinc 16 

1A. Limits on Discretionary Budget Authority fe)J' 2013 19 

J-5. Discfl'tiollJry Spending Projected in CRO's Baseline 26 

1-6. Federal Debt Projt'ct~d in CHO's Baseline 28 

1-7. Budgetary FHecls orSclccted Policy Alternatives Not Included in CRO's Baseline 32 

2-1. CBO's Economic Projections for Calendar Years 2012 to 202.1 42 

2-2. Kcy Assumptions in eBO's Projection ofPotcnrial eDP Ii) 

2-3, of CBO\. Current and Previous Economic Projections for 

Years 2012 to 2022 48 

""'''t-"."" of Economic Projections by CB(), the Hlue Chip Consensus, and the 

Rc:,en'c 49 

A-I. Changt.'s in cno's Baseline Proje'LtlOns of the Deficit Since August 2012 '52 

/\-2. of CB(Ys F,stlmarcs of the Effect:, of Insurance Coverage 

in the Affordable Care Act 60 

R-1. eBO's Economic Projections, by Calendar Year 64 

B-2. eBO's Economic Projections, by Fiscal Ye'ar 6'\ 
112 


87610.078

68 WE B[ DGET \\D ECO\O,\HC ot TLOOK: FlSC\L )LWS 20t., TO 202.~ 

Figures 

S-l. Federal Dcht Held by the Public 

S ') CDP ,lnd Potential CDP 

1-1. Tota! DefIcits or Surpluses 

1-2. Total Rev~nLlcs and Outlays 

Pro;ccted Spending in lvtajor Budget Cltcgor;c~ 

2-1. GDP and PotcI11ial CDP 

2-2. Real Rcsidcf1tial Investment 

IJH1g-'rcrm Uncmployment 

Actual Valut's and CBO's Projections oCKer Economic Indicators 

2~5. Labor IrKOmt' 

FEBRl ,\RY 2015 

2 

20 

n 

36 

3B 

y) 

41 

46 
113 


87610.079

FEBHl/\HY 2()1.1 TilE m-D(JEr X\D ECO\<nllC ot nOOK: FISCAL )Ems 201:\ TO lOH 69 

About This Document 

This voluIne is one of a series of reports on the state of the budget and the 

Office (CBO) issues each year. It satisfies the requirement 

of 1974 tor CBO to submit to the Committees on the Budget 

and to provide baseline projections of the federal budger. This year, 

report is cOllsicienlbiy than it has been in the past because of the limited 

enactment of the American "Elxpaycr Relief Act of 20 12 early In 

mandate to provide objective, impartial analysis, this repon ,·c,o",,,,,·,,,jo,""'" 

CBO's Pand of Economic Advisers commented on an early version of the economic forecast 

this report. Members of the pand are Raj Cherty, Menzie D. Chinn, Dan L. Crippen, 

Robert E. I IaU, Jan Hatzlus, Simon Johnson, Charles L Jones, Anil Kashyap, 

Lawrence Katz, Donald Kohn, June O'Neill, Rudolph G. Penner, Adam S. Posen, James Poterba, 

Joel Prakken, Carmen M. Reinhart, Alice Rivlin, Robert Shimer, Matthcvv and 

E Zeldes. Nicholas Bloom and Mickey attended the 

CBO's outside advisers provided COllS;ciwlbie assistance, 

contents of this report. 

projections; 

preparing the economic, rcvenue, and 

it; compiling the "",01,<>","°",,1 

posted along with 

listed on the following pages. 

Douglas W. Elmendorf 

Director 

February 201 J 

and providing 
114 


87610.080

70 rilE Bl DIrE"!' \\[) ECO\0"1IC Ol TWOI\: FISc\L )E\HS 2015 TO 1()23 FEBRI \R) 1n!:~ 

Economic Projections The economic projection!> [he 1\l.lcroci..onomiL Analysi,:., Divi!>ion, with contrihutions 

[rom in other diYi,~ion;.,. wa;., h:' 

Robert Benjamin Page, :ll1d \v'illiam (formerly 

Bruce Arnold 

Alexander Arnon 

David Brauer 

Stephanie Burns 

I'llais Canedo 

Cahrid Ehrlich 

Ronald Gecan 

Jon<lthan Huntley 

,\hrk La:::.ky 

Felix Reirhling 

Frank Rus:::,ek 

Robert Shackleton 

Christopher \'\'i!1iams 

Revenue Projections 

Net expons, exchange rates 

rVinde! and data management 

Inflation, labor markers 

J"10u!>ing :::,('ctor, research assistance 

Research J:.\i;.,tance 

Inren.'sf rares, moner'lr:' policy, energy prices. 

hOll:::'C prices 

Energy prices 

;\'[cdium-term anJ!}';;i;; or fIscal policy 

Business inv<.:'stmeot, homing 

Shorr-term analysi~ of fiscal policy 

Federal, sUte, and local government spending and 

Potential output, producrivi!y 

C:onsumer :.pending, incomes 

The revenue projections were prcparl'd hy the Tax Analysis 

David \'\/cincr, rVIark Booth, and Janet Holtzblatt. In addition. 

'l;lx,llion provided valu,lblc assistance. 

Committee on 

Pow! Burnham 

lhrhara Edwards 

knni!er Gravelle 

Ed Harris 

SheW non tvlok 

Larry (han!1l' 

Kevin Peresc 

Kurt Seibert 

Joshua Sh:lkill 

Logan cI'immerhofr 

Retirement income 

federal Reserve Sv,qem l'arnings, CllSroll1S Juries, 

miscellaneous \:eceipts '-

I kprcci,nion, illtcrnational taxation 

(:orporate income taxes, cSt,He and gift t.rxcs 

Individual income taxes, social insurance uxcs, 

tax modeling 

Estate and gift taxes 

Capital g.lins realizations, excise taxes 

Tax modeling 

Social insurance laxes, rdlmdable fax credits, 

depreciarion, tax modding 

Individual income t<txes 

Excise taXl~S 
115 


87610.081

FEBRlARY 2015 TilE BI'DGET \\1) ECO:\O~UC Ol TWOK: FISCAL )MRS 201.1 TO 2025 71 

Spending Projections The estimates were prepared by the Analysis Division, with contributions from 

analysts in that work was 

Jan~t Airis, Tom Bradley, Kim 

by Peter Fontaine, Theresa Gullo, Holly Harvey, 

Holland, and Sam 

Papenfuss of the Analysis Retirement, and 

Long-'Jcnn Analysis 

De/elise. Jllfel'l1a/ionai Aifilil's. and Veterans' Agclil's 

Kent Chtistensen Defense (projections, funds, 

Sunita f)'Monte 

Ann Futrell 

Raymond Hal! 

\Xlilliam i\:1a 

David Newman 

Da'wn Sauter Regan 

Matthew Schmit 

Jason \'Vhcclock 

Dwayne Wright 

Health 

Kirstin Blom 

Stephanie Cameron 

julia Christensen 

Anna Cook 

Smarr Hagen 

Lori Housman 

Paul Jacobs 

Paul Masi 

Sarah I'vIasi 

Jamease Miles 

AIC'xandra Minicozzi 

Julia Mitchell 

procufel11enr, scorekeCf""I4i 

International affairs 

Veterans' health care 

Defense (research ;md development, stockpile sales, 

:uornic energy, other programs) 

Veterans' readjusrment benefit!>, reservists' 

(,ducation benl.'fits, ddcnse (operation and 

maintenance) 

Defense (military construction and f:amily housing, 

military aCiivities in Afghanistan), veterans' 

housing 

Ddcme (military pnsonncl) 

Military retirement, military health care 

Defense (other programs, operation and 

maintenance, compensation for radiation 

for energy employees' 

Veterans' compensation and pensions 

Medicaid, Children's Health Insurance Program 

Medicare, Puhlic ~lca!th Service 

Food and Drug Administration, prescription drugs 

Prescription drugs 

l'1calth insurance coverage 

i\lcdicare 

Health insur<Hlce coverage 

Medicare 

Health insurance exchanges, other programs 

Medicare, Public Health Service 

Health insurance coverage 

Federal Employees Health Benefirs program 
116 


87610.082

72 THE BUlGET A\\) ECO~O:\lICOl'TWOK: FISC·\!, YE\RS 2015 TO 202;\ 

Health (Collfil1ued) 

Andrea Noda 

Romain Parsad 

Allison Percy 

Lisa Ramirez-Branum 

Lara Robillard 

Robert Stewart 

Ellen Wcrble 

Rebecca Yip 

Christopher Zogby 

Income Securit)' and Education 

Christina Hawley Anthony 

Chad Chirico 

Sheila Dacey 

Kathleen FitzGerald 

Justin Humphrey 

Deborah Kalcevlc 

Jonathan Marancy 

David Rafferry 

Emily Stern 

Sa/ural and P/~)'sical Resources 

Megan Carroll 

Mark Grabowicz 

Kathleen Gramp 

Gregory Hitz 

Medicaid 

Public 

drugs, long-term care, 

Health insurance coverage 

Health insurance coverage 

Medicaid, health insurance coverage, 

Public Health Service 

Medicare 

fEBRl ARY 2015 

tv1edicaid, Children's Health insurance Program, 

Indian Health Service 

Health insurance coverage, other programs 

Medicare Part D, prescription drugs 

Health insurance coverage 

Unemployment illsurance, training programs, 

Administration on Aging, Smithsonian, arts and 

humanities 

Housing assistance, Fannie Mac and Freddie Mac, 

Ti'oubled Asset Relief Program, Pension Benefit 

Guaranty Corporation 

Old-Age and Survivors Insurance, Social Security 

trUSt funds, Pension BenefIt Cuaranty 

Corporation 

SUI,'picmcnrai Nutrition Assistance Program and 

nutrition programs 

and secondary education, Pel! grants, 

StLldent loans, higher education 

Temporary Assistance for Needy Families, Child 

Enforcement, fostcr care, Social Services 

Gram, child care programs, Children and 

families Services, Low Income Home Energy 

Assistance Program 

Disability Insurance, Supplemental Security 

Income, refugee assistance 

Child nutrition and other nutrition programs 

Energy, air transportation 

Administration of justice, PostaJ Service 

Energy, Outer Continental Shelf receipts, 

spectrum auction receipts 

Agriculture 
117 


87610.083

FEBRI"ARY 2015 

Salural and Physical Resources (Continued) 

Daniel Hoople 

David Hull 

Jeff LaFave 

James Langley 

Susanne Mehlman 

Matthew Pickford 

Sarah Puro 

Aurora Swanson 

Martin von Gnechtcn 

Susan Willie 

Other Areas and Functions 

Janet Airis 

Shane Beaulieu 

Edward Blau 

Barry BIom 

Jared Brewster 

Joanna Capps 

Mary Froehlich 

Avi Lerner 

Amber Marcdlino 

Virgillia Jv1yers 

Mitchell Remy 

Mark Sanford 

Esther Steinbock 

Santiago Vallinas 

Patrice Watson 

Adam \X'ilson 

TilE BlW;ET A\f) ECO\tn-nC OLTLOOK: HSCAL Y!i.\RS 2015 TO 202.) 73 

regional development, 

Management Agency, 

deposit insurance 

Agriculture 

Conservation and land management, other natural 

resources 

Agriculture 

Pollution control and abatement, Federal Housing 

Administration and other housing credit 

programs 

General government, legislative branch 

Highways, Amtrak, water transportation 

Water resources, Fannie Mae and Freddie Mac 

Administration of justice, science and space 

exploration, Bureau of Indian Affairs, recreation 

Mass transit, commerce, Small Business 

Administration, Univcr:;al Servlt:e Fund 

Legislative branch appropriation bills 

Computer support 

Aurhorizarion Dills 

Federal pay, monthly Treasury d.1tl 

Interest on the public debt 

Appropriation bills (Labor-Health and Human 

Services, State-Foreign operations) 

Computer suppOrt 

'froubled Asset RdiefProgram, autOmatic budget 

enforcemcm and sequestration, other interest 

Federal civilian retirement, historical dat;l 

ADDre'Driari,oIl bills (Commerce-Justice, financial 

general government) 

Fannie Mae and Freddie Mac 

Appropriation bills (Agriculture, Defense) 

Appropriation bills Cfi-ansportation-Housing <lnd 

Urban Development, military construction and 

veterans' affairs, energy and water development) 

Various federal retirement programs, national 

income and product accounts, federal pay 

Database system administrator 

Appropriation bills (Homeland Security, Interior) 
118 


87610.084

74 rJ!E Bl D(;ET ,\\1) ECO\o\llC ot TWO"'. FlSC\!. \E.\RS 2013 TO 2015 FEBRi.\fn Wl3 

Writing 

C:hristina Hawley 1, ""ith assistance 

wrote Box 1-!. \'V'ha!cn wrofC Chaptl'r 2. 

as~isul1(c from Vhrk Booth and Jc~sica Banthin. 

Alexander Arnon 

Editing and Pnblishing The editing and publishing of the report were handled hy CliO's 

:.upelTised by John Skeen. and the agency's \'\!l'h team, <;upervi:.ed by 

group, 

(:hri<;til\C 

f()[ publication. 

Christian Howk,tt, "atl' Kelly, and Jeanine Ree'> edited the report, with :hsistance 

and Shcrr~' Sn~'(kr. 1\hureen Co:.tantlno and Jeanine Rees prcp_m:d rhe report 

Alexander Arnon and 

CBO':. \'{/eb site. Jeanine 

TimmcrhotT compiled "(he supplc11lent,l1 dar~l posted \vith rhe reporr on 

and Simone Thomas coordin,ned the pre~ent,lfion of those data. 
119 


87610.085

Questions for the Record 

"The Budget and Economic Outlook: Fiscal Years 2013 to 2023" 

Questions for Dr. Douglas Elmendorf 

Hearing Date: February 26, 2013 

Questions from Senator Ron Wyden 

Question 1(a): What are some of the least economically efficient and/or justifiable tax 

expenditures? What economic effects-positive or negative--would you expect from their 

repeal? How would each of you propose we maximize any positive or mitigate any negative 

effects? 

Answer: 

The staff of the Joint Committee on Taxation identifies over 250 provisions of the individual and 

corporate income tax systems that it includes in its list of tax expenditures. l Of that number, the 

10 largest income tax expenditures (show in the tables below) account for most of the total cost. 

CBO has prepared separate analyses of a number of major tax expenditures (see for example: 

Refimdable Tax: Credits. Options (or Taxing U.S. Multinational Corporations, Taxation of 

Owner-Occupied and Rental Housing: Working Paper 20i2-14. Federal Support air State and 

Local Governments Through the Tax Code. Options (or Changing the Tax: Treatment of 

Charitable Giving. Tax Arbitrage by Colleges and Universities. Testimony on the Taxation of 

Carried interest. The Tax Treatment ofEmplovment-Based Health Insurance. Ta"\; Policv (or 

Pensions and Other Retirement Saving) but has not done a systematic comparison ofthe 

economic efficiency of those provisions nor a complete investigation of the economic effects of 

their repeal. Nonetheless, some general conclusions apply. 

Tax expenditures are generally designed to further societal goals. For example, the tax 

expenditures for health insurance costs, pension contributions, and mortgage interest payments 

may help to promote a healthier population, adequate financial resources for retirement and 

greater national saving, and stable communities of homeowners. However, tax expenditures have 

a broad range of effects that do not always further those goals. 

First, tax expenditures may lead to an inefficient allocation of economic resources by if 

encouraging more consumption of goods and services receiving preferential treatment; they also 

may subsidize activity that would have taken place without the tax incentives. For example, the 

tax expenditures mentioned above may prompt people to be less cost-conscious in their use of 

health care services than they would in the absence of the tax expenditure for health insurance 

costs; to reallocate existing savings from accounts that are not tax-preferred to retirement 

accounts, rather than add to their savings; and to purchase more expensive homes, investing too 

much in housing and too little elsewhere relative to what they would do if all investments were 

treated equally. 

1 Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2012-2017 (JCS-l-13), 

February 1, 2013. 
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Second, by providing benefits to specific activities, entities, or groups of people, tax 

expenditures increase the size and scope of federal involvement in the economy. Indeed, adding 

tax expenditures to conventional federal outlays makes the federal government appear notably 

larger relative to GDP. 

Third, tax expenditures reduce the amount of revenue that is collected for any given set of 

statutory tax rates-and thereby require higher rates to collect any chosen amount of revenue. 

All else being equal, those higher tax rates lessen people's incentives to work and save and 

therefore decrease output and income. At the same time, some tax expenditures more directly 

raise output and income. For example, the preferential rate on capital gains and dividends raises 

the after-tax return on some forms of saving, which tends to increase saving and boost future 

output. As another example, the increase in take-home pay arising from the earned income tax 

credit appears to encourage work effort by some people. 

Fourth, tax expenditures have mixed effects on the societal goal of limiting the complexity of the 

tax code. On the one hand, most tax expenditures, such as itemized deductions and tax credits, 

require that taxpayers keep additional records and make additional calculations, increasing the 

complexity of the tax code. On the other hand, some exclusions from taxable income simplify 

the tax code by eliminating recordkeeping requirements and the need for certain calculations. For 

example, in the absence of the exclusion for capital gains on assets transferred at death, 

taxpayers would need to calculate the appreciation in the value of their assets since their original 

purchase--a calculation that would require records of the purchase of assets acquired by 

deceased benefactors, perhaps many decades earlier. 

Fifth, tax expenditures affect the distribution of the tax burden in ways that may not always be 

recognized, both among people at different income levels and among people who have similar 

income but differ in other ways. For example, the deduction for nonbusiness state and local taxes 

tends to benefit higher-income taxpayers more than low- and moderate-income taxpayers 

because higher-income taxpayers are more likely to itemize their deductions and because, 

generally, the higher a taxpayer's income, the higher is his or her marginal tax rate and thus the 

larger is the reduction in federal taxes for each additional dollar of state and local taxes paid. The 

deduction for state and local taxes also benefits taxpayers living in high-tax states more than 

taxpayers with similar income who live in low-tax states. 

Limiting or eliminating tax expenditures would have different economic impacts on specific 

sectors of the economy. For example, limiting the deduction for charitable contributions in a way 

that reduces the marginal incentive for giving would reduce the amount of funding available to 

charities (though in aggregate, contributions account for a small portion of their funding). 

Likewise, limiting the deduction for mortgage interest on owner-occupied housing would depress 

home prices to some degree, which might be undesirable at a time when housing markets are still 

weak and in the process of recovery. 

Lawmakers could choose to offset some of those impacts, either for a transitional period or 

permanently, through policies that avoided some of the undesirable effects of the current tax 

expenditures. Using tax credits in place of exclusions or deductions would avoid some of the 

distributional outcomes of current tax expenditures-that is, higher-income households receive a 

larger subsidy for each deductible dollar. Thus, some proposals would replace the deductions for 
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mortgage interest and charitable contributions or the exclusion of tax-exempt interest with tax 

credits. 

Another approach, in the case of charitable contributions, would be to limit the deduction for 

contributions by disallowing the tax deduction for contributions that were Jess than a specified 

minimum amount. Such a policy would continue to provide incentives for charitable giving of 

contributions above the limit but would reduce the cost of the federal subsidy. The floor could 

either be a fixed dollar amount or a percentage ofa taxpayer's income. Although there would be 

some reduction in giving for contributions below the limit, CBO has found that with either type 

of floor, the reduction in charitable giving would be less than the reduction in the cost of the tax 

expenditure. 

Another option for mitigating the negative effects of repealing tax expenditures would be to use 

some or all of the additional revenues to finance other tax or spending policies that would offset 

some or all of the impact of repeal on the economy as a whole or on certain sectors or categories 

of people (see the response to the following question). 

Finally, even if limiting or eliminating certain tax expenditures would lead to a more efficient 

allocation of resources over time, abrupt changes could have adverse short-term effects. For 

example, limiting or eliminating the mortgage interest deduction without a gradual transition 

could depress home prices at a time when housing markets are weak and in the process of 

recovery. 
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Ten largest Corppra~e TliIX.ExPlntlitures,~013 .. ... (bil,lons of dollars) 

Deferral of active income of controlled foreign corporations 42.4 

Depreciation of equipment in excess of the alternative depreciation system 13.9 

Deduction for income attributable to domestic production activities 10.1 

Exclusion of interest on public purpose state and local government bonds 9.3 

Deferral of gain on non-dealer installment sales 7.0 

Credit for increasing research activities (Code section 41) 6.8 

Credit for low-income housing 6.1 

Deferral of active financing income 5.9 

Expensing of research and experimental expenditures 5.3 

Deferral of gain on like-kind exchanges 4.9 

Ten LargestlndivlduaJ TaX: Expenditures, 2013 

(billions of dollars) 

Reduced rates of tax on dividends and long-term capital gains 160.8 

Exclusion of employers' contributions for health care, health insurance premiums, and longterm care insurance premiums 131.7 

Net exclusion of pension contributions and earnings 101.2 

Deduction of nonbusiness state and local government income taxes, sales taxes, personal 

property taxes, and taxes on real property 77.3 

Deduction for mortgage interest on owner-occupied reSidences 69.7 

Exclusion of Medicare benefits 67.0 

Earned income credit 60.9 

Credit for children under age 17 57.3 

Exclusion of capital gains at death 42.8 

Deduction for charitable contributions 39.0 
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Questiou I(b): In a similar vein, there is a great debate among Republicans and Democrats 

as to what we should do with any additional revenue generated by rolling back or reducing 

tax expenditures, also commonly referred to as closing loopholes. On the one hand, some 

would have us use any additional revenue to buy down marginal tax rates, while, on the 

other, some would have us use any resulting revenue for deficit reduction and/or other 

investments. Weighing in on that debate, Martin Sullivan, a widely read commentator ou 

tax policy, has suggested that perhaps the best solution would be to devote half of any 

resulting revenue to reducing rates and half to reducing the deficit. Do you feel that 

Sullivan has the ratio about right? Qr would you suggest a different allocation of any 

resulting revenue and why? 

Answer: 

The Congressional Budget Office does not make policy recommendations, so we cannot make 

judgments about how lawmakers should use the additional revenues that would be generated by 

reducing tax expenditures. 

In a recent publication (Choices for Deficit Reduction, November 2012), CBO identified several 

criteria that might be used in evaluating federal budget plans. That analysis focused on the 

following factors, all of which could be considered in assessing how best to apply such revenues: 

How big would the government be? 

How would the government's resources be allocated among various priorities? 

How much deficits would be reduced in the next 10 years and beyond? 

What would the economic impact be in the short term as well as in the medium and long 

term? 

Who would bear the burden of proposed changes in tax and spending policies? 

In addition to those broader factors, there are some specific issues to consider concerning the 

economic impact and the distributional consequences of limiting or eliminating specific tax 

expenditures, and how those effects might be addressed by other changes in tax or spending 

policies. Those impacts would depend very much upon which tax provisions were modified and 

the way in which they were changed 

For example, limiting or eliminating tax expenditures would affect incentives to work and save. 

A sometimes overlooked effect of limiting or eliminating certain tax expenditures is that that 

doing so would raise effective marginal tax rates on labor and capital. Some ofthat effect would 

occur directly. For example, limiting or eliminating the deduction for state and local income 

taxes would raise the combined federal and state marginal tax rate on both labor and capital 

income for taxpayers claiming the deduction. Restricting or eliminating other tax expenditures, 

such as the preferential tax rates for dividends and realized capital gains or the deduction for 

mortgage interest, would directly raise the effective marginal tax rate on capital income. 

Although limiting or eliminating preferential rates for certain types of investments would have 
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87610.090

the economic benefit of reducing the disparity in effective marginal tax rates across all 

investments, it would nonetheless raise the overall marginal tax rate. Other effects would occur 

indirectly. For example, restricting the amount of deductions that taxpayers can claim would 

increase taxable income, pushing more income into higher tax brackets and raising marginal tax 

rates on additional earnings and investment. Lawmakers could choose to offset these increases in 

effective marginal rates with a uniform reduction in statutory tax rates. 

In addition, limiting or eliminating tax expenditures would have differing effects on households 

depending upon the amount and sources of their income and how they choose to spend it. For 

example, tax expenditures for the earned income tax credit and child tax credit largely go to lowand moderate-income families with children, while tax expenditures for most major itemized 

deductions tend to go to families at the higher end of the income scale. Lawmakers could choose 

to offset some ofthe impact on lower-income families through alternative tax or spending 

policies (for example, by boosting spending on means-tested programs), but those policies might 

not function more efficiently in reaching the intended families than the tax expenditures they 

would replace. 

Question 2: Inadequate revenues in the Highway Trust Fnnd have denied state 

transportation departmeuts the long-term stability to carry out much-needed investments 

in critical infrastructure projects. Given the difficulty of finding new revenues aud the 

ueed to get our fiscal house in order, do you think there's a strong case to be made for 

federal tax-credit bonding for transportation and infrastructure projects as an alternative 

to direct spending? Can you provide your thoughts on the relative economic merits of this 

approach to infrastructure financing in a time of scarce budget resources? 

Federal financial support for public spending on transportation and other infrastructure currently 

includes both spending programs (for example, grants made to states from the Highway Trust 

Fund) as well as tax preferences for bonds issued to finance infrastructure investment by state 

and local governments and, in some cases, the private sector. Tax preferences, including tax 

exemptions and tax credits, provide a federal subsidy for infrastructure spending by lowering the 

cost of borrowing money to finance infrastructure projects. Providing such tax preferences has 

both advantages and disadvantages. Tax preferences for debt financing have the advantage of 

leaving to the discretion of state and local governments, which may have a better understanding 

of infrastructure needs in their jurisdictions, decisions about how much to borrow and spend, 

what types of projects to undertake, and the burden-net of the federal financing subsidy--of 

paying for them. But offering a tax preference for infrastructure financing also has drawbacks 

compared with federal spending; most notably, tax preferences mask the true scope ofthe federal 

government's activities. That is because the tax preferences, though a commitment of federal 

resources, are reflected in the budget as a reduction in revenues, rather than as spending. As a 

result, the revenue forgone through tax preferences is outside the control of the annual 

appropriation process. Moreover, the federal government can make explicit decisions about how 

much of its limited resources it wants to spend on a particular type of activity, but when tax 

preferences are provided, those decisions are made by others in most cases. 
125 


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The primary type of federal tax preference for state and local borrowing is the exclusion from 

federal income tax of interest payments on bonds. However, for several reasons, among taxpreferred bonds, traditional tax-exempt bonds are considered an inefficient means of providing a 

federal subsidy and thus are inherently less efficient than tax-credit bonds. First, not all of the 

federal revenue loss from the tax exclusion translates into lower borrowing costs for issuers. 

Second, the subsidy rate is not under the control of the federal government but depends instead 

on conditions in taxable and tax-exempt debt markets. Tax credit bonds can address both types of 

inefficiency. In particular, borrowers that issue tax credit bonds receive all of the federal 

revenues forgone through the tax credit. Moreover, the federal government can set the subsidy 

rate according to the types of projects to be financed and the benefits expected from them at the 

national level. (For more information, see Congressional Budget Office, Subsidizing 

Infrastructure Investment with Tax-Preferred Bonds (October 2009), 

http://www.cbo.gov/publication/22059.) 

In spite of their advantages in theory, most tax-credit bond programs have in practice not been 

particularly well received by financial markets. There are a number of reasons for that, including 

the limited size and temporary nature of the programs and the absence of rules for separating tax 

credits from the associated bonds and reselling them (which could make such bonds 

advantageous to investors whose income tax liability does not allow them immediately to claim 

the full value of the credit). Additionally, there is a potential disincentive for individuals to 

purchase tax-credit bonds because bond holders must complete additional paperwork to claim the 

tax credit (in contrast, tax-exempt bond holders are asked-but not required-to report interest 

income from tax-exempt bonds when filing their federal income taxes). Because the market for 

tax credit bonds has tended to be fairly limited, those bonds are not very liquid. As a 

consequence, issuers have to pay a premium to sell their bonds, and that cost offsets some of the 

federal subsidy provided through the tax credit. 

An exception to the typically tepid reception for tax-credit bonds was the response of bond 

buyers to the Build America Bond (BAB) program, under which $181 billion of bonds were 

issued in 2009 and 2010. However, in contrast to earlier tax-credit bond programs, all of the 

BABs that were issued were "direct-pay" bonds, which entitled the issuer to a claim a subsidy 

payment from the Secretary of the Treasury against interest costs (which were fully taxable). 

Because issuers received the full federal subsidy-set at a rate that varied somewhat by purpose 

of issuance-direct-pay BABs shared the efficiency-enhancing properties attributed to traditional 

tax-credit bonds. Additionally, because subsidy payments are counted as outlays, the federal 

financial support provided to bond issuers through direct-pay BABs is more readily assessed 

than would have been the case under traditional tax -credit bonds. (Issuers also responded to the 

larger federal financing subsidy offered by BABs compared to conventional tax-exempt debt.) 

As suggested above, the direct-pay subsidy also proved much more marketable than a tax credit. 

Indeed, when the direct-pay option was subsequently applied to other types of tax-credit bonds 

(Qualified School Construction Bonds), issuance of those bonds rose dramatically. 
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Ouestions from Senator Robert P. Casey, Jr. 

With rising gas prices and an uncertain fiscal future, there are a number of indications 

consumers are pulling back. The Congressional Budget Office's February 5th report cites 

the expiration ofthe payroll tax cut as a drag on consumer spending and therefore on the 

economy. To that point, the Wall Street Journal reported this week that Wal-Mart and 

other retailers are making adjustments to their projections in response to consumers' 

decreased spending power. Can you quantify the drag on the economy? Shonld Congress 

pursue policies to reverse this impact? 

Answer: 

CBO estimates that economic growth in 2013 is being held down by federal fiscal tightening. 

That tightening is mostly a result of two developments: the automatic spending reductions that 

are now occurring (the sequestration) and the expiration of certain tax policies, which has led to 

an increase in tax revenue. The most significant source of the increase in tax revenue is the 

expiration of the 2-percentage-point payroll tax cut, which resulted in an increase in payroll tax 

rates. In addition, tax rates on income above certain thresholds increased. Those changes have 

reduced after-tax income for many people, which will constrain the growth of consumer 

spending and thus restrain overall growth in output and employment this year. 

In the absence of that fiscal tightening, real GDP would grow about 1 V. percentage points faster 

between the fourth quarter of2012 and the fourth quarter of2013, CBO estimates. The automatic 

spending cuts and the expiration of those tax provisions, including the expiration of the payroll 

tax cuts, account for about equal portions of that I v.-percentage-point effect. The spending 

changes have a smaller budgetary impact than the tax changes, but they affect GDP by a larger 

amount per dollar of budgetary cost. (Other, smaller changes in spending and taxes will diminish 

growth by another V. percentage point, CBO estimates.) 

Reversing the fiscal tightening in 2013 would boost the economy in the short run. However, 

other things equal, reversing the fiscal tightening would also increase federal debt, which 

eventually would crowd out capital investment and reduce output and incomes, CBO estimates. 

To illustrate such effects, CBO analyzed some illustrative budget paths in its report 

Macroeconomic Effects of Alternative Budget Paths (February 2013). Relative to projections 

under current law, CBO estimated that policies that led to larger deficits throughout the coming 

decade by raising spending or cutting taxes would boost GNP from 2014 to 20 16-reflecting the 

short-term impact of tax and spending policies on the demand for goods and services. But 

sustained higher deficits would lead to lower GNP beginning in 20 17-reflecting the impact of 

deficits on national saving and domestic investment. 

Ouestion from Senator Chuck Grassley 

In 2003, during the consideration ofthe Medicare Modernization Act, CBO developed a 

measure referred to as the cost reduction factor (CRF). The CRF was the factor CBO 

applied to the Part D scoring depending on how aggressive the competitive model was and 

for other factors. Is it plausible for CBO to develop a similar tool in 2013 to consider 

potential Medicare-Medicaid restructuring proposals? While not to oversimplify the 
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87610.093

complex task you are charged with, scoring cuts to providers and increases in beneficiary 

liability are easier than considering structural change. That said, if Members of Congress 

wanted to explore the ability to bend the growth curve through programmatic 

restructuring, CBO modeling will be critical. Considering risk-bearing, competitive 

models that consider populations and service packages differently than is contemplated 

under statute today is quite complex. Your ability to provide guidance will be essential to 

any conversation that tries to examine Medicare and Medicaid through a fresh perspective. 

Answer: 

In both its published reports and its analysis of legislation, the CBO focuses on identifYing and 

describing the key levers that the agency believes would affect budgetary outcomes and 

explaining the magnitude and direction of those effects. Towards that end, CBO's analysts strive 

to develop whatever tools and techniques are necessary to estimate the budgetary effects of 

possible new policies. For example, CBO is currently engaged in developing its modeling 

capacity in the areas of Medicare restructuring and supply-side responses and is carefully 

following reforms that states are undertaking to provide care to people through both Medicare 

and Medicaid. 

In its analysis of restructuring proposals, it is unlikely that CBO would be able to provide a "cost 

reduction factor" in the same way as was done during consideration of legislation to create the 

Medicare Part D program because the issues are more complex and consist of more dimensions 

or factors than was the case with Part D. Nonetheless, as it assesses proposed legislation in the 

health area, CBO will endeavor to fully account for the effects of competition, changes in 

people's incentives to use or provide medical services, and any other structural changes that 

might be contemplated. 
128 


87610.094

Center on 

Testimony of Robert Greenstein 

President, Center on Budget and Policy Priorities 

Before the Senate Committee on Finance 

February 26, 2013 

{\iIr. Chairman and diStllbJ'lllshed members of the Finance Committee, I 

to testify here today. As \vc all knO\v, the nation faces fiscal and economic 

the invitation 

and \VC \vill 

have to make some tough decisions 

to put the on a more 

sustainable course and to do 

so without hindering a still-too-\,.,eak 

economic recovery. 

Farlier this month, we issued an 

analysis "\vhich finds 

$:1.5 Trillion in Additional Deficit Reduction Would 

Stabilize the Debt Over the Coming De<:ade 

-Ratiowlthout BCAor ATRA 

Ratio with BCA butnotATRA 

Ratio with BCA and ATRA 

- Ratio with BCA, 

ATRA,arul 

St.5trillion 

moresavinq5 

Notes: SeA stands for the Budget Control Act, enacted in August 2011; ATRA 

stands for the American Taxpayer Relief Act, enacted in January 2013. 

Source: Center on Budget and Policy Priorities based on Congressional Budget 

Office and Joint Committee on Taxation data, 

would stal)llize the debt ov('[ the latter years of the decade at 

CBO has lust 1"1;leased. \'\'e use CBO's econonuc 

are identical to the adjustments that organ17,auom 

also make. \'\,'e freeze i\fcdlGlrC retmburscmen1 rates 

current levels, rather than assummg slashed deeply. \"%"e phast:" down war 

polKpnakm are on course to do, rather than assum1ng: that current lcyels 

2023_ \\7e assume dIsaster reverl to the 
129 


87610.095

Policymakers could achieve these savings with $1.3 trillion in policy savings (that is, spending cuts 

and revenue increases), which wou1d generate about $200 billion in savings in interest payments. 

The $1.5 trillion in total savings would stabilize the debt at 73 percent of gross domestic product 

(GOP) over the latter part of the decade. (Stabilizing the debt at a somewhat lower level of GOP 

would require a larger amount of deficit reduction; stahilizing at a somewhat higher level of GOP 

wou1d require a lesser amount of deficit reduction.) 

The fact that $1.5 trillion in deficit savings, rather than a much larger amount, wou1d stabilize the 

debt over the coming decade at about the 2012 debt-to-GOP ratio of 73 percent of GOP is due 

primarily to two factors. First, Congress and the President have enacted significant deficit reduction 

over the two-plus years since the BowlesSimpson report and Rivlin-Oomenici task 

force made major deficit reduction 

proposals; over this period, policymakers 

have enacted nearly $1.5 trillion in 

spending cuts for appropriated programs 

(relative to the CBO baseline in use at the 

time of the Bowles-Simpson and RivlinDominici reports), mainly through the 

annual caps enacted in the 2011 Budget 

Control Act and nearly $600 billion in 

revenue increases in the American 

Taxpayer Relief Act (ATRA). Including 

the related savings in interest payments, 

policymakers have achieved about $2.35 

trillion in deficit reduction so far. (Other 

analysts, like those at the Committee for 

Responsible Federal Eudget, use the same 

$2.35 trilliion savings estimate.) These 

savings are for the ten-year budget 

window of 2013-2022. Over the new 

budget window of 2014-2023, the same 

policies are estimated to produce savings 

of$2.75 trillion, as Table 1 indicates. 

illl!!ll})ltw ~ , 

~Iilfilllt BIil(ltH1U€llll jJ~ SI~I.\\~li~tl tl1e Del:lt 

(lpLltl"ll!;\!t~t'l tC>Jldls. 21!)~l!t-:ilO~W, III !lltIlIQt1s 

Discretionary 

savings from cuts in 

2011 funding and 

caps imposed by 

the BCA 

Savings from the 

ATRA 

Further savings to 

stabilize debt at 

73%ofGDP 

TOTAL 

Policy 

savings 

1.576 

732 

3,636 

Interest Total deficit 

savings reduction 

336 1,912 

117 850 

655 4,290 

Notes: SeA stands for the Budget Control Act, August 2011; ATRA 

stands for the American Taxpayer Relief Act, January 2013; all savings 

measured relative to current polley (see Appendix 1) 

Policy Priorities based on Congressional 

on Taxation data. 

The od,er factor is that CEO's economic and technical projections have improved over the past 

few years. Not counting the reductions in discretionary funding and the savings from ATM, the 

new projections reduce estimated deficits under current policies by about $750 billion over the 

coming decade, relative to CBO's forecast oflast March. Relative to CEO's August 2010 forecast, 

which the Bowles-Simpson and Rivlin-Domenici panels relied upon for their reports, the new CBO 

economic and technical projections reduce estimated deficits by about $1.3 trillion. 

Is Stabilizing the Debt the Rigl1t Target? 

Stabilizing the deht-to-GOP ratio over the coming decade - so the debt grows no faster than the 

economy - is the minimum appropriate budget policy. Stabilizing the debt at 73 percent of GDP 

wou1d require shrinking annual deficits to below 3 percent of GOP. 
130 


87610.096

Stabilizing the debt ratio for the decade ahead would requite that policymakers subsequently enact 

additional deficit reduction for the long term. In ensuing decades, the aging of the population and 

increases in per-capita health care costs (which are likely to rise faster than per-capita GDP) will 

raise costs for health and retirement programs, returning the budget to a path where debt is 

increasing as a share of the economy. 

Some call for greater deficit reduction now in order to achieve a declining debt ratio, citing these 

long-term trends. Enacting larger deficit reduction now would require deeper program cuts, larger 

tax increases, or both. Enacting a latger amount of deficit reduction now would be desitable if 

policymakers can secure it without doing harm in other areas - that is, if policymakers can achieve 

it through policies that: do not impede the economic recovery or jeopardize future productivity 

growth by providing inadequate resources for areas like education, infrastructure, and basic research; 

don't increase poverty and inequality, which already are higher here than in many other Western 

nations, or rai~e the number of Americans who are uninsured; and don't sacrifice health care quality 

or increase overall U.S. health care costs. 

This brings me to a related point. It is not just the quantity of deficit reduction that matrers; the 

quality of the deficit reduction measures chosen matters as well. 

This is particularly true in the health care area - where knowledge about effective ways to slow 

health care cost growth without risking the quality of care or jeopardizing access to needed care 

remains limited at the present time, with policy remedies still elusive, and where such knowledge is 

likely to be greater in coming years due to changes underway in the health care sector and various 

research and demonstration projects. 

Policymakers can enact measures now, as part of a balanced deficit-reduction package, that would 

achieve significant Medicare savings (a few hundred billion dollars over ten years) without 

jeopardizing the quality of care or access to care. Rushing now to enact cuts much deeper than that 

in federal health spending, however, could result in measures that latgely shift costs to states, 

individuals, and private employers and harm some of the most vulnerable members of society, while 

failing to address the underlying causes of the unsustainable growth in costs across the U.S. health 

care system. Indeed, analysts have found that some proposals to enact latge cuts now in Medicare 

or other health programs would actually increase total U.S. health care costs, not a desitable 

outcome. 

Stabilizing the debt for the coming decade would give policymakers time to figure out how to take 

the further steps that will be needed to slow the growth of health care costs throughout the U.S. 

health care system without impairing the quality of care. Stabilizing the debt during the decade 

ahead won't permanently solve our fiscal problems, but it would represent a significant 

accomplishment. 

Designing Deficit Reduction 

Given the continued weakness in the U.S. economy, with the unemployment tate still close to 8 

percent and CBO projecting it will take four more years before the economy recovers fully, deficit 

reduction needs to be designed very carefully to avoid making the recovery even slower. Deficit 
131 


87610.097

reduction should be phased in over coming years. In fact, policymakers really should couple some 

temporary fiscal measures to accelerate growth and job creation now with permanent deficit reduction 

measures. 

As noted, the design of permanent deficit reduction measures matters. As I've indicated, we 

recommend that deficit reduction be secured through well-designed, balanced policies that don't 

impede the economic recovery, jeopardize future productivity growth, increase poverty and 

inequality, or sacrifice access to health care or health care quality. For the remainder of my 

testimony, let me discuss a few issues related to deficit-reduction design: 1) its immediate effect on 

the economy; 2) how it affects the disadvantaged; 3) some issues related to health care and elderly 

individuals; and 4) the debate over revenue increases versus spending cuts. 

1. Implementing or Replacing Sequestration and the Effect on the Economy 

We all know that the impending automatic, across-the-board cuts, which affect both defense and 

non-defense programs, represent unsound policy. The point I want to make here is that 

replacement savings, which I hope policymakers will be able to agree upon, should be enacted now 

but be designed so that the budget cuts and/or revenue increases involved largely or entirely take 

effect after the economy has more fully recovered. As the economy's poor performance in the 4"' 

quarter of 2012 indicates, it would be injurious to growth and jobs to institute either sequestration or 

alternative savings measures right now. This is reflected in CBO's estimate that by the fourth 

quarter of this year, sequestration would cut 0.6 percentage points off of GDP growth and cost 

750,000 jobs. 

2. Protecting the Disadvantaged 

The Bowles-Simpson report made it a core principle that deficit reduction should not increase 

poverty or harm the disadvantaged. It largely shielded core programs for the disadvantaged from 

the cuts it recommended. And in the revised plan they released last week, Erskine Bowles and Alan 

Simpson reiterated that principle and said "Broad-based entitlement reforms should either include 

protections for vulnerable populations or be coupled with changes designed to strengthen the safety 

net for those who rely on it the most." Bowles and Simpson have also called for revenue increases 

to be designed so they maintain or improve the progressivity of the tax code. 

These principles and design features also are reflected in the plan presented in July 2011 by the 

Senate's bipartisan "Gang of Six." These principles have been highlighted as well by a group of 

Christian leaders that ranges from the Catholic Bishops' Conference and the Episcopal Church to 

the Salvation Army and the National Association of Evangelicals, which has issued a call for 

policymakers to safeguard the poor in deficit reduction and draw a "circle of protection" around 

programs targeted on them. 

Our current system of supports for low-income families and individuals surely isn't perfect. But it 

does a great deal of good for tens of millions of our less fortunate fellow citizens. Using a measure 

of poverty that many analysts favor because it countJ rather than ignores major benefits like food 

stamps and refundable tax credits - the Census Bureau's Supplemental Poverty Measure - we see 

that the poverty rate would have been 29 percent in 2011 without government assistance. Yet it 

stood at about 16 percent when those benefits were counted. The safety net cuts U.s. poverty 

nearly in half, compared to what it would otherwise be. 
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One can also look at the Census data on how many people individual programs lift out of poverty. 

In 2010, for example, the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) lifted 

about 9 million people in low-income working families above the poverty line, including nearly 5 

million children. (SNAP, formerly called the Food Stamp Program, lifted about 4 million out of 

poverty.) 

Some argue that in the absence of safety net programs, some people might have worked more. 

But the impact of the safety net on poverty - including its effect on work - has been extensively 

studied. In a recent comprehensive review and synthesis of the research literature, some of the 

field's leading scholars examined the impact of means-tested programs on the amount that people 

work and found the programs' overall impact on work to be small. They also found that, after 

taking behavioral effects into account, the safety net lowers the U.S. poverty rate by approximately 

14 percentage points. In other words, one of every seven Americans - more than 40 million people - would 

be poor without the saftty net but is above the poverty line because of it.' 

Refundable tax credits, which this Committee has jurisdiction over, are of particular note. A 

strong body of research finds that the Earned Income Tax Credit not ouly reduces poverty but also 

increases work substantially, especially among single mothers.' The research indicates that the 

expansions of the EITC in the 1990s had as large or larger an effect in inducing more single mothers 

to go to work as the changes in the 1996 welfare law. (The EITC and the welfare changes 

reinforced each other in this respect.) The research similarly finds that the EITC likely contributed 

as much to the decline in cash welfare receipt among female-headed families as did time limits and 

other welfare reforms: 

In addition, in the past few years, a growing body of research has found that the EITC and related 

types of assistance can have sizeable positive long-term effects on children such as improvements in 

educational success, health status, and future labor-market outcomes. The research finds that 

programs that supplement the earnings of low-income working families, like the EITC and the lowincome component of the Child Tax Credit, boost children's school achievement and are associated 

with increased work and earnings in adulthood. Economists Raj Chetty and John N. Friedman of 

Harvard University and Jonah Rockoff of Columbia University analyzed school data for grades 3-8 

from a large urban school district and found that additional income from the EITC and CTC led to 

significant increases in students' test scores.' Economists Gordon B. Dahl of the University of 

California, San Diego and Lance Lochner of the University of Western Ontario similarly found, after 

2 Yonatan Ben-Shalom, Robert A. Moffitt, and John Karl Scholz "An Assessment of the Effectiveness of Anti-Poverty 

Programs in the United States," NBER Working Paper 17042, May 2011. 

, Stacy Dickert, Scott Houser, and John Karl Scholz, ''The Earned Income Tax Credit and Transfer Programs: A Study 

of Labor Market and Program Participation," Tax Policy and the Economy, Vol. 9, MIT Press, 1995. V. Joseph Holt, 

Charles H. Mullin, and John Karl Scholz, "Examining the Effect of the Earned Income Tax Credit on the Labor Market 

Participation of Families on Welfare," NBER Working Paper No. 11968, January 2006. 

4 Jeffrey Grogge!, ''The Effects of Time Limits, the EITC, and Other Policy Changes on Welfare Use, Work, and 

Income among Female-Head Families," Review if Economics and Statistics, May 2003. In separate study using different data, 

Grogger reaches similar conclusions. Jeffrey Grogger, 'Welfare Transitions in the 19905: the Economy, Welfare Policy, 

and the EITC," NBER Working Paper No. 9472, January 2003, http://www.nber.org/papers/w9472.pdf. 

5 Cherty, Friedman, and Rockoff 2011. 
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Costs of Means-Tested Programs Other Than Health Care Will Decline Over the Coming 

Decade, and Fall Back to Historical Average, as a Share of GDP 

Historical data on government spending and the new CBO projections enable us to examine cost 

trends for means-tested programs outside health care. The data are illuminating. In fiscal year 2011, total 

federal expenditures for means-tested entitlement (or mandatory) programs outside health care equaled 

2.0 percent of GDP, which was about 50 percent higher than the average for the prior 40 years. But the 

recent increases were driven largely by the economic downturn and temporary program expansions under 

the Recovery Act. The CBO projections show that total expenditures for means-tested entitlements 

outside health care -w:ill decline steadily as a share of the economy as the economy recovers, and will fall to 

1.3 percent of GDP by 2020 and thereafter. (These figures include outlays for refundable tax credits.) 

Spending as a percent of GDP 

2.5% 

2.0 

1.5 

1.0 

0.5 

0.0 !!. ! 

1972 1977 1982 1987 1992 1997 2002 2007 2012 2017 2022 

Sources; CBPP estimates based on OMS and eBO data. _____ ~ ___ •••• _"w __ • _______ ••••••••••••• __ 

In other words, by 2020, means-tested entitlement expenditures outside health care, measured as a 

share of GDP, will return to their prior 40-year average. And these figures do not include low .. income 

which are virtually certain to decline as a share of GDP under the Budget Control 

Act caps. non-defense discretionary spending will fall under the BCA caps to its lowest level, as a 

share of GDP, since 1962, so a decline in low-income discretionary programs is virtually inevitable) As a 

result, total expenditures on low-income (or means-tested) probr-tatns outside health care, including both 

mandatory and discretionary programs, are expected to decline over the coming decade to a level below 

their average over the prior 40-year period. 

Costs for health care programs, in contrast, are rising as a share of GDP. But this is a reflection, 

especially in the case of Medicaid, of rising health care cuts throughout die U.S. health care system and the 

aging of the Medicaid beneficiary population. Medicaid already is lean, providing health coverage at a 

significantly lower cost than private insurance. The data show it costs about 27 percent less per child and 

20 percent less per non-elderly adult than private coverage. Most budget proposals that would secure 

more than a modest amount of Medicaid savings would do by shifting costs to states. If that occurs, 

however, state policymakers are likely to cut benefits and provider payments and hence reduce patients' 

access to care. In recent years, as states faced severe recession-induced budget crunches, many scoured 

Medicaid for savings and imposed painful cuts, including eliminating dental or vision care for various 

beneficiaries, restricting personal care for some people who are frail or disabled, and restricting access to 

nursing homes and other long-term services. States also cut provider payments, which already are well 

below what private insurance and Medicare pay. 
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studying nearly two decades of data on mothers and their children, that additional income from the 

EITC significantly raises students' math and reading test scores. 6 

The research suggests that the beneficial effects of the EITC and CTC follow children into 

adulthood. Harvard's Chetty and his co-authors report evidence that test score gains can lead to 

significant improvements in students' later earnings and employment rates when they become 

adults.' Their fmdings are consistent with other research that followed poor children from early 

childhood into their adult years and found that significant increases in the incomes of these 

children's families are associated with some enduring beneficial effects. The researchers found that 

each additional $3,000 in annual income in early childhood, whether from earnings or government 

assistance, was associated with more hours of work and an additional 17 percent in annual earnings 

in young adulthood.s 

One final point related to refundable tax credits bears noting. The minimum wage has been 

allowed to erode over recent decades and is now more than 20 percent lower, after adjusting for 

inflation, than in the late 1960s. For this and other reasons, relating in part to globalization of the 

economy, wages for low-paid jobs in the United States have fallen. Partly in response, policymakers 

have expanded refundable tax credits for low-income working families with children, principally the 

EITC. These credits offset part of the wage decline for low-income working parents with children. 

Any consideration of the increases in federal costs in recent decades for refundable tax credits and 

other supports for low-income working families should be put in the context of what has happened 

to these workers' wages. 

3. Health Care Costs and an Aging Population Pose Longer-Term Challenge 

The aging of the population and projected increases in per-capita health care costs, which are 

likely to rise faster than per-capita GDP, will put pressure on federal health and retirement 

programs, and on the budget in the decades ahead. 

At the present time, there are major unknowns in the health area. The growth of both public and 

private health costs has slowed appreciably in the past few years. Spending for Medicare grew by 

Building on Dahl and Lochner's research methods, economists Alexander M. Gelber of the %arton School of Business 

and Matthew C. Weinzierl of the Harvard Business School conclude that the income boost that low-income families 

\\1ith children receive from the EITe helps the tax system raise revenue more effectively. In essence, they conclude, 

when low-income families with young children receive additional income, their children perform better in school, which 

increases the opportunities that their children will have to succeed. Alexander M. Gelber and 1vfatthew C. Weinzierl, 

"Equalizing Outcomes vs. Equalizing Opportunities: Optimal Taxation 'W'hen Children's Abilities Depend On Parents! 

Resources," 01BER Working Paper No. 18332, "-\ugust 2012, http:! fwww.nber.orgfpapersfwI8332. 

'Raj Chetty,John N. Friedman, Nathaniel Hilger, Emmanuel Saez, Diane \"ihitmore Schanzenbach, and Danny Yagan, 

"How Does Your Kindergarten Classroom Affect Your Earnings? Evidence from Project Star," The Quarterly Journal of 

Economics (2011), http:1 f 'J)e.oxfordjoumals.orgfcontentI126f 4fI593.abstract. 

, Greg]. Duncan, Kathleen M. Ziol-Guest, and Ariel Kalil, "Early-Childhood Poverty and Adult Attainment, Behavior, 

and Health," Child Development (January/February 2010), pp. 306-325.) The $3,000 figure is in 2005 dollars, equivalent 

to approximately $3,530 in 2012. 
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In Designing Medicare Changes, Policymakers Should Consider Effects 

On Beneficiaries with Modest Incomes 

When designing changes in Medicare, and in Social Security as well, policymakers should consider the 

circumstances of beneficiaries Vlith very modest incomes. People sometimes think of affluent seniors 

playing golf and receiving benefits from these programs. To be sure, some beneficiaries are affluent and 

can afford to pay somewhat higher Medicare premiums or receive somewhat less from Social Security. 

However, half of all Social Security and Medicare beneficiaries have income (including their spouse's 

income) of less than about $25,000 a year. 

It's often also assumed that people who are elderly or disabled face little in the way of out-of-pocket 

health costs because they are covered by Medicare (or jointly by Medicare and Medicaid, Medigap, or other 

supplemental insurance). Yet data from the Kaiser Family Foundation show that while U.S. households 

who are not receiving Medicare spend an average of 5 percent of their budgets on out-of-pocket health 

costs, Medicare households as a whole spend an average of 15 pm"nt of their budgets on such costs. And, 

near-poor Medicare beneficiaries those with incomes between 100 percent and 200 percent of the 

poverty line - or between $11,500 and $23,000 for an elderly or disabled individual spend an average 

of 23 percent of their modest incomes on out-of~pocket health costs. 

Changes affecting Medicare and Social Security beneficiaries should therefore be designed carefully to 

avoid causing hardship or impeding access to needed health care among people ,,~th modest incomes. 

The Social Security checks that beneficiaries receive equal their Social Security benefits minus their 

Medicare premiums, which are deducted from the checks. The premiums increase with health care costs, 

which tend to rise faster than general inflation, which erodes the purchasing power of Social Security 

checks over time. 

The nation would not be well served if, for example, elderly widows trying to live on $15,000 a year in 

Social Security are unable to afford to see a doctor because we have set their Medicare deductible too high 

and they can't afford to pay it out of their Social Security check. These are the types of matters that ",ill 

require considerable attention to detail in the design of deficit reduction measures. 

only 3.2 percent in fiscal year 2012, CBO has reported,' compared to an average of 6.7 percent a 

year from 2007 through 2011. Moreover, Medicare spending per beJlejiciary rose only 0.4 percent in 

2012. 

CBO's latest projections of Medicare spending over the 2011-2020 period under current policy are 

more than $500 ;';1!iol1 below the projections CBO made just two years ago, a significant 

improvement. 

Experts do not yet know whether this slowdown is ongoing, at least in part - and will generate 

more savings than CBO has projected for future years and decades, as a growing number of experts 

now believe likely - or is strictly temporary. The answer will affect the magnitude of the nation's 

long-term fiscal problem and the scope of the future changes that will be needed to further slow 

health care cost growth. 

by beneficiaries and corrects for shifts in the timing of payments. Congressional 

rlscal Year 2012, October 5, 2012, 
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Most important, we currently lack needed information on how to slow health cost growth 

appreciably without reducing health care quality or impeding access to necessary care. 

Demonstration projects and other experiments to find ways to do so are starting, some of them 

government-funded and others entirely private-sector efforts. By later in the decade, we should 

have substantially more knowledge of what works and what doesn't, and whether substantial 

changes are already occurring in health care delivery that are slowing cost growth and can be built 

upon and spread. Taking major policy action in this area beyond the few hundred billion dollars 

in potential Medicare savings referred to earlier - before we have the necessary knowledge and 

experience could produce problematic results - it could fail to restrain health care cost growth, 

compromise health care quality, or harm substantial numbers of sick or otherwise vulnerable 

individuals. This isn't an argument for talting no action, but rather for acting now to stabilize the 

debt for the coming decade, knowing that we'll need to come back and do more for the longer run. 

Stabilizing the debt would buy us time to find answers to these very important health care questions. 

4. Taxes or Spending? 

Some policymakers argue that all further deficit reduction should come from spending cuts. 

Others argue it should come from a mix of spending cuts and revenue increases. 

Can this difference be overcome? Martin Feldstein, former chief economic adviser to President 

Reagan, has written that there is a great deal of government spending that is embedded in the tax 

code. Feldstein suggests that deficit reduction could be achieved through reductions both in spending 

in the tax code and in spending on the outlay side of the budget. 

Writing in the Wall Street Journallast week, Feldstein observed: "Republicans want to reduce the 

deficit by cutting government spending while Democrats insist that raising revenue must be part of 

the solution. Yet the distinction between spending cuts and revenue increases breaks down if one 

considers tax expenditures. Here are some examples. If I buy a solar panel for my house, a hybrid 

car, or an energy-efficient refrigerator, the government pays me. But instead of sending me a check, 

it gives me a tax credit or a tax deduction. There are dozens of such examples that increase the 

annual budget deficit by billions of dollars. Congress should review these tax expenditures and 

eliminate those that the country cannot afford." 

Feldstein wrote earlier that tax expenditures are the single largest source of wasteful and lowpriority spending in the federal budget and one of the first places policymakers should go to restrain 

spending. 

CBO director Douglas Elmendorf made a similar analytic point earlier this month at the House 

Budget Committee. In response to a question, Elmendorf explained: 

"And I think that many economists agree that [tax expenditures] are really best viewed as a 

form of government spending because they are directed at particular people or entities or 

designed to subsidize particular activities, very much analogous to the way that government 

spending is often directed at particular people or entities or designed to subsidize particular 

activities. 
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87610.103

So it is essentially a large component of spending by the federal government even though it 

is recorded essentially as lost revenue on the revenue side of the budget." 

Alan Greenspan, as well, has made this point. He has referred to tax expenditures as "tax 

entitlements" and said they should be looked at along with spending entitlements. 

That policymakers should look togetller at tax and spending entitlements can be illustrated by 

examining the subsidies that the federal government provides for child care costs. A parent with 

low or moderate income may be able to obtain a subsidy to help defray child care costs, with the 

subsidy being provided through a government spending program. A parent higher on the income 

scale also can receive a government subsidy that reduces her child care costs, but this parent's 

subsidy is delivered through the tax code, via a tax credit or an exclusion from income. 

The two types of subsidies differ in their availability to eligible families. The low- or moderateincome parent may fail to get any subsidy to help with her child care costs, because the spending 

programs that provide these subsides are not open ended; they can serve only as many people as their 

capped funding allows, and only about one in six eligible low-income working families with children 

receives such a subsidy. By contrast, the child care tax-based subsidies for higher-income 

households are guaranteed; the child care tax subsidies operate as open-ended entitlements, and they 

are available to families up the income scale. Ail higher-income households that qualify can receive 

the tax subsidy, despite the fact that they - unlike many of the working-poor families would 

generally be able to afford child care without the subsidy. 

It would not be sound policy for policymakers to put the tax-code subsidies off limits for deficit 

reduction while making the 

program subsidies a target for 

deficit reduction, because one 

type of subsidy is delivered 

through a "spending" 

program and the other is 

delivered through the tax 

code. 

"l bis isn't a small matter. 

The federal income tax code 

includes about $1.1 trillion a 

year in tax expenditures. As 

Mr. Elmendorf noted in 

House Budget Committee 

testimony earlier this month, 

the cost of tax expenditures 

exceeds the cost of Medicare 

(which was $480 billion in 

2011), Social Security ($725 

billion) and defense ($699 

billion). In fact, it 

substantially exceeds the cost 
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87610.104

of Medicare and Medicaid combined ($755 billion). 

It also far exceeds the total spending on of nondefense discretionary programs, which stood at $648 

billion in 2011. 

It's also worth noting that tax expenditures and 

spending entidements do differ in an important 

respect - how they distribute their benefits. \'I7ith 

spending entidements, the middle class receives a 

share of the benefits that is roughly proportionate to 

its share of the population: in 2010, the middle 60 

percent of the population received 58 percent of the 

entidement benefits. The bottom 20 percent 

received 32 percent of the benefits, while the top 20 

percent received 10 percent of the benefits.'o 

With tax entidements, however, the situation is 

different. The Urban Institute-Brookings 

Institution Tax Policy Center has estimated that for 

tax year 2011, the top fifth of the population 

received 66 percent of all individual tax-expenditure 

benefits, with the top 1 percent of households 

receiving 24 percent of those benefits. The middle 60 

percent of the population received just a litde over 31 

percent of the benefits. The bottom 20 percent of the 

population received 2.8 percent of the benefits. 

If policymakers want to achieve deficit reduction 

that doesn't further widen inequality or overly burden 

middle- and low-income households, and if they want 

to achieve deficit reduction in an economically 

efficient way, they will need to look at spending 

throughout the entire budget in the tax code as 

well as on the outlay side of the ledger. 

, Share of population and entitfement benefits by income 

group, 2010 

50 

40 

30 

20 

10 

o 

Share of population. Share of entitlement benefits 

60"10 58% 

Bottom 20% Middle 60% Top 20% 

Share of population Share of tax expenditures 

60% 66% 

Note: The bottom 20% means the 20% of tax units with 

! the lowest incomes; the same !s true for the other 

,0 Spending entitlement figures l11clude the outlay components of the Earned Income Tax Credit and the Child Tax 

Credit. See Arloe Sherman, Robert Greenstein, and Kathy Ruffing, "Contrary to 'Entitlement Society' Rhetoric, Over 

Nine-Tenths of Entitlement Benefits Go to Elderly, Disabled, or Working Households," Center on Budget and Policy 

Priorities, February 10, 2012, http://\X.7\\r\\l.cbpp.org/cms!?fa:::::view&ld::::36'77. 
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87610.105

Questions for the Record 

"The Budget and Economic Outlook: Fiscal Years 2013 to 2023" 

Questions for Mr. Robert Greenstein 

Hearing Date: February 26, 2013 

Questions from Ranking Member Orrin G. Hatch 

1. I hear conflicting claims about promised future deficit reduction, along with conflicting 

claims about how much of the promises involve spending cuts relative to tax hikes. Deficit 

reduction numbers I have seen range from the just above $ 2 trillion to over $3.6 trillion, and 

ratios of cuts to tax hikes I have seen are all over the map. Your testimony says that we have 

achieved $2.35 trillion in deficit reduction so far, if interest payments are included, or $2.75 

trillion if you move the budget window by a year. I have two questions: 

a. First, can you explain to me the wide range of numbers being thrown around regarding 

how much "we have achieved" in deficit reduction and the wide ranges of claimed ratios 

of spending cuts to tax hikes? 

Answer: I can explain the figures the Center on Budget and Policy Priorities uses, and 

would note that the Committee for a Responsible Federal Budget accounts for deficit 

reduction the same way we do and has published an identical estimate. But I would not 

attempt to explain figures used by others. 

The Center measures the cumulative change in projected deficits during a budget window 

that spans ten years. My testimony first referred to the 2013-2022 budget window, then to 

the 2014-2023 budget window. The latter encompasses the coming fiscal year- 2014 - for 

which new congressional and presidential budgets are formulated, as well as the subsequent 

nine years. 

In our methodology, we count spending cuts and revenue increases as those changes in 

policy caused by the enactment of new legislation; natural increases or decreases in costs or 

changes in estimates caused by factors outside the control of Congress are not part of the 

calculation. We estimate that policy savings over the 2013-2022 period reflects nearly $1.5 

trillion in spending cuts to appropriated programs, mainly through the caps on discretionary 

funding imposed in the 2011 Budget Control Act, and another $565 billion in savings from 

the American Taxpayer Relief Act. (These figures do not count either war savings or the 

sequestration.) With the savings in interest on the debt these two actions generate (because 

deficits and thus debt will be lower than ifthey did not happen), the cumulative deficit 

reduction over the 2013-2022 window is $2.35 trillion. 

When we project the $2.35 trillion savings forward into the new budget window, covering 

2014-2023, the total deficit reduction (including interest) rises to $2.75 trillion. The noninterest savings over that period are 70 percent budget cuts and 30 percent revenue increases. 

For a more technical discussion of our assumptions, you may wish to refer to two Center 

analyses: "$1.5 Trillion in Deficit Savings Would Stabilize the Debt Over the Coming 

Decade" by Richard Kogan, Robert Greenstein, and Joel Friedman, February 11,2012; and 
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87610.106

"Congress Has Cut Discretionary Funding By $1.5 Trillion Over Ten Years," by Richard 

Kogan, revised November 8, 2011. 

b. And, second, how much in terms of actual federal spending cuts have been realized-that 

is, cuts we have banked-relative to fiscal year 2009 when the President took office, or 

fiscal year 2010 if you don't want to hold the President entirely responsible for 2009 

spending? 

~: The estimate of $2.75 trillion for the period 2014-2023 is entirely prospective; that 

amount of deficit reduction will be achieved as long as Congress continues to adhere to the 

discretionary caps enacted in the Budget Control Act of2011 and as long as Congress does 

not reverse the revenue and other changes enacted in the American Taxpayer Relief Act. 

In addition to the $2.75 trillion over 2014-2023, enacted funding for appropriated programs 

was lower in fiscal years 2011, 2012, and 2013 than CBO's 2010 projection for those years, 

reflecting funding cuts totaling about $230 billion over those three years. Moreover, this 

figure does not include the 2013 sequestration currently in effect. 

2. CBO identifies that federal outlays as a share of GDP have averaged 21.0 percent over the 

past 40 years, but are projected to remain above the average in their projection period, after 

having peaked at over 25.0 percent ofGDP in 2009. Many people argue that, given 

demographics and the resulting increases in entitlement beneficiaries in future years, 

spending as a share ofGDP will have to rise in coming decades. I wonder if you agree and, 

if you do, precisely how much above the long-run average do you believe should be the 

federal-spending share of GDP, on average, over the next 10 years? 

~: I do agree that, because Social Security, Medicare, and Medicaid currently 

constitute almost half of all non-interest federal program costs, and because these programs 

will grow faster than the economy as whole over the next two decades as the baby boom 

generation retires, they will inevitably put upward pressure on the federal budget. This is one 

key reason that I do not regard historical averages as useful policy guides for the future; what 

may have sufficed when we had relatively few retirees will not suffice when we have more. 

In addition to the growth of these three programs as a percent of GDP, interest costs will rise 

as interest rates return to more normal levels. But partly offsetting these two upward 

pressures will be reductions in spending in other programs relative to GDP, as the economy 

recovers and as war costs wind down, for example. All in aU, total outlays are likely to 

remain above the historical average, but below the 2009-2011 recession peak, in every year 

over the next ten years. 

We last published long-term budget projections in 2010, and are currently in the process of 

revising those projections to take into account legislation that has been enacted and changes 

in underlying economic and technical assumptions. Our estimates will rely on longer-term 

projections by the Social Security and Medicare actuaries and by CBO with respect to 

Medicaid. Our preliminary findings show that the long-term outlook is more favorable than 

what we had previously published. 
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87610.107

3. I believe that you advocated for higher taxes as part of the resolution of the fiscal cliff and 

seemed to have no reservations about raising taxes before the economy has more fully 

recovered. And I see, in your written testimony, that you hope that sequestration is replaced 

with other policies, but argue that those other policies to reduce future deficits be designed to 

"largely or entirely take effect after the economy has more fully recovered." 

Did you think that it was premature to have raised taxes on New Year's Day, before the 

economy has more fully recovered? And, if you think that the tax hike earlier this year was 

not problematic in an economy that has not fully recovered, why would it suddenly now be 

problematic to engage in fiscal restraint? 

Answer: We have advocated for a balanced approach to long-term deficit reduction that 

includes not just spending measures but also policies that increase revenues. In general we 

have recommended that deficit reduction be phased in on the grounds that too much deficitreduction too soon in a slack economy reduces aggregate demand and is therefore a drag on 

the economic recovery. 

However, different policies have a different effect on aggregate demand - that is, they have a 

different "bang-for-the-buck." At one extreme, programs that put money in the hands of 

people who will spend it quickly, such as food stamps or unemployment insurance, have a 

high bang-for-the-buck. So cutting these programs reduces aggregate demand 

significantly-by many estimates, by more than a dollar for each dollar of budget savings. 

At the other extreme, increasing top marginal tax rates or lowering the exemption for the 

estate tax have a low bang-for-the-buck, because spending by very high-income or wealthy 

taxpayers is much less sensitive to changes in after-tax income. We supported raising upperincome tax rates in the fiscal cliff deal because, for these low bang-for-the-buck policies, the 

benefits from locking in budget savings far outweigh any minor change in aggregate demand 

in the short term. 

4. You note in your written testimony that the minimum wage has been allowed to erode 

because of inflation, and I presume that you support the President's idea of indexing the 

minimum wage to inflation. If you do not agree, then I would be interested to learn that. If 

you do agree, I wonder whether you would also support indexing the threshold level of 

public works projects after which Davis-Bacon wage requirements apply-a threshold whose 

value has significantly been eroded by inflation over time--and, if not, why not? 

Answer: The Davis-Bacon Act is not a policy that we work on or have studied, and we 

therefore do not have a response. 

5. The President laid out a list of what he would like done in his recent State of the Union 

Speech, including things like creating a network of 3D printing manufacturing hubs, setting 

up a "fix-it-first" program to hire people to work on infrastructure, somehow facilitating 

more mortgage refinancing by federal means, providing preschool availability to every child 

in America, and more. He said that "nothing I'm proposing tonight should increase our 

deficit by a single dime." The President also claimed that we have reduced the deficit by 

more than $2.5 trillion and are more than halfway towards a goal of $4 trillion, meaning that 

he wants $1.5 trillion more in deficit reduction. 
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87610.108

If we got the President's desired $4 trillion of promised future deficit reduction and instituted 

his list of desires, which must include additional federal funding, it seems to me that some 

combination of the following two things has to happen. One, spending on some things other 

than the President's latest wish list would have to be cut. And, two, taxes would have to go 

up. 

Do you agree that satisfYing the President's desire for more spending along with his desire 

for more promised future deficit reduction would have to involve either other spending cuts 

or more tax hikes or both? And, do you think it would be feasible to enact $1.5 trillion of 

additional promised future deficit reduction, raise spending on some of the President's new 

proposals, and not cut any other spending while at the same time not adding a dime to 

deficits and not raising taxes on the middle class? 

~: I agree that addressing the nation's many fiscal challenges will require a 

combination of spending cuts and revenue increases. Definitions ofthe "middle class" are 

often subjective, but I also agree that it is implausible to assume that the nation can rely 

solely on the extremely wealthy to produce all of the deficit reduction needed to put the 

budget on a more sustainable path. 

Since I testified before the Finance Committee, the President has released his fiscal year 

2014 budget. As you suggest, he relies on a combination of spending cuts and revenue 

increases to offset the cost of his proposed initiatives, which in total are deficit neutral. In 

addition, the President's budget includes a deficit-reduction package that reflects his final 

offer to Speaker Boehner during their budget negotiations at the end oflast year. That 

package also includes both revenue increases and spending reductions. 

I also support a balanced approach to deficit reduction, believing that our longer-term fiscal 

challenges cannot be addressed only by changes to one side of the budget or the other. 

Rather, it will require changes to both revenues and spending programs. Further, it is 

essential for revenues to be part of a deficit-reduction package if policymakers are to adhere 

to the important principle (endorsed in the deficit-reduction plan by fiscal commission cochairs Erskine Bowles and Alan Simpson) that policy changes to reduce the deficit should be 

crafted in a way to ensure they do not increase poverty or inequality. 
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Questions from Senator Ron Wyden 

I) As you are undoubtedly aware, almost 27 years ago, when President Reagan and 

Congressional Democrats enacted Tax Reform, it was a big boost to the economy. More than 

six million new jobs were created in just the two years after the 1986 reform - something 

that's urgently needed today. I don't claim that everyone ofthose jobs was the direct result 

of tax reform but it certainly helped. 

Since that time, especially in recent years, there have been dozens of calls from members of 

Congress, Administrations, outside task forces and commissions, and economists of every 

stripe for comprehensive tax reform. In the same vein, the Obama Administration has 

acknowledged the need for comprehensive reform with the release of two reports-one in 

August 2010 and one just less than a year ago. And, in his inaugural address last month, the 

President made clear the need to "revamp our tax code." 

However, despite such repeated calls for comprehensive reform, the reality appears more like 

lip service than commitment. Our current system is terribly inefficient, hopelessly complex 

and not by any measure the kind of pro-growth policy our country needs. 

Since 200 I, Congress has passed almost 140 laws amending the tax code in one way or the 

other, and with each such adjustment, the revenue regime the country now has becomes even 

more byzantine, counterproductive and uneconomical. It has now gotten to the point that 

almost as much, ifnot more, money is spent through the tax code as it brings in, so it's 

getting harder and harder even to call it a revenue code at all. 

Individuals and businesses need confidence and certainty, and irregular short-term extensions 

of major parts of the tax code offer neither. 

In Dr. Greenstein's testimony, he notes that deficit reduction can be achieved through 

reductions both in spending in the tax code and in spending on the outlay side of the budget, 

and he cites the esteemed Martin Feldstein in support of this proposition. 

In the Wall Street Journal last week, Dr. Feldstein wrote: "Republicans want to reduce the 

deficit by cutting government spending while Democrats insist that raising revenue must be 

part of the solution. Yet the distinction between spending cuts and revenue increases breaks 

down if one considers tax expenditures. Here are some examples. If I buy a solar panel for 

my house, a hybrid car, or an energy-efficient refrigerator, the government pays me. But 

instead of sending me a check, it gives me a tax credit or a tax deduction. There are dozens of 

such examples that increase the annual budget deficit by billions of dollars. Congress should 

review these tax expenditures and eliminate those that the country cannot afford." 

Feldstein has also written that "tax expenditures are the single largest source of wasteful and 

low-priority spending in the federal budget and one of the first places policymakers should 

go to restrain spending." 

Dr. Elmendorf, in testimony before the House Budget Committee, made a similar point when 

he stated that tax expenditures "are really best viewed as a form of government spending 
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because they are directed at particular people or entities or designed to subsidize particular 

activities," almost precisely analogous to other government spending. 

Alan Greenspan has suggested that tax expenditures represent just as great a threat to a 

sustainable budget path as any other spending, including entitlements. 

a. With that background, what, in your respective views, are some of the least economically 

efficient and/or justifiable tax expenditures? What economic effects-positive or 

negative-would you expect from thcir repeal? How would each of you propose we 

maximize any positive or mitigate any negative effects? 

Answer: There are two areas oftax expenditures that should be the focus of reform: the 

large individual tax deductions and exclusions; and specific loopholes in the tax code which 

allow wealthy individuals to avoid or defer taxation, or pay tax at a lower rate. 

First, roughly 70 percent of each year's spending on individual tax expenditures results from 

deductions, exemptions, or exclusions. The value of these tax breaks increases as household 

income rises - the higher one's tax bracket, the greater the tax benefit for each dollar that is 

deducted, exempted, or excluded. As a result, these tax expenditures provide their largest 

subsidies to high-income people, even though those are the individuals least likely to need a 

financial incentive to engage in the activities that these tax policies are generally designed to 

promote, such as buying a home, sending a child to college, or saving for retirement. 

Meanwhile, middle-class families receive considerably smaller tax-expenditure benefits for 

engaging in these activities. In this regard, these tax expenditures are "upside down," which 

makes them less efficient, as well as less equitable. 

Consider how the deduction for home mortgage interest affects two households' decisions to 

buy a home. An investment banker making $675,000 who has a $1 million mortgage and 

pays $40,000 in mortgage interest each year receives a housing subsidy of about $14,000 

annually from the mortgage interest deduction. By contrast, a middle-class family led by a 

nurse making $60,000, and paying $10,000 a year in mortgage interest on a more modest 

home, receives a housing subsidy worth $1,500 annually. Not only does the mortgage interest 

deduction provide the high-income banker with a larger total subsidy (in dollar terms) than 

the nurse, but the subsidy also represents a greater share of the banker's mortgage interest 

expenses. In fact, the proportion of the banker's mortgage interest expense covered by the 

subsidy is more than twice as large as the percentage subsidy that the nurse receives. 

The most economically efficient policy response would be to turn these deductions and 

exclusions into single-rate, refundable tax credits. The Bipartisan Policy Center, for 

example, used this approach for its proposed reform ofthe mortgage interest deduction. 

Such a policy shift would address the problems highlighted in my banker/nurse example, and 

improve both equity and economic efficiency. This would be an ideal template for reform. 

To the extent that political constraints and other factors limit the reach of the policy change, 

movement in this direction could still prove beneficial. For example, the Obama 

Administration's proposal to limit to 28 percent the benefit from a range of deductions and 
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exclusions would improve upon their current upside-down structure, even though it may fall 

short of idea! policy. 

As far as possible negative consequences to avoid, the Committee would need to give due 

consideration to transition issues and near-term weakness in the economy. 

Second, while converting deductions or exclusions to credits or imposing an across-the-board 

limitation can address many issues, some tax expenditures are embedded in the tax code in a 

way that would make it difficult or impossible to apply such approaches. These types of tax 

breaks should be addressed directly, with carefully designed policies. 

In particular, policymakers should examine tax breaks that enable various people with high 

incomes to avoid substantial amounts of tax on that income (and do so without creating 

incentives for desirable activities such as homeownership or charitable giving). Former 

Treasury Secretary Lawrence Summers wrote recently that policymakers "should be able to 

come together around the idea that it should not be possible to accumulate and transfer large 

fortunes while avoiding taxation almost entirely. Yet this is all too possible today." For 

many of these tax breaks, it would make sense to restructure or eliminate them 

independently. Some examples of these tax breaks include carried interest, like-kind 

exchanges, and valuation adjustments. Closing each of these loopholes would have 

economic efficiency gains. 

For a more detailed discussion of these issues, I would rccommend this Center analysis: 

"Tax Expenditure Reform: An Essential Ingredient of Needed Deficit Reduction," by Chuck 

Marr, Chye-Ching Huang, and Joel Friedman, February 27,2013. 

b. In a similar vein, there is a great debate among Republicans and Democrats as to what we 

should do with any additional revenue generated by rolling back or reducing tax 

expenditures, also commonly referred to as closing loopholes. On the one hand, some 

would have us use any additional revenue to buy down marginal tax rates, while, on the 

other, some would have us use any resulting revenue for deficit reduction and/or other 

investments. Weighing in on that debate, Martin Sullivan, a widely read commentator on 

tax policy, has suggested that perhaps the best solution would be to devote half of any 

resulting revenue to reducing rates and halfto reducing the deficit. Do you feel that 

Sullivan has the ratio about right? Or would you suggest a different allocation of any 

resulting revenue and why? 

Answer: I do not support the idea of splitting the revenue generated by reforming tax 

expenditures evenly between deficit reduction and lower rates, but rather believe it is 

essential that deficit reduction be the top priority. I believe it would be a serious mistake for 

the Committee to put cutting tax rates ahead or even on the same level as deficit reduction 

when setting its priorities for tax reform. In the context of long-term budget deficits, 

burgeoning inequality, and the political difficulty of cutting tax expenditures, cutting ratesand particularly the top rate - would be very expensive, would aggravate inequality, and 

would not provide as much long-term economic benefit of deficit reduction. 
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Curbing tax expenditures is difficult politically, and tax reform will likely exhaust the 

achievable savings in that area. Thus, once tax reform is enacted, opportunities for significant 

revenue-raising will likely be gone for many years. If policymakers use tax expenditure 

savings to pay for lower tax rates - particularly in the context of revenue-neutral reform -

then they will have squandered the opportunity to raise the significant additional revenue 

needed for deficit reduction. Further, if revenue-neutral tax reform takes revenues for deficit 

reduction off the table, I believe it will likely dim prospects for agreement on future deficit 

reduction. I think it will be very difficult for policymakers to build support for cutting 

popular entitlement programs such as Social Security and Medicare in the name of deficit 

reduction in the absence of additional revenue from curbing unproductive or low-priority tax 

breaks that is also dedicated to reducing the deficit 

2) In his State of the Union, the President discussed the need for investment in transportation 

and infrastructure. That means roads, bridges, rail, ports, and inland waterways. You 

simply cannot have a big league economy with a little league transportation system. In the 

Senate, there is widespread consensus that highways, roads, transit systems, and bridges must 

be fortified. Furthermore, transportation projects put people to work, which the construction 

industry and the country need. 

But the big challenge, in my view - the outstanding issue - is how America will pay for 

improving our transportation system, especially given the budget outlook. Fortunately, there 

is a proven way to generate tens ofbilJions of dollars of additional funds for transportation on 

top of what is raised by the gas tax. The idea is based on Build America Bonds, which for 

years had widespread bipartisan support and were tremendously successful. 

My proposal would be to authorize Transportation Regional Infrastructure Project bonds, or 

"TRIP bonds", which I first proposed in legislation last Congress. Under the legislation, 

TRIP bonds would provide up to $1 billion in tax credit bonds for each state to use for 

transportation and infrastructure projects of the state's choosing. 

In a time when we are trying to get our fiscal house in order, "TRIP bonds" use federal tax 

credit bonding to leverage private dollars for investment in infrastructure. This decreases the 

federal government's share of the cost, while still investing in critical infrastructure that's the 

gateway to the United States' big league economy. 

Soon, I will reintroduce the TRIP legislation, and I hope it garners the same bipartisan 

support it did last Congress. It's my hope that we can use TRIPs to grow our national 

investment in transportation and infrastructure in a fiscally responsible and economically 

efficient manner. 

Inadequate revenues in the Highway Trust Fund have denied state transportation departments 

the long-term stability to carry out much-needed investments in critical infrastructure 

projects. Given the difficulty of finding new revenues and the need to get our fiscal house in 

order, do you think there's a strong case to be made for federal tax-credit bonding for 

transportation and infrastructure projects as an alternative to direct spending? Can each of 

you provide your thoughts on the relative economic merits of this approach to infrastructure 

financing in a time of scarce budget resources? 
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Answer: We have not studied the TRIP legislation. But, in general, economists find that 

well-designed tax credit bonds are able to subsidize state and local infrastructure financing 

more efficiently than the traditional approach of making the bond interest tax-free to 

investors, while also encouraging more investors to buy them (because they are attractive to 

investors with no tax liability, such as pension funds). 
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From Senator Robert Menendez 

I) As you already know, the Ryan budget sought to cut all discretionary spending as a share of 

the total economy to 3.5 percent of GDP, while somehow still protecting defense spending. 

Assuming defense spending remains level in real terms, budget experts have estimated that 

under the Republican budget most of the rest of the federal government outside of health 

care, Social Security, and defense would cease to exist. 

If you compare the cuts to the non-defense side of discretionary spending from sequestration 

to the cuts that would be necessary for the Ryan budget to work, is sequestration that much 

harsher? Would the real world impact on air travel, our schools, food inspection and any 

number of other important services face any more serious deterioration over the long-term 

from sequestration than they would if the Ryan budget actually became law? 

~: The recent House-passed budget resolution for fiscal year 2014 cuts nondefense 

discretionary spending significantly below sequestration. The non-defense discretionary caps 

enacted in the Budget Control Act of201 1 would reduce funding for these programs to the 

lowest level on record as a share ofGDP. Relative to these levels, sequestration would 

further reduce funding for non-defense discretionary programs by about $350 billion over the 

10-year period 2014-2023. In contrast, the House-passed budget resolution calls for that 

funding to be cut below the caps by almost $1.1 trillion. In short, sequestration would cut 

funding below the levels already imposed by the tight caps set in the Budget Control Act, and 

the cuts required under the Ryan budget would be three times as deep as sequestration. 

2) The Congressional Budget Office wrote in their latest report on the budget and economic 

outlook: "Persistent long-term unemployment will lead some workers to leave the workforce 

earlier than they would have otherwise and will erode the skills of other workers, making it 

harder for them to find work in the coming years." Compounding this problem is evidence 

which shows many employers discriminating against the long-term unemployed, 

perpetuating a vicious cycle. The longer a worker is unemployed the less attractive they are 

as a job candidate and the longer they remain unemployed. 

How difficult do you believe the crisis of long-term unemployment is today and what, in 

your view, are some of the most effective steps we can take to tackle the problem? 

~: The problem of long-term unemployment is very serious. The percentage of the 

unemployed who are long-term (unemployed 27 weeks or longer) jumped over the course of 

the recession and has remained high - around 40 percent - since the end of the recession, a 

figure that is significantly higher than the highest level reached in any previous recession 

since the end of World War II (26 percent in June 1983). 

Stimulus policies that increase the demand for goods and services are critical to reducing 

long-term unemployment by creating more job opportunities. Evidence suggests that 

employers discount the value of applicants who have been unemployed for long periods. A 

healthier job market reduces that effect. As the economy improves, it still may be necessary 
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to devote special effort to assisting the long-tenn unemployed in their job search and helping 

them rebuild their skills through retraining programs. 

3) In my view, expanding opportunities for workers to advance their skills and their value is a 

critical one when we're thinking about how to help shore up the economic fortunes of the 

middle class. Estimates show the economy is going to be short 5 million trained workers by 

2018. Every state in the country is confronted with this shortage and in my opinion, we 

shouldn't shy away from any opportunity to address the issue. 

Do you agree that there is an increasing challenge for America to produce more skilled 

workers and do you believe there should be a federal role in meeting that challenge? If so, 

what do you believe would be some ofthe most effective policy measures Congress should 

consider? 

~: Over the years, improvements in the average skill levels of our workforce have 

been one of the most important contributors to increased productivity and a rising standard of 

living. We do face challenges ahead making sure that our workforce has appropriate levels 

of education and training. That means continuing the federal commitment to higher 

education through Pell Grants and other policies that help people pursue higher education, 

but it also will likely require an increased commitment to policies that produce an educated 

workforce at all levels of educational achievement. 

These investments in our workforce are largely funded through annual appropriations in the 

nondefense discretionary part of the budget. This budget category includes other programs, 

such as basic research and infrastructure, that can also make an important contribution to 

increasing our future productivity. Yet funding for nondefense discretionary programs is 

projected to fall to historically low levels under the caps imposed by the Budget Control Act, 

and would be cut even further if sequestration were to remain in effect. We are very 

concerned about these cuts, and their potential to hann the nation's ability to meet important 

economic challenges, including those that you have raised concerning boosting the skill 

levels of our workforce. 
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Questions from Senator Robert P. Casey, Jr. 

1. Your testimony rightly acknowledges the positive long-term impact of the Child Tax 

Credit and the Earned Income Tax Credit on children and working families, including 

boosting children's school achievement and future earnings as an adult. 

Can you speak to the impact of the EITC on school performance specifically? In recent 

years, we have worked to expand these tools. What are the impacts of these 

improvements? Specifically, how have they created economic ladders of opportunity? 

Answer: There is exciting new research that concludes that the extra income from the 

EITC and the child tax credit improves the educational outcomes of young children in 

low-income families. 

When researchers analyzed ten anti-poverty and welfare-to-work experiments, they found 

a consistent pattern of better school results for low-income children in programs that 

provided more income. Each $1,000 increase (in 2001 dollars) in annual income - the 

equivalent of a full CTC for one child - for two to five years led to modest but 

statistically significant increases in young children's school performance on a number of 

measures, including test scores. While not specifically analyzing the EITC's impact, the 

researchers noted that their results have important implications for income-boosting 

policies like the EITC "that link increases in income to increases in employment." 

Other researchers analyzed data for grades 3-8 from a large urban school district and the 

corresponding U.S. tax records for families in the district. Even under conservative 

assumptions, they found, additional income from the EITC and CTC leads to significant 

increases in students' test scores. Likewise, researchers who studied nearly two decades 

of data on mothers and their children concluded thilt additional income from the EITC 

raises the combined math and reading test scores of students by similarly large 

magnitudes. 

Gordon Berlin, the president ofMDRC - one ofthe nation's leading research 

organizations that is known for its rigorous evaluation of anti-poverty and welfare-towork programs - summarized the results this way: 

[There is] a remarkably strong body of research - much of it based on large-scale, 

well-implemented, experimental research designs - showing that supplementing 

the earnings of parents helps raise families out of poverty and improves the school 

performance of young children. This point is so important - and to many so 

surprising - that I want to state it again: We have reliable evidence involving 

thousands of families in multiple studies demonstrating that "making work pay" 

causes improvements in young children's school performance. 

We discuss these finding in more detail in a report titled: "Earned Income Tax Credit 

Promotes Work, Encourages Children's Success at School, Research Finds," by Chuck 

Marr, Jimmy Charite, and Chye-Ching Huang, revised April 9, 2013. 
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2. In your testimony you state "Policymakers can enact measures now, as part of a balanced 

deficit-reduction package, that would achieve significant Medicare savings (a few 

hundred billion dollars over ten years) without jeopardizing the quality of care or access 

to care." 

What specific changes would you suggest we make to strengthen Medicare while also 

protecting it for millions of older citizens and people with disabilities? 

Answer: The Medicare proposals in the Administration's fiscal year 2014 budget would 

save $371 billion over the first ten years and $1 trillion in the second ten years, according 

to the Office of Management and Budget. These proposals all merit serious consideration 

and illustrate the kinds of changes that can be made without raising Medicare's age of 

eligibility or removing its guaranteed benefit. 

More than three-quarters of the budget's Medicare savings over the first ten years stem 

from changing payments to providers. The largest single proposal would secure the same 

low prices for drugs prescribed to low-income Medicare beneficiaries that Medicaid pays 

for those drugs. Other provider proposals in the budget include refining payment 

mechanisms for post-acute care, reducing overpayments to Medicare Advantage plans, 

and changing payments for clinical laboratory services. 

The budget also includes earlier Administration proposals for further structural changes 

in Medicare. The budget would increase the income-related premiums paid by upperincome beneficiaries and gradually expand those premiums to cover a larger fraction of 

beneficiaries. It would also increase cost-sharing for new beneficiaries by raising the 

deductible for physician services, introducing co-payments for certain home health care 

services, and introducing a premium surcharge for those who purchase Medigap 

supplement plans that provide near-first-dollar coverage (which encourages greater 

utilization of health care services). Finally, the budget would strengthen the Independent 

Payment Advisory Board and lower Medicare's target spending growth rate per 

beneficiary, now set at the rate ofGDP growth per capita plus 1 percentage point, to GDP 

growth per capita plus 0.5 percentage points. 
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STATEMENT OF HON. ORRIN G. HATCH, RANKING MEMBER 

U.S. SENATE COMMITTEE ON FINANCE HEARING OF FEBRUARY 26,2013 

THE BUDGET AND ECONOMIC OUTLOOK: FISCAL YEARS 2013 TO 2023 

WASHINGTON - U.S. Senator Orrin Hatch (R-Utah), Ranking Member of the Committee on 

Finance, delivered the following opening statement at a committee hearing examining the 

nation's budget and economic outlook for fiscal years 2013 to 2023: 

Thank you, Mr. Chairman, for holding today's hearing. I want to welcome all of our 

witnesses and thank them for their willingness to appear here today. 

This is an important hearing and, given that we are currently in the midst of a national 

debate over our country's fiscal future, it couldn't be more timely. 

Anyone who takes a careful look at our federal finances should be very nervous. We 

have had four consecutive years with deficits above $1 trillion. Sy the end of this fiscal year, 

CSO projects that the debt held by the public will reach the largest percentage of GOP since 

1950. 

And, it only gets worse as time goes on. 

After a temporary lull in the growth of debt in 2018, CSO projects that the debt will rise 

for the remainder of the 10-year budget projection window, measuring 77 percent of GOP by 

the end of 2023. 

According to CSO: 

"Along such a path, federal debt held by the public will equal a greater percentage of 

GDP than in any year between 1951 and 2012 and will be far above the average of 39 

percent over the 1973-2012 period. Moreover, it will be on an upward trend by the end 

0/ the decode. Debt that is high by historical standards and heading higher will have 

significant consequences for the budget and the economy ... " 

Those negative consequences of our growing national debt will indude: higher interest 

costs, lower national savings, more borrowing from abroad, less domestic investment, lower 

incomes, lesser abilities of policymakers to respond to unexpected challenges like natural 

disasters, and a greater likelihood of a fiscal crisis. 

While some will try to argue that the coming debt crisis can be blamed on a lack of 

sufficient revenue, nothing could be further from the truth. 

With the tax increases included as part of the fiscal cliff package that passed on New 

Year's Oay, federal revenue as a share of our GOP is on a path to exceed the average of the last 

40 years. 
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So, despite some adamant claims to the contrary, it's clear that our government has a 

spending problem, not a revenue problem. 

Another common claim we've heard from the White House and from many here in 

Congress is that, over the last year and a half, we've already cut spending dramatically. 

This is also untrue. By any measure, spending has increased significantly under this 

administration. 

For starters, federal outlays in Fiscal Year 2012 were well above 2009 levels. 

Now, some have argued that it's not fair hold the Obama Administration entirely 

accountable for all of the outlays incurred during 2009. So, for now,let's consider Fiscal Year 

2010. 

When you compare federal outlays in Fiscal Year 2012 with those of Fiscal Year 2010, 

you see an increase in spending of over $82 billion. 

At the same time, as the economy has sluggishly recovered, federal revenues have 

increased. In Fiscal Year 2012, they were up by more than $286 billion compared to 2010. 

So, between 2010 and 2012 the deficit went down by just over $204 billion. And, 

literally no part of that reduction can be attributed spending cuts; it's all due to higher 

revenues. 

Despite these facts, the President continues to resist any real spending restraint and 

calls for even more tax hikes, even though he just raised taxes less than two months ago. He 

also refuses to entertain serious, structural changes to our entitlement programs, even though 

everyone agrees that entitlement spending is the main driver of our debts and deficits. 

As far as I'm concerned, any conversation about reducing our deficits that doesn't focus 

on shoring up and reforming our entitlement programs is a missed opportunity. 

In the more immediate future, we face the indiscriminate spending reductions that are 

scheduled to begin on March 1 under the so-called sequester, which CBO says will reduce 

actual outlays in FY 2013 by around $44 billion, or just over one percent of total federal" 

spending. 

The debate over the sequester appears to be headed down the same path that all of our 

recent fiscal debates have followed, with the President and his allies here in Congress insisting 

that, in lieu of actually cutting spending, we raise taxes on the so-called rich. 

And, once again, none of the tax hike proposals we're hearing about were considered by 

this Committee. Instead, they have been drafted somewhere else behind closed doors. 

Today, we will hear more about these and other fiscal challenges facing our nation. In 

addition to discussions about our long-term budgetary problems, I expect we'll hear 

recommendations about how to deal with short-term spending reductions scheduled under the 

sequester. 
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I assume that we'll also continue to hear grand claims of deficit reduction that measure 

progress using selective baselines and include only promises to reduce spending in the future. 

Once again, by any measure, spending has not been cut to date. We have promises for future 

cuts in spending, but nothing has been realized. 

I hope today's hearing will, among many other things, help us get to the bottom of some 

of these claims and clarify for the American people how much Congress has actually done to 

reduce the deficit in recent years. 

Mr. Chairman, thank you again for holding today's hearing, and I look forward to 

hearing from our witnesses on both of today's panels. 

### 
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SUBMITTED BY SENATOR HATCH 

July 26, 201l 

Fact Sheet: Who Benefits From Tax Expenditures? 

In much of the coverage of tax expenditures, it has been taken as an article of faith that they disproportionately 

benefit wealthy taxpayers. But, data show tax expenditures tend to skew towards middle class Americans or those 

below the Obama Administration's definition of the rich - that is singles with adjusted gross incomes over $200,000 

per year and married couples with incomes over $250,000 per year. 

According to the Joint Committee on Taxation, taxpayers with income over $200,000 bear 64% of the tax burden 

while taxpayers earning under $200,000 bear 36%. The following summarizes the percentage of tax expenditures 

that go to these taxpayers: 

Mortgage Interest Itemized Deduction: 30% of the benefit oflhe mortgage interest tax expenditure goes to 

taxpayers over $200,000. Taxpayers with income below $200,000 receive 70% of the benefit, while shouldering 

36% of the tax burden. By a ratio of almost 2 to 1, taxpayers under $200,000 benefit from it. 

Earned Income Credit: It is a refundable credit. That means taxpayers receive it whether they pay income tax or 

not. Because the earned income credit is refundable, the so-called rich taxpayers do not benefit from it, but 100% of 

the benefits go to those earning under $200,000. 

Child Tax Credit: This is by defmition, limited to lower and middle income taxpayers. Again, none of it goes to 

higher income taxpayers. 

State and Local Taxes: This one splits down the middle - 50% of this broad-based deduction goes to middle 

income families and 50% to top earners. 

Cbaritable Itemized Deductions: Of all of the tax expenditures listed, at 55% this one distributes in the higbest 

proportion 10 taxpayers above $200,000 in income. But keep in mind, overall, taxpayers with income over $200,000 

bear 64% of the tax burden. This means, proportionately, the charitable deduction benefits taxpayers under the 

$200,000 level more than taxpayers above the $200,000 level. 

Tax-Free Portion of Social Security Benefits: Just 2% of thai favorable lax treatmenl of Social Security goes 10 

seniors with incomes over $200,000. 

Real Property Taxes: While some may say that only those with villas are taking the property tax deduction, 80% 

of the real property tax benefit goes to taxpayers under $200,000. 

Education Credit: Here again, 100% of these benefits go to taxpayers earning under $200,000. 

Medical Itemized Deduction: 89% of this tax benefit goes to taxpayers earning less than $200,000. 

Dependent child care credit: This is a modest tax credit that working moms and dads can tap. Like the child tax 

credit, it mainly is used by middle income families. 96% of the benefits of this credit go to families earning less 

than $200,000. 

Student Loan Interest Deduction: This tax benefit is income limited. All of the benefit goes to taxpayers earning 

less than $200,000. 

Source: Joint Committee on Taxation Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014, 

December 15th, 2010, http://www.ict.gov/publications.html?func=startdown&id=37l8. 
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July 14,2011 

Fact Sheet: What Are the Top 10 Largest Tax Expenditures? 

Tax expenditures are incentives that were intentionally included in the tax code by Congress to realize certain policy 

goals. They are neither spending nor "loopholes" for millionaires, yachts or corporate jets. 

Given their reach and impact on so many middle-class families, reducing them as a means of accomplishing 

fundamental tax reform shows the challenge ahead. Achieving a significant tax overhaul requires a basic 

understanding of what tax expenditures are in order to have a fair and constructive debate to make the tax code more 

efficient and less burdensome. 

So, what are the top 10 largest tax expenditures? 

(NOTE - these are not only the largest tax expenditures, but they also benefit individuals.) 

1. Exclusion for Employer-Provided Health Insurance. 

Representing 13 percent of tax expenditures, it's the single largest tax expenditure. To do away with this would 

threaten access to health care for families and individuals that have health insurance through their employers. 

2. Home Mortgage Interest Deduction. 

Having helped millions of Americans achieve home ownership, this expenditure accounts for 9 percent of all tax 

expenditures. 

3. Preferential Rates for Dividends & Capital Gains. 

Take away this tax expenditure which accounts for 8 percent of tax expenditures, and the rate on dividends will 

almost triple in less than 18 months, and the rate on capital gains will go up 59%, also in Jess than 18 months. This 

will discourage investment in stocks and bonds. 

4. Exclusion of Medicare Benefits. 

Accounting for 7 percent of tax expenditures, its elimination would increase taxes seniors' Medicare benefits. 

5. Pre-Tax Treatment of Defined Benefit Pension Plan Contributions. 

This is a tax benefit that reduces the cost for those workers who save for retirement. It represents 6 percent of tax 

expenditures. 

6. Earned Income Tax Credit. 

Designed for low-income people, the Earned Income Tax Credit accounts for five percent of all tax expenditures. 

7. Deduction for State and Local Taxes. 

This deduction would hit high-tax states hardest, driving up the marginal rate of taxpayers who take this deduction 

by as much as 35 percent. It represents 5 percent of all tax expenditures. 

8. Pre-Tax Treatment for Contributions to a 401(k). 

At four percent of tax expenditures, this is a significant incentive to families and individuals to save for retirement. 

9. Exclusion of Capital Gains at Death. 

If this one goes, death would be taxed twice. First, the decedent's estate might get hit with the death tax. Then the 

decedent's heirs would be subject to tax again on the gain embedded in any inherited asset, should they decide to 

sell it. This accounts for four percent of tax expenditures. 

10. Deductions for Charitable Contributions. 

This is the tax benefit for donations to charities other than education and health care institutions, including donations 

to religious institutions. This charitable deduction represents four percent of tax expenditures. 

Source: Joint Committee on Taxation, "Estimates Of Federal Tax Expenditures For Fiscal Years 2010-2014," 

December 21, 20 I 0, http://www.jct.gov/publications.html?func-startdown&id-3717. 
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July 12,2011 

Debunking the Mytbs of So-Called Tax Expenditures 

Some in Washington have claimed that eliminating tax expenditures is the same as getting rid of wasteful spending 

or closing unwanted loopholes. The reality is somewhat different. Middle-class families would hardly agree that 

incentives to save for college and retirement or to buy a home are loopholes. Here's a closer look at the myths of 

tax expenditures: 

MYTH: Tax Expenditures Are Spending. 

FACT: The federal government cannot spend money that it never touched and never possessed. Tax expenditures 

let taxpayers keep more of their own money. And only by the public consent is the government permitted to take 

some of it in taxation to pay for certain public goods. When tax hike proponents say we are giving businesses and 

individuals all this money in tax expenditures, they are incorrectly assuming that the government has that money to 

give in the first place, when in fact it does not. To the contrary, the government never touches the money that a 

taxpayer keeps due to benefitting from a tax expenditure, whereas with spending, the government actually collects 

money from taxpayers and then spends it. 

Another difference between tax expenditures and spending is that reducing or eliminating a tax expenditure without 

an offsetting tax cut to reach a revenue neutral level will cause the size of the federal government to grow, while 

reducing or eliminating spending causes the size ofthe federal government to shrink. 

MYTH: Tax Expenditures are Loopholes. 

FACT: This is deliberately inaccurate. A loophole is something that Congress did not intend and would generally 

shut down, at least going forward, once it learned oflhe loophole. Tax expenditures, by contrast, were generally 

placed by Congress into the tax code deliberately. For example, the largest tax expenditure is the exclusion for 

employer-provided health insurance and benefits. The second-largest: the home mortgage interest deduction. 

Whether you agree with a particular tax expenditure or not, an honest debate requires recognition that tax 

expenditures were designed by Congress with economic or social goals in mind and are not inadvertent loopholes. 
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July 11,2011 

Hatch: Raising Taxes By Cutting Tax Expenditures For Deficit Reduction is "Dog That Won't Hunt" 

WASHINGTON - In a speech on the Senate floor today, U.S. Senator Orrin Hatch (R-Utah), Ranking Member of 

the Senate Finance Committee (R-Utah), slammed the Obama Administration's decision to raise taxes by cutting tax 

expenditures to achieve deficit reduction, will be a "bull's eye on the backs of middle class American families." This 

speech is the third in a series Hatch has delivered on so-called tax expenditures. 

Following are excerpts from Hatch's speech: 

On Why Tax Hikes "On the Rich" Won't Restore Fiscal Order: 

"Tax increases on the wealthy will not get our nation to fiscal balance. Even if we let the Bush tax breaks expire for 

the top income bracket, the total amount raised over ten years would be $615 billion. Yet our deficit this year alone 

is $1.5 trillion. And this is why the issue of tax expenditures is critical. Democrats talk about tax expenditures as 

though they are the holy grail of deficit reduction. Just close these loopholes, and happy days are here again. I am 

not going to let them get away with this. Cutting back tax expenditures is a convenient way for Democrats to tax 

middle class taxpaying families and small businesses without having to say they are raising their tax rates." 

On tbe "Lion's Share of Tax Expenditures": 

"The lion's share of tax expenditures go to that part of the middle class that is already shouldering much of the 

nation's tax burden. Most tax expenditures are either income limited or of limited value to wealthy taxpayers. 

Likewise, low income families don't pay income tax. They receive tax expenditures that are designed for the nontaxpaying population. So, who is left? The answer is the taxpayers who are not rich by the President's definition. 

The answer is middle class families." 

On Current Deficit Reduction Negotiations: 

"Contrary to the President's vague assertions, the left wing hase that he is depending on for his reelection, refuses to 

any meaningful structural reforms to the spending programs that are hankrupting the country. That means that the 

only serious deficit reduction option available to Democrats is massive tax increases on the middle class. Democrats 

won't acknowledge the inevitable tax increases that their agenda assnmes, and Repuhlicans won't give the President 

any cover in this drive to 'spread the wealth around.' That is what is holding up this process." 

On Why Cut Backs in Tax Expenditures Will Not Achieve Real Deficit Reduction: 

"Instead, he [president Obama] and his party sit around and spread the myth that simply getting rid of tax 

expenditures and loopholes will fix our problem. We have two reasons to worry about that wrong-headed 

approach. One, to the extent deficit reduction energies are diverted to cutting back tax expenditures, pressure is 

taken off the root cause of the deficit and debt problem. That is, pressure that should be brought to bear on out-ofcontrol spending programs, is released. Two, the productive sectors of the economy - workers, small business 

owners, and investors - are burdened with yet more in federal taxes. For many reasons, cutbacks in tax expenditures 

are a deficit reduction dog that won '1 hunt." 
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Economic Implications of the Budget and Economic Outlook: 

Fiscal Years 2013 to 2023 

Testimony presented to the 

U.S. Senate 

Committee on Finance 

Douglas Holtz-Eakin, President' 

American Action Forum 

February 26,2013 

'The views expressed here are my own and do not represent the position of the 

American Action Forum. I thank Gordon Gray for tremendous assistance in 

preparing this testimony. 
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Introduction 

Chairman Baucus, Ranking Member Hatch and members of the Committee, I am 

pleased to have the opportunity to appear today. In this testimony, I wish to make 

three basic points: 

• The level and projected growth offederal debt is a drag on current U.S. 

economic growth and a threat to future prosperity, 

• The scale of debt reduction required dwarfs the impending sequester and 

associated discretionary caps in the Budget Control Act, and 

• A superior strategy for debt control and economic growth is to pair 

entitlement reform with pro-growth tax reform. 

I will pursue each in additional detail. 

The Economic Consequences of Federal Debt 

Earlier this month, the Congressional Budget Office (CBO) released its Budget and 

Economic Outlook for 2013-2023. This release is particularly significant in light of 

recent events. 

For the first time in over ten years, the current-law baseline offers a fairly 

reasonable projection of the nation's current budget policy over the next decade. 

With the enactment of the so-called "fiscal cliff" tax deal, current tax law is relatively 

stable - that is, largely free of scheduled expirations that are regularly overturned. 

On the spending side, the discretionary caps under the Budget Control Act of 2011 

(BCA) give a realistic pathway for annual appropriations. Mandatory spending is, of 

course, guided by current law with the overall result that current law provides a 

good depiction of current budgetary intent over the next decade. 

One would hope that outlook would reveal that existing deficit reduction measures 

(the BCA and the tax increases embedded in the American Taxpayer Relief Act 

(ATRA)) have improved the federal government's finances. Unfortunately, CBO's 

baseline confirms that the nation, despite claims to the contrary, remains on a 

damaging debt pathway. 

The Debt Trajectory (2013-2035) 

Under current law debt held by the public - measured as a fraction of Gross 

Domestic Product (GDP) - will temporarily shrink during the ten-year budget 

window. Some will suggest that the absence of immediate and additional severe 

debt accumulation in the near-term provides the nation the freedom to forgo 

meaningful debt reduction. This ignores the fact that the debt outlook is but a 
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temporary reprieve, as the debt burden begins to rise toward the end of the budget 

window. A conservative medium-term projection reveals that the debt held by the 

public will continue to spiral upward and reach 105 percent ofGDP by 2035 (see 

Figure 1).1 

Figure 1: 

Debt Trajectory 

120% 

Q. 

g 100% 

15 

<II 

"" fl fl 80% 

~ Q. 

~ '" :il '" 60% 

" Q. 

<II 

75 

>-

.a 

:!! 

<II 

:x: 

~ 

40% 

.g 20% 

Cl 

0% 

2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 

Federal Debt is a Drag on the Economy 

It is often asserted that the economic downside to excessive federal debt is a distant 

threat; indeed. that it is even more economically damaging to address the debt 

explosion than to accommodate it. This reasoning is 180 degrees from reality. as the 

U.S. is already paying an economic price for the excessive federal debt. 

Research of Carmen Reinhart and Kenneth Rogoff - based on a careful empirical 

analysis of 44 countries over the past two centuries - indicates that when gross 

government debt (as a percent of GDP) exceeds 90 percent, median growth is 

roughly 1 percentage point lower annually than for comparable countries with 

lower debt burdens. 2 
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Gross federal debt already exceeds 100 percent of U.S. GDP, and under current law 

gross debt will remain above 90 percent over the entire 2013-2023 period.3 

Applying the research rule of thumb indicates that the u.s. is right now paying a 

persistent growth penalty of 1 percentage point per year (see Figure 2). 

Accordingly, debt reduction is no mere arithmetic exercise - it is an economic 

imperative. Continued high levels of indebtedness will slow annual economic 

growth, and therefore slow job creation and wage growth. 

Figure 2: 

High Debts Penalize Growth 

110% 

105% 

~ 100% 

!!> 

-0 95% OJ 

.. 

J:l 90% " " t: 

" C\, 85% .. 

:g 80% 15 

0 '" 75% ~ 

2 

!!> 70% 

65% 

60% 

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 

15% 

13% 

Gl 

11% '5 

Gl 

0 

9% ~ ::r 

':;; 

~ 

7% 2 

;:; 

So 

Gl 

5% <:> 

3 

3% 

1% 

-~ Baseline Growth - with Growth Penalty -<;ross Debt Reinhart-Rogoff Threshold 

The administration has estimated that one percentage point in growth translates 

into approximately 1 million jobs created.4 Accordingly, over the period in the CBO 

baseline, a persistent 1 percentage point growth penalty should translate into an 

annual penalty of 1 million jobs forgone - or 11 million jobs over 2013-2023 (see 

Figure 3). 

3 Gross federal debt is larger than the debt in the hands of the public. I focus on it in what follows to permit comparisons with 

the published research. 

4 http://wwwpolitico.com/pdffPPM116 obamadoc.pdf 
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87610.129

Figure 3: 

High Debts Penalize Jobs 

110% 

105% 

25 100% 

Cl 

'0 95% <II 

~ "" 

c 90% 

~ 

'" CI. 85% 

'" '" .. 80% .0 

<II 

0 75% '" e '" 

Cl 70% 

65% 

60% 

I million jobs are 

lost each year due 

to high debts 

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 

10 

9 

8 

1 

o 

- Baseline Employment -with Jobs Penalty -Gross Debt Reinhart-Rogoff Threshold 

Slower job creation is only one metric of the price the U.S. is paying for not 

addressing the federal debt load. Over 2013-2023, CBO estimates growth of wages 

and salaries to average about 5 percent. Median household income was $50,054 in 

2011.5 Under CBO's projections, this should exceed $86,000 by 2023. Assuming a 

growth penalty of 1 percent, however, indicates that this income growth would be 

penalized by as much as $9,390 by 2035 under current law (see Figure 4). 

The Mechanisms a/Slower Growth 

One question that arises is the mechanism by which the deleterious growth effects 

occur. This is far from mysterious. In the worse case, a nation might be unwilling to 

undertake the tax and spending changes needed to stabilize its debt. A conscious 

strategy to sail straight toward a financial crisis would alarm small firms, large 

firms, and investors alike. Their unwillingness to hire, expand, and start new firms 

would immediately hamper growth. 

Alternatively, the strategy might be dominated by an unwillingness to control 

spending and instead a commitment to dramatic tax increases as the means of 
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reducing deficits and debt. The deleterious growth effects of anticipated sharply 

lower returns to work, saving and investment will become immediately apparent. 

These estimated penalties to growth, employment, and income penalties from high 

debt include the budgetary impacts of higher tax rates, lower discretionary 

spending, and the sequester enacted in recent years. The obvious conclusion is that 

additional deficit reduction is needed to avoid debt-driven economic stagnation. 

There exist, however, important disagreements over just how much further deficit 

and debt reduction should be pursued. 

Figure 4: 

High Debts Penalize Incomes 

110% 

105% 

0.. 100% o 

\!) 

'0 95% <II 

$250,000 

$200,000 

3: 

J:l "" 

c: 90% $150,000 !\, 

~ 

'" 0.. 85% 

'" ~ 

Income of the average 

worker will decrease 

.. 

:> 

:; 

~ '" ~ 80% .0 

'" 

$9,390 by 2035 under 

current law 

$100,000 !.. 

~ 

0 75% ~ 

2 

\!) 70% $50,000 

65% 

60% $0 

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 

- Baseline Income -with Income Penalty -Gross Oebt Reinhart-Rogoff Threshold 

Targets for Debt Reduction 

What is the right target for debt reduction? Many recent discussions on additional 

debt reduction have focused on "stabilizing" the debt as a share of GDP. That would 

be a sensible goal if it is stabilized at a level that is manageable and does not pose 

risks to the economy. Unfortunately, as noted above, the debt is currently above 

those levels. Stabilizing at or near the current levels of debt is a commitment to a 

future of slower growth and impending financial crisis. 

A more sensible would be to reduce the debt to below the empirically observed 

threshold of 90 percent of gross debt as a share of GDP, thereby reducing the risk of 
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financial crisis and stagnant growth. For example, choosing a gross debt-to-GOP 

ratio of 85 percent would require approximately $4 trillion in additional deficit 

reduction over ten years (see figure 5). 

Figure 5 

Debt Comparisons 

110% 

105% 

100% 

is 

~ 95% 

t 

!::! 90% 

ijj 

l< 

~ 85% 

'" '" i 80% 

i!j 

:Ii 75% 

e 

<.!l 

70% 

65% 

60% 

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 

- Reinhart-RogoffThreshold _$4 Trillion Reduction """"'''$1.5 Trillion Reduction 

In addition to maintaining the current anti-growth effects of high debt, any plan to 

merely stabilize the debt within ten years would contribute to a failure to restrain 

debt accumulation over the medium and long-term. The stability promised by a 

more modest ($1.5 trillion in 10 years) deficit reduction plan would persist for only 

a single year beyond the ten-year budget window. Thereafter, the debt would grow 

as a share of the economy to 87 percent by 2035 (see Figure 6). 

This is significant from a risk-management perspective. The longer that debt is 

preserved at high levels, the longer the risk remains that the United States would be 

vulnerable to a fiscal crisis. 

Risk Management Issues and Debt Projections 

The economic projections underlying the CBO baseline assume real GOP growth of 

2.7 percent and 10-year interest rates of 4.4 percent over the next ten years. Plans 

to stabilize the debt-to-GOP using this projection are vulnerable to downside risks 
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that would worsen the nation's debt outlook, and contribute to the well-understood 

mechanics of a fiscal spira\. 

Slower growth or higher interest payments would be followed by higher debt, 

slower-yet growth, higher-yet interest rates and so on. Moreover, preserving debt 

held by the public at above 70 percent of GDP (or 100 percent in gross terms) leaves 

no cushion to absorb other adverse geopolitical or natural events. It assumes on can 

take comfort in the razor-thin margins embedded in necessarily- inexact 

projections. 

Figure 6 

"Stability" is Merely Temporary 

120% 

c.. 

g 100% 

'0 

<U 

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~ 80% 

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40% 

Z 20% 

~ 

0% 

2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 

_aseline Debt -'Stabilized" Trajectory 

Importantly, even a "stable" deficit reduction plan for the next 10 years does not 

contain the growth of the debt beyond the ten-year window. 

Sequestration: A bad idea whose time has come 

Of lesser consequence than the broader fiscal outlook, but perhaps greater 

immediacy, is the pending sequester. The automatic enforcement mechanism of the 

failed "Super-Committee's" goal $1.2 trillion in deficit reduction is an admittedly 

blunt budgetary policy that is a poor substitute for meaningful reform, but is 

preferable to no spending reduction at all. 
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First, there is a need to demonstrate that spending will actually be controlled. CBO 

estimated that the discretionary spending caps in the BCA would reduce spending 

by $756 billion over ten years, exclusive of debt service.6 However, these are 

promised benefits - they contain no programmatic changes that would guarantee 

lasting deficit reduction. Will these really occur? 

Indeed, this past year has already seen Congress and the Executive branch willing to 

exceed the statutory caps for security spending, and supplement expenditures for 

Hurricane Sandy will increase budget authority by over $50 billion in FY 2013.7 This 

increase nearly matches the entirety of the funding reduction of $62 billion in 

FY2013 attributable to the discretionary caps imposed by the BCA, as estimated by 

CBO. I point this out only to emphasize that promised deficit reduction in the 

absence of programmatic change is ephemeral. CBO has echoed this sentiment, 

noting that "holding discretionary spending within the limits required under 

current law might be difficult ... the original caps on discretionary budget authority 

established by that legislation would reduce such spending to an unusually small 

amount relative to the size of the economy." 

Sequestration will reduce the deficit modestly this year. Going forward, the 

mechanics of this automatic enforcement mechanism - essentially tighter 

discretionary caps married to a mandatory sequester - may only worsen the 

challenge of maintaining the discretionary caps. However, in the near term, the 

sequester will reduce outlays by $44 billion this year. 

A second issue is the impact on government services. These impacts are real and we 

are beginning to hear about potential service disruption. To the extent practicable, 

agencies should be allowed to mitigate service disruption through prioritization, but 

some diminution of federal services should be expected. The potential disruption to 

federal agencies is not insignificant, but also not insurmountable. 

The final issue is the impact on economic growth. Obviously, I believe it is 

imperative to control the debt and that this will have beneficial impacts. At the 

same time, the near-term impacts of the sequester are far less consequential than 

many have portrayed. The sequester is an $85 billion (roughly $44 billion in actual 

outlays) cut in a $3.6 trillion annual budget in a $16 trillion economy. That is a slice 

representing one half of one percent of the pie. Economic calamity will not ensue. 

The economy is growing at about $630 billion per year. For the sequester to wipe 

out economic growth - as some rhetoric suggests - it would have to create roughly 7 

times its size in economic impact, which far exceeds any realistic estimate of the size 

of economic multipliers. 

6 bttp' Ilwwwcho Wy/siteS /defuultlfiles/cbQfiles/ftpdQcsI123x" Idoc12357/budgetcQntrolactaugl pdf 

7 http'llwwwcbo gov /sjtes/defaultlfiles/cbofiles/attachments/SummarvDRAppropAct2013 ~HRl 52-Passed House pdf 
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Thus, a more realistic estimate predicts more modest near-term effects. I don't 

dispute that, all else being equal, a reduction in federal expenditures now will not 

have some impact in the economy. Rather, it is important to recognize the need for 

some near term reduction in current spending to the benefit of future economic 

growth that is risked by higher debt. 

Better Strategies for Debt and Growth 

As noted above, the nation faces a significant debt challenge, and existing measures 

to address it, though necessary, are inadequate. Removing the sequester would 

avoid some near-term discomfort, but the fiscal challenge confronting the United 

States is daunting and failure to address it in a credible way would likely generate 

negative economic effects. The CBO noted "eliminating or reducing the fiscal 

restraint scheduled to occur next year without imposing comparable restraint in 

future years would reduce output and income in the longer run relative to what 

would occur if the scheduled fiscal restraint remained in place." It is therefore 

necessary to pair any mitigation of near-term fiscal tightening with meaningful 

budget restraint in future years. 

The essence of a better strategy is to pair the entitlement reform with tax reform, 

thereby controlling the underlying source of debt explosion and supporting the 

most rapid pace of economic growth possible. As an example, the American Action 

Forum has formulated Balanced, a plan to navigate these duel challenges. Balanced 

reflects the principle that the United States is served best by a contained, efficient 

government focused on core national security and domestic activities, including a 

durable social safety net. It is guided by the lesson of history that the best approach 

to simultaneous poor growth and explosive debt is to keep taxes low, reform taxes 

to be more pro-growth, preserve core functions of government, and focus on 

transfer programs - entitlement programs in the United States - as the route to 

controlling debt. 

Balanced includes several key priorities that reflect the right balance of near-term 

growth considerations and longer term debt challenges. 

Fundamental Tax Reform 

While the "fiscal cliff' tax deal established some degree of permanence to the tax 

code, it did little to otherwise improve it. Rather, it locked in higher rates and a 

narrower base than is optimal. Looking past the current tax code, there is wide 

agreement that the U.S. corporate tax is an international outlier and in need of 

reform. The end-of-year tax agreement left this outlier untouched. 

Balanced incorporates a fundamental tax reform that would move the U.S. to a 

progressive consumed-income tax code. This plan would be pro-growth and not 

penalize savings and investment. Research suggests that implementing a 
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progressive consumed-income tax consistent with AAF's tax plan would improve 

long-run economic growth by over 6 percent.s 

Reprioritize the Sequester in Favor of Entitlement Reform 

The sequester has been Widely acknowledged as poor policy - a failed "stick" to 

induce more substantive reforms that the "Super-Committee" ultimately failed to 

deliver. Balanced would reprioritize sequestration with more lasting, mandatory 

savings through programmatic reforms. 

Balanced takes on the budgetary challenge by reforming the projected growth in 

mandatory spending programs, specifically health and retirement entitlements. 

Accordingly, major reforms focus on these areas ofthe federal budget. Future social 

security benefits are reformed to reflect price, rather than wage growth, while a 

premium support model is phased into Medicare for future retirees. Medicaid is 

reformed to reflect cost efficiencies achievable through competitive bidding. 

Balanced includes additional reforms to other major areas of spending. The plan 

keeps discretionary spending slightly above current law. However, the plan includes 

a repeal of the overreaching and broken Affordable Care Act. 

Taken together, these changes would set forth a credible and gradual improvement 

in the U.S. fiscal position. The American Action Forum plan achieves balance in 

2031, with debt to GDP of 60.2. Over the long term, the AAF plan pays down the 

debt by 48 percent going from 77.6 percent ofGDP at the end of FY2013 to 40.1 by 

2037. These are far better budgetary outcomes than those contemplated in either 

current law or modest deficit reduction plans, but through the right policy choices -

fundamental tax reform paired with entitlement reform - are eminently achievable 

and would leave future generations with a higher standard of living, rather than a 

legacy of debt and poor economic growth. 

Obviously, I have a preference for the proposals developed at AAF. However, more 

important than the particulars are a strategy that shifts the focus of spending 

control to the needed entitlement reforms and shifts the debate on taxes away from 

harmful higher marginal tax rates in favor of pro-growth tax reform. 

Thank you for the opportunity to appear today. I look forward to answering your 

questions. 

• David Attig. Alan J. Auerbach, Laurence J. Kotlikoff, Kent A Smetters, and Ian Walliser, "Simulating Fundamental 

Tax Reform in the United States; American Economic Review, 91(3), June 2001, pp. 574-595. 
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Questions for the Record 

"The Budget and Economic Outlook: Fiscal Years 2013 to 2023" 

Questions for Dr. Douglas Holtz-Eakin 

Hearing Date: February 26, 2013 

Questions from Senator Ron Wyden 

1) As you are undoubtedly aware, almost 27 years ago, when President Reagan and 

Congressional Democrats enacted Tax Reform, it was a big boost to the economy. More than 

six million new jobs were created in just the two years after the 1986 reform - something 

that's urgently needed today. I don't claim that everyone of those jobs was the direct result 

of tax reform but it certainly helped. 

Since that time, especially in recent years, there have been dozens of calls from members of 

Congress, Administrations, outside task forces and commissions, and economists of every 

stripe for comprehensive tax reform. In the same vein, the Obama Administration has 

acknowledged the need for comprehensive reform with the release of two reports-{)ne in 

August 2010 and one just less than a year ago. And, in his inaugural address last month, the 

President made clear the need to "revamp our tax code." 

However, despite such repeated caJls for comprehensive reform, the reality appears more like 

lip service than commitment. Our current system is terribly inefficient, hopelessly complex 

and not by any measure the kind of pro-growth policy our country needs. 

Since 200 I, Congress has passed almost 140 laws amending the tax code in one way or the 

other, and with each such adjustment, the revenue regime the country now has becomes even 

more byzantine, counterproductive and uneconomical. It has now gotten to the point that 

almost as much, if not more, money is spent through the tax code as it brings in, so it's 

getting harder and harder even to call it a revenue code at all. 

Individuals and businesses need confidence and certainty, and irregular short-term extensions 

of major parts ofthe tax code offer neither. 

In Dr. Greenstein's testimony, he notes that deficit reduction can be achieved through 

reductions both in spending in the tax code and in spending on the outlay side of the budget, 

and he cites the esteemed Martin Feldstein in support of this proposition. 

In the Wall Street Journal last week, Dr. Feldstein wrote: "Republicans want to reduce the 

deficit by cutting government spending while Democrats insist that raising revenue must be 

part of the solution. Yet the distinction between spending cuts and revenue increases breaks 

down if one considers tax expenditures. Here are some examples. IfI buy a solar panel for 

my house, a hybrid car, or an energy-efficient refrigerator, the government pays me. But 

instead of sending me a check, it gives me a tax credit or a tax deduction. There are dozens of 

such examples that increase the annual budget deficit by billions of dollars. Congress should 

review these tax expenditures and eliminate those that the country cannot afford." 
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Feldstein has also written that "tax expenditures are the single largest source of wasteful and 

low-priority spending in the federal budget and one of the first places policymakers should 

go to restrain spending." 

Dr. Elmendorf, in testimony before the House Budget Committee, made a similar point when 

he stated that tax expenditures "are really best viewed as a form of government spending 

because they are directed at particular people or entities or designed to subsidize particular 

activities," almost precisely analogous to other government spending. 

Alan Greenspan has suggested that tax expenditures represent just as great a threat to a 

sustainable budget path as any other spending, including entitlements. 

a. With that background, what, in your respective views, are some of the least economically 

efficient and/or justifiable tax expenditures? What economic effects-positive or 

negative-would you expect from their repeal? How would each of you propose we 

maximize any positive or mitigate any negative effects? 

The fundamental problem facing the United States is poor growth. Since growth 

ultimately derives from decisions to forego current consumption in favor of investments 

in capital, skills, and technologies, tax policy can support better growth by not 

discriminating against investment, or by not subsidizing consumption. Tax expenditures 

should be evaluated from this perspective. Those that subsidize consumption (e.g., the 

tax exclusion for employers sponsored health insurance) should be pared back. 

b. In a similar vein, there is a great debate among Republicans and Democrats as to what we 

should do with any additional revenue generated by rolling back or reducing tax 

expenditures, also commonly referred to as closing loopholes. On the one hand, some 

would have us use any additional revenue to buy down marginal tax rates, while, on the 

other, some would have us use any resulting revenue for deficit reduction and/or other 

investments. Weighing in on that debate, Martin Sullivan, a widely read commentator on 

tax policy, has suggested that perhaps the best solution would be to devote half of any 

resulting revenue to reducing rates and halfto reducing the deficit. Do you feel that 

Sullivan has the ratio about right? Or would you suggest a different allocation of any 

resulting revenue and why? 

The greatest tax reform need is to lower the US. corporation income tax rate to an 

internationally-competitive level; say, 25 percent. Good tax policy requires that 

businesses be taxed the same, regardless of their legal form. In practice, that means that 

the pass-through entities taxed under the individual income tax shouldface a 25 percent 

rate as well. To the extent that base-broadening meets this objective and still generates 

additional revenue, that revenue should be devoted to deficit reduction. 

2) In his State ofthe Union, the President discussed the need for investment in transportation 

and infrastructure. That means roads, bridges, rail, ports, and inland waterways. You 

simply cannot have a big league economy with a little league transportation system. In the 

Senate, there is widespread consensus that highways, roads, transit systems, and bridges must 
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be fortified. Furthermore, transportation projects put people to work, which the construction 

industry and the country need. 

But the big challenge, in my view - the outstanding issue - is how America will pay for 

improving our transportation system, especially given the budget outlook. Fortunately, there 

is a proven way to generate tens of billions of dollars of additional funds for transportation on 

top of what is raised by the gas tax. The idea is based on Build America Bonds, which for 

years had widespread bipartisan support and were tremendously successful. 

My proposal would be to authorize Transportation Regional Infrastructure Project bonds, or 

"TRIP bonds", which I first proposed in legislation last Congress. Under the legislation, 

TRIP bonds would provide up to $1 billion in tax credit bonds for each state to use for 

transportation and infrastructure projects of the state's choosing. 

In a time when we are trying to get our fiscal house in order, "TRIP bonds" use federal tax 

credit bonding to leverage private dollars for investment in infrastructure. This decreases the 

federal government's share of the cost, while still investing in critical infrastructure that's the 

gateway to the United States' big league economy. 

Soon, I will reintroduce the TRIP legislation, and I hope it garners the same bipartisan 

support it did last Congress. It's my hope that we can use TRIPs to grow our national 

investment in transportation and infrastructure in a fiscally responsible and economically 

efficient manner. 

Inadequate revenues in the Highway Trust Fund have denied state transportation departments 

the long-term stability to carry out much-needed investments in critical infrastructure 

projects. Given the difficulty of finding new revenues and the need to get our fiscal house in 

order, do you think there's a strong case to be made for federal tax-credit bonding for 

transportation and infrastructure projects as an alternative to direct spending? Can each of 

you provide your thoughts on the relative economic merits ofthis approach to infrastructure 

financing in a time of scarce budget resources? 

I have supported TRIP bonds - implemented in a deficit-neutral fashion -- as a means of 

financing the U.S. infrastructure needs. See httv:/lamericanacliontorum.org/topicltripbonds-and-national-in{i-astructure-needs . 
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From Senator Robert Menendez 

1) As you already know, the Ryan budget sought to cut all discretionary spending as a share of 

the total economy to 3.5 percent ofGDP, while somehow still protecting defense spending. 

Assuming defense spending remains level in real terms, budget experts have estimated that 

under the Republican budget most of the rest of the federal government outside of health 

care, Social Security, and defense would cease to exist. 

If you compare the cuts to the non-defense side of discretionary spending from sequestration 

to the cuts that would be necessary for the Ryan budget to work, is sequestration that much 

harsher? Would the real world impact on air travel, our schools, food inspection and any 

number of other important services face any more serious deterioration over the long-term 

from sequestration than they would if the Ryan budget actually became law? 

Both sequestration and the House budget resolution overly rely on disciplined non-defonse 

discretionary spending to meet budget targets over the next decade. An important difference 

is that any budget approach provides flexibility that is not available in the across the board 

cuts sequestration uses in 2013 and 2014. < 

2) The Congressional Budget Office wrote in their latest report on the budget and economic 

outlook: "Persistent long-term unemployment will lead some workers to leave the workforce 

earlier than they would have otherwise and will erode the skills of other workers, making it 

harder for them to find work in the coming years." Compounding this problem is evidence 

which shows many employers discriminating against the long-term unemployed, 

perpetuating a vicious cycle. The longer a worker is unemployed the less attractive they are 

as a job candidate and the longer they remain unemployed. 

How difficult do you believe the crisis of long-term unemployment is today and what, in 

your view, are some of the most effective steps we can take to tackle the problem? 

I believe that this is a significant problem that merits a strategic response. At the 

macroeconomic level, better policies (tax reform, entitlement reform, immigration reform) 

that raise the trend rate of economic growth in the u.s. are essential. For too many years, 

the focus has been on discretionary "stimulus" approaches that neither suit the problem 

(poor sustained growth) nor have a track record of success. At the microeconomic level, it is 

time for the federal government to consolidate the disparate training programs strewn across 

agencies into a single, effective lifelong learning program for adult workers. 

3) In my view, expanding opportunities for workers to advance their skills and their value is a 

critical one when we're thinking about how to help shore up the economic fortunes of the 

middle class. Estimates show the economy is going to be short 5 million trained workers by 

2018. Every state in the country is confronted with this shortage and in my opinion, we 

shouldn't shy away from any opportunity to address the issue. 

Do you agree that there is an increasing challenge for America to produce more skilled 

workers and do you believe there should be a federal role in meeting that challenge? If so, 
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what do you believe would be some of the most effective policy measures Congress should 

consider? 

America's global competitive success and the concerns over a Widening income distribution 

can only be addressed through better education policies. In general, the U.S. education 

sector is characterized by an absence of competition and open-endedfederal subsidies, a 

combination that has produced a "product" of uneven quality and high cost. K-I2 education 

should focus on enhancing choice and accountability in every feasihle W4Y - magnet, 

charter, and other schools. Higher education reform should begin with targetingfederal 

subsidies (Pell grants and student loans) more effectively. 
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Comments for the Record 

to the 

United States Senate 

Committee on Finance 

The Bndget and Economie Ontlook: Fiscal Years 2013 to 2023 

Tuesday, February 26, 2013,10:00 AM 

By Michael G. Bindner 

Center for Fiscal Equity 

4 Canterbury Square, Unit 302 

Alexandria, VA 22304 

fiscalequity@verizon.net 

571-334-8771 

Chainnan Baucus and Minority Leader Hatch, thank you for the opportunity to provide 

comments for the record on this topic. As always, we are available to more fully brief members 

and staff regarding our comments or to answer any questions. 

We expect that Dr. Elmendorf will bring you his best assumptions. as is his duty as Director of 

the CBO. Meanwhile, Dr. Holtz-Eaken will likely continue to call for the need to cut 

entitlements while Mr. Greenstein will defend them. 

At the Center for Fiscal Equity, we continue to offer a fresh approach that will help control 

spending, improve the perfonnance of entitlement programs and lead to the paying down, if not 

paying off, of the national debt. In today's comments, we will highlight how our four part plan 

of reform accomplishes this - especially if taken to its fullest extent. Our plan is as follows: 

A Value Added Tax (V A T) to fund domestic military spending and domestic discrctionary 

spending with a rate between 10% and 13%, which makes sure very American pays something. 

A VAT-like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT with 

additional tax expenditures for family support, health care and the private delivery of 

governmental services, to fund entitlement spending and replace income tax filing for most 

people (including people who file without paying), the corporate income tax, business tax filing 

through individual income taxes and the employer contribution to OASI, all payroll taxes for 

hospital insurance, disability insurance, unemployment insurance and survivors under age 60. 

Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income cap, 

which allows for lower payment levels to wealthier retirees without making bend points more 

progressive. The floor of contributions could also occur where the Earned Income Tax Credit 

occurs now, because employer contributions will be funded equally (regardless ofindividual 

wage). 

Personal income surtaxes on joint and widowed filers with net annual incomes of $1 00,000 and 

single filers earning $50,000 per year to fund net interest payments, debt retiremen~ regional 

deficits and overseas and strategic military spending and other international spending, with 

graduated rates between 5% and 25% in either 5% or 10% increments. Heirs would also pay 

taxes on distributions from estates, but not the assets themselves, with distributions from sales to 

a qualified ESOP continuing to be exempt. 
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Using these tools, we can gain control over our budgetary and economic policy, rather than have 

it happen too us as the CBO projections seem to indicate. 

The debate for many years now centers on discretionary spending. Indeed, the current sequester 

takes place solely in that sphere because it is most controllable. Both parties hold on to the 

dream that the budget could be controlled i[wasteful pork-barrel spending were limited. At the 

Center, we agree, although providing such control would require a constitutional amendment, as 

a Value Added Tax qualifies as excise taxes for constitutional purposes. Our proposal would be 

to segregate discretionary non-strategic military and civil spending into regional pools and have 

them be fully funded by a regional VAT. If a region wanted more spending, it would raise its tax 

rate. If it wanted less spending, spending cuts would occur. On the occasion that a region is 

facing dire economic circumstances and fiscal policy appears to be the answer, it would be 

allowed to run a deficit - but only then. This puts the power to determine the size of government 

back in the hands of the people, especially if the VAT is receipt visible. 

Net Business Receipts Taxes (NBRT) are similar to a VAT, except that they allow employer 

offsets for providing social goals. If employer contributions to Social Security were to include 

personal retirement accounts (which should only hold insured employer voting stock rather than 

funds for the Wall Street Casino), they would be an offset to this tax. Otherwise, they would be 

offset from the VAT. This tax would also include offsets for health care funded by the employer 

as well as an enhanced, consolidated and refundable Child Tax Credit, as the Center has 

explained in mulliple comments over the past two years. Ifthe Affordable Care Act collapses 

the private insurance system, however, and no offsets are allowed, then the V AT rather than the 

NBRT would fund any single-payer system. The NBRT could also be regionally set (falling 

under the same constitutional change allowing regional VATs) and could include deficit 

spending to develop regions which face human capital deficits. 

Individual OASI taxes can be reduced, with more of the burden put on employers and consumers 

- who in reality pay the tax anyway, especially if the employer lax is shifted to a consumption 

tax. The goal of such a change would be to reduce or eliminate bend points in the benefit 

system, with progressivity provided on the employer side while allowing employees an incentive 

to demand higher wages to build their retirement savings. The OASI taxes would need no 

adjustment to solve the Social Security funding program, as the easier fix would be to increase 

NBRT obligations instead. Because the NBRT and/or VAT have no income cap, increasing 

these taxes will not hurt American workers or jobs as much as a change to the payroll tax or 

benefit formulas surely would. 

As to the income surtax, we would urge that inheritance tax changes rccently enacted in the 

American Tax Relief Act be modified so that inheriting an asset is not a taxable event, but 

liquidating it becomes one above the same floor as the income tax. We urge you to respect 

equality among the living rather than among the dead. 

The recent eBO report, which will undoubtedly be discussed, shows that the major driver for our 

deficit is the funding of net interest on the debt, especially internationally. The Center 

commented upon this instance to the House Ways and Means Committee on February 14th on 
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