THE FEDERAL BUDGET OUTLOOK: Implications for LowIncome Families

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THE FEDERAL BUDGET OUTLOOKImplications for
Low-Income Families
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I. Background on the Federal Budget and the
Return of Budget Deficits
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FROM LARGE SURPLUSES TO LARGE DEFICITS IN JUST 5
YEARS
Cumulative Surpluses/Deficits, 2002-2011
Note The January 2001 projection is the
Congressional Budget Office baseline from that
time. CBPPs January 2006 projection adds to the
current CBO baseline a number of new likely
costs, such as the extension of the Bush tax
cuts, AMT relief, and funding of the Presidents
budget request for defense. We also adjust the
baseline to reflect a continuation and gradual
phase-down of operations in Iraq and
Afghanistan. At the start of 2001, the federal
government was projected to amass 5.6 trillion
in surpluses over the 2002-2011 period. Due
mainly to over-optimistic revenue projections,
large tax cuts, and increases in defense
spending, the government is now projected to
amass 3.4 trillion in deficits during that
period a negative swing of more than 9
trillion (or more than 900 billion per year).
Center on Budget and Policy Priorities last
revised February 14, 2006.
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LEGISLATION ADDING TO DEFICITSMOSTLY TAX CUTS
AND DEFENSE
Cost in 2005 of legislation enacted since January
2001
Tax Cuts Defense, Homeland Security and
International Entitlements Domestic Discretionary
(except Homeland Security)
48
36
8
8
CBPP calculations from Congressional Budget
Office data. Reflects costs in 2005 above a CBO
January 2001 current services baseline projection
for 2005. May not add to 100 due to
rounding. 70 percent of the deterioration in the
budget in 2005 has resulted from legislation
enacted by Congress and the President. And 85
percent of the cost of that legislation stems
from tax cuts or increases in defense,
international aid, and homeland security not
domestic spending.
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EVEN WITH KATRINA, FEDERAL SPENDING IS BELOW
AVERAGE FOR RECENT DECADES
Outlays with Katrina
Average Outlays as Share of the
Economy 1975-2005 21
Outlay Path without Katrina
Source CBPP Calculations based on Congressional
Budget Office Data
Center on Budget and Policy Priorities last
revised February 14, 2006.
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REVENUES AS SHARE OF THE ECONOMY ARE BELOW THEIR
HISTORICAL AVERAGE
2005 Revenues As Share of the Economy 17.5
Average Revenues As Share of the Economy
1975-2005 18.3
Source CBPP Calculations based on Congressional
Budget Office Data
Center on Budget and Policy Priorities last
revised February 14, 2006.
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Average Value of Tax Cuts, 2006

Source Tax Policy Center
Center on Budget and Policy Priorities last
revised Feb. 14, 2006
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Tax Cuts Cost More Than MostAgency Budgets
2005 Agency Budgets, Tax Cuts if Fully in Effect
in 2005
Source CBPP calculations from Congressional
Budget Office data
Center on Budget and Policy Priorities last
revised February 14, 2006.
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WHAT WOULD IT TAKE TO BALANCE THE BUDGET WHILE
PRESERVING THE TAX CUTS?
To balance the budget by 2016 while making the
tax cuts permanent, policy makers would have to
To balance the budget in the next decade while
extending the tax cuts enacted since 2001 would
require cutting Social Security benefits by
nearly half, cutting Medicare or the Pentagon by
roughly two-thirds, or cutting practically
everything else by nearly one-third.
Center on Budget and Policy Priorities last
revised February 14, 2006.
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UNDER CURRENT POLICY, DEFECITS WOULD GROW DEEPER
IN FUTURE DECADES (Surplus ()/Deficit(-) as a
Percent of GDP)
Source CBPP long-term deficit estimates assuming
continuation of current policy including
extension of the tax cuts and continuation of AMT
relief.
Center on Budget and Policy Priorities last
revised February 14, 2006.
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II. Impact of the 2005 Budget Decisions
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DECISIONS IN 2005 AFFECTING THE BUDGET
Center on Budget and Policy Priorities last
revised February 14, 2006.
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IMPACT OF THE ENTITLEMENT CUTS

• Analysis by the Congressional Budget Office
  indicates the bill would
• Cause many low-income people eligible for
  Medicaid to forgo needed health care because of
  increased co-payments and premiums
• Result in 8 billion in child support going
  uncollected due to cuts in child support
  enforcement
• Shift billions of dollars in welfare reform and
  child care costs to the states
• Raise charges for many student loans

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TOGETHER, TAX AND SPENDING BILLSINCREASE THE
DEFECIT
Budget Reconciliation Spending Cuts and
House-Passed Tax Cuts, 2006-2010

Source CBO and JCT estimates
Center on Budget and Policy Priorities last
revised February 14, 2006.
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• III. The Presidents FY 2007 Budget Proposal

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KEY ELEMENTS OF THE PRESIDENTS BUDGET PROPOSAL

• Large cuts in domestic discretionary programs,
  with cuts growing deeper over time
• Cuts in Medicaid that shift significant costs to
  states
• Elimination of Social Security death benefit
• Makes 2001 and 2003 tax cuts permanent
• Expanded high-income health tax cuts
• New budget rules that make it easier to pass tax
  cuts and force significant spending cuts in the
  future
• Net Effect Increase deficits by 192 billion
  over 5 years, according to OMB documents

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THE PRESIDENTS PROPOSED CUTS IN DOMESTIC
DISCRETIONARY FUNDING GROW DEEPER OVER TIME
Source CBPP calculations based on OMB data
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PROPOSED DOMESTIC DISCRETIONARY FUNDING CUTS
TOTAL 183 BILLION OVER 2007-2011 PERIOD
Cuts measured against baseline funding level
(2006 funding level adjusted for inflation in
future years)
Source CBPP calculations based on OMB data
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THE PRESIDENTS BUDGET CALLS FOR DEEP CUTS TO
BROAD RANGE OF DOMESTIC PROGRAMS
Source CBPP calculations based on OMB data
20
Proposed Cuts in Domestic Discretionary Program
Categories (cuts compared to 2006 funding levels
adjusted only for inflation)
Source CBPP calculations based on OMB data
21
Proposed Funding Cuts, Relative to the Baseline,
for Budget Sub-Categories
Source CBPP calculations based on OMB data
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EXAMPLES OF PROGRAM TERMINATIONS ANDDEEP PROGRAM
CUTS

• TERMINATED The Community Services Block Grant,
  which provides funding for a range of social
  services and other types of assistance to
  low-income families and elderly and disabled
  individuals.
• CUT Section 811 housing for persons with
  disabilities is cut by nearly 50 over the next
  year. This cut eliminates all funding for the
  construction of new affordable housing units for
  those with disabilities.
• CUT Services Block Grant by 500 million from
  1.7 billion in 2006 to 1.2 billion in 2007 a
  30 percent cut below the 2006 funding level
  without adjusting for inflation.

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CUTTING MEDICAID AGAIN

• The budget proposes legislative changes in
  Medicaid that would cut federal Medicaid funding
  by a net of 1.5 billion over five years and 5.1
  billion over ten years.
• In addition, proposed regulatory changes would
  reduce Medicaid costs by an additional 12.2
  billion over five years.
• A substantial majority of these Medicaid changes
  would be achieved by shifting costs to states.
• States could react to cost-shifts by reducing
  Medicaid eligibility or scaling back health
  benefits.
• The recently enacted budget reconciliation bill
  allows states to increase fees and reduce covered
  services for Medicaid beneficiaries.

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PRESIDENTS MEDICAID PROPOSALS FY 2007-11
LEGISLATIVE VS. REGULATORY PROPOSALS
Net federal cuts in billions
Source FY 2007 HHS Budget in Brief
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PRESIDENTS MEDICAID PROPOSALS FY 2007-11
LEGISLATIVE PROPOSALS SHIFT FEDERAL COSTS TO
STATES
Proposals that reduce federal and state costs
2.0 billion
Proposals that shift costs to states 2.9
billion
Source CBPP analysis of FY 2007 HHS Budget in
Brief
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PRESIDENTS MEDICAID PROPOSALS FY
2007-11REGULATORY CUTS REDUCE FEDERAL COSTS BUT
SHIFT COSTS TO STATES
Proposals that increase state and local cost
burdens 11.8 billion over 5 years
Proposals that reduce federal and state costs
430 million over5 years
Source CBPP analysis of FY 2007 HHS Budget in
Brief
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CUTS IN SOCIAL SECURITY BENEFITS (6.3 BILLION
OVER 10 YEARS)

• Examples
• End benefits at age 16 for the child of a
  deceased, disabled or retired worker if that
  child isnt in school full-time.
• Eliminate the 255 death benefit paid to
  surviving spouses or entitled children of a
  beneficiary who dies.
• While SSAs administrative budget would receive
  an increase, funding would be inadequate to
  maintain current SSA staffing levels. SSA will
  not be able to reduce backlogs and wait times at
  the initial disability decision level.

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KEY POINTS ON HEALTH TAX PROPOSALS(HSA
EXPANSIONS)

• The new health care tax cuts are likely to weaken
  significantly the employer-based health insurance
  system through which the vast majority of
  Americans now obtain their health coverage.
• They will primarily benefit higher-income
  taxpayers and provide greater tax sheltering
  opportunities for the affluent. Most Americans
  will derive little or no tax benefit from these
  proposals.
• These proposals will be extremely costly, and add
  substantially to already large federal budget
  deficits. HSA expansions would cost 156 billion
  dollars over 10 years.
• Resulting deficits could leave existing
  low-income health insurance programs such as
  Medicaid vulnerable to deeper cuts in the future.

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• IV. Drivers of the Long-term Fiscal Problem
• Rising health care costs in the private and
  public sectors alike
• Tax cuts
• The aging of the population, and its impact on
  programs such as Medicare, Medicaid and Social
  Security

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MEDICARE, MEDICAID, AND SOCIAL SECURITY EXPECTED
TO RISE RAPIDLY
Source CBO, Long term Budget Outlook, Dec 2005
Center on Budget and Policy Priorities last
revised Feb. 1, 2006
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MEDICAID COSTS LESS THAN PRIVATE HEALTH INSURANCE
Estimated 2001 per capita costs of serving
Medicaid enrollees with Medicaid vs. private
insurance, after adjusting for health differences.
Source Hadley and Holahan, Inquiry, 2004
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MAKING THE TAX CUTS AND AMT RELIEF PERMANENT
WOULD COST TRILLIONS
Cost of tax cuts with interest, adjusted for
inflation
Source CBPP calculations from Congressional
Budget Office data
Center on Budget and Policy Priorities last
revised February 14, 2006.
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THE TAX CUTS AND SOCIAL SECURITYCosts through
the next 75 years
Tax cuts if made permanent
75-year shortfall in Social Security
Note The figure for the tax cuts represents the
costs of the 2001 (EGTRRA) and 2003 (JGTRRA) tax
bills. Estimates of the tax cuts assume that the
tax cuts are extended as proposed by the
Administration and include the additional cost of
Alternative Minimum Tax relief attributable to
the 2001 and 2003 tax bills. The cost of the tax
cuts is assumed to grow only with the economy
after 2016. The Social Security estimate comes
from the 2005 Trustees Report. All figures are
net present values of costs from inception
through 2079.
Center on Budget and Policy Priorities last
revised February 14, 2006..
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STUDIES FIND RECENT TAX CUTS AS LIKELY TO REDUCE
ECONOMIC GROWTH AS TO INCREASE IT

tax legislation will probably have a net negative
effect on saving, investment, and capital
accumulation over the next 10 years.
-- Congressional Budget Office making the
2001 and 2003 tax cuts permanent would raise the
cost of capital for new investments, reduce
long-term investment, and reduce economic
growth. -- Brookings Institution
economists Studies by Federal Reserve
economists, the Joint Committee on Taxation, and
other noted experts have produced similar
findings.



Sources Congressional Budget Office, The Budget
and Economic Outlook An Update, Aug. 2003, p.
45 Gale Orszag, "Budget Deficits, National
Saving, and Interest Rates," prepared for the
Brookings Panel on Economic Activity, September
2004, p. 34 Elmendorf Reischneider (Federal
Reserve economists), Short-Run Effects of Fiscal
Policy with Forward-Looking Financial Markets,
National Tax Journal, Sept. 2002, pp. 357-86
Joint Committee on Taxation, Macroeconomic
Analysis of HR 2, Congressional Record, May 8,
2003, pp. H3829-32.
Center on Budget and Policy Priorities last
revised Nov. 2, 2004
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IV. Short and Long Term Policy Choices
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SHORT TERM FEDERAL BUDGET CHALLENGES, 2006-2008
?

• Continued deficits
• Pressure for more domestic program cuts
• Medicaid/SCHIP could be particular targets
  in 2007
• Continued calls to scale back discretionary
  programs
• Pressure to make the tax cuts (or pieces of
  them) permanent
• Proposals to change budget process rules
  that would force large cuts in domestic programs
  over time

?
?
?
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LONGER TERM BUDGET OUTLOOK
?

• Deficits will grow larger and unsustainable
  as baby boomers retire
• Something will have to give financial
  markets will not allow the government to borrow
  enough to meet current federal obligations
• Policy Question Will policy changes be
  balanced with both revenues and spending on
  the table or will the public sector be scaled
  back substantially?

?
?
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LIKELY CONSEQUENCES OF CONTINUED UNBALANCED
APPROACH TO DEFICIT REDUCTION

• Large cuts over time in programs for
  low-income other vulnerable Americans
• Increases in number of uninsured Americans
• Federal government may be unable to fulfill
  some core functions
• More cost shifts to states

?
?
?
?
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THE GOAL BALANCED APPROACH TO DEFICIT REDUCTION

• Balanced approach would include revenue
  increases and spending cuts, especially since a
  main reason we have deficits is because of recent
  tax cuts.
• Cuts would not fall disproportionately on
  low-income programs. Cuts would target weak
  claims, not weak clients.
• Balanced approach was taken in 1990 and 1993
  by Presidents Bush and Clinton.

?
?
?
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IV. Impact of Federal Budget Policy on States



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STATES DEPEND ON FEDERAL FUNDING
State General Revenue
Other sources, 73
Federal funding, 27
Center on Budget and Policy Priorities last
revised May 6, 2005