Page 2. Budget Chart Book. The Federal Budget in Pictures

2 Budget Chart Book 2011 The Federal Budget in Pictures

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2011 Budget Chart Book The Federal Budget in Pictures The Thomas A. Roe Institute for Economic Policy Studies 214 Massachusetts Avenue, NE Washington, D.C. 20002 (202) 546-4400 Copyright 2011 The Heritage Foundation

iii About the Budget Chart Book iii The federal budget is on an unsustainable course, with even more runaway spending and rising debt on the horizon. Now, more than ever, it is important for Americans to understand what our nation s spending, taxes, and debt mean to them. The Heritage Foundation s Budget Chart Book is a user-friendly way to learn about the federal budget through pictures. Federal spending was on the rise prior to the economic recession and passage of the 2009 stimulus bill, and it continues to climb steeply under President Obama. As illustrated on page 2, Federal Spending per Household Is Skyrocketing, and on page 3, Federal Spending Is Growing Faster Than Federal Revenue. Some policymakers would pay for increased spending with tax hikes. However, taxes have already risen to burdensome levels and will reach unprecedented heights. As explained on page 15, The Top 10 Percent of Earners Paid 70 Percent of Federal Income Taxes, and on page 21, Total Tax Burden Is Rising to Highest Level in History. Record deficits will be the norm as spending continues to grow faster than revenue. Absent spending cuts and serious entitlement reforms, debt will approach dangerous levels and further strain the economy. As emphasized on page 29, Federal Budget Deficits Will Reach Levels Never Seen Before in the U.S., and page 31, U.S. Debt on Track to Fuel Economic Crisis. America is poised on a precipice of disastrous deficits due primarily to spending on the three major entitlement programs Social Security, Medicare, and Medicaid. Entitlement spending is growing and bold reforms are necessary to fix this massive problem. As shown on page 37, Entitlement Spending Will More Than Double by 2050, and on page 48, The Heritage Plan Keeps Spending Low and Ends Deficits Without Raising Taxes. Tough policy choices and strong entitlement reforms are essential to get the federal budget back on track. The Budget Chart Book will help you understand the current fiscal situation, and it will help Americans to appreciate the magnitude of the decisions that policymakers must enact to protect America s fiscal future.

Table of Contents v Page FEDERAL SPENDING Federal Spending per Household Is Skyrocketing...2 Federal Spending Is Growing Faster Than Federal Revenue...3 Federal Spending Grew More Than Ten Times Faster Than Median Income...4 Federal Spending Is Outpacing Inflation...5 Total Government Spending Has More Than Doubled Since 1965...6 Mandatory Spending Has Increased Five Times Faster Than Discretionary Spending...7 Defense Spending Has Declined While Entitlement Spending Has Increased...8 Obama s Budget Would Reduce National Defense Spending...9 More Than Half of the President s Budget Would Be Spent on Entitlement Programs...10 Total Welfare Spending Is Rising Despite Attempts at Reform...11 Runaway Spending, Not Inadequate Tax Revenue, Is Responsible for Future Deficits...12 FEDERAL REVENUE Taxes per Household Have Risen Dramatically...14 The Top 10 Percent of Earners Paid 70 Percent of Federal Income Taxes...15 Federal Revenues Have More Than Tripled Since 1965...16 Federal Revenues by Source...17 Tax Receipts Return to Historical Average...18 Increasing Tax Rates Does Not Necessarily Lead to Higher Income Tax Receipts...19 U.S. Corporate Tax Rate Is Uncompetitive...20 Total Tax Burden Is Rising to Highest Level in History...21

vi DEBT AND DEFICITS National Debt Set to Skyrocket...24 Each American s Share of National Debt Is Growing...25 Obama s Budget Would Send Federal Debt to Levels Not Seen Since World War II...26 Obama s Budget Worsens Debt Problem, but The Heritage Plan Solves It...27 Obama s Budget Would Deepen Already Unprecedented Deficits...28 Federal Budget Deficits Will Reach Levels Never Seen Before in the U.S...29 Rising Deficits Drive U.S. Debt Limit Higher, Faster...30 U.S. Debt on Track to Fuel Economic Crisis...31 Net Interest Spending Will More Than Triple Over the Next Decade...32 In One Year, Spending on Interest on the National Debt Is Greater Than Funding for Most Programs...33 ENTITLEMENTS Entitlements Will Consume All Tax Revenues by 2049...36 Entitlement Spending Will More Than Double by 2050...37 Medicare Spending Is Adding to Future Deficits Faster Than Other Program Spending...38 Without Entitlement Reform, Federal Spending Could Consume One-Half of the Economy by 2056...39 Letting Tax Cuts Expire Will Not Balance the Budget...40 Hiking Taxes to Pay for Entitlements Would Require Doubling Tax Rates...41 Taxing the Wealthy to Cover Future Deficits Won t Work...42 Balancing the Budget Without Cutting Spending Would Cause Taxes to Skyrocket...43 Discretionary Spending Cuts Alone Are Not an Adequate Substitute for Entitlement Reform...44 Even Eliminating Vital Defense Spending Completely Would Not Solve the Entitlement Spending Problem...45 The Alternative: Saving the American Dream...46 The Heritage Plan Would Reverse Trajectory of Unsustainable Debt...47 The Heritage Plan Keeps Spending Low and Ends Deficits Without Raising Taxes...48

Federal Spending Spending has risen to unprecedented levels, threatening limited government and economic freedom. Spending National Defense: 19% Net Interest: 6% A lother Spending: 12% Mandatory atory Spending n Revenue Discretionary ionary Spending Note:Figures have been rounded. 1995 2000 50% 2005 Foreign Aid: 2% Education: 3%

2 Federal Spending per Household Is Skyrocketing The federal government is spending more per household than ever before. Since 1965, spending per household has grown by nearly 162 percent, from $11,431 in 1965 to $29,401 in 2010. From 2010 to 2021, it is projected to rise to $35,773, a 22 percent increase. INFLATION-ADJUSTED DOLLARS (2010) $40,000 $35,000 $30,000 $25,000 $29,401 $35,773 $20,000 $11,431 $15,000 $10,000 $5,000 Actual Projected $0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: U.S. Census Bureau, White House Office of Management and Budget, and Congressional Budget Office. Inflation-Adjusted Dollars (2010) federal-spending-per-household Federal Spending Chart 1 2011 Budget Chart Book

3 Federal Spending Is Growing Faster Than Federal Revenue Since 1965, spending has risen constantly. Federal revenues have dropped recently due to the economic recession, but spending has reached a record high. INFLATION-ADJUSTED TRILLIONS OF DOLLARS (2010) $4 trillion $3.77 trillion $3 trillion Spending Est. 2011 deficit: $1.62 trillion $2 trillion Revenue $2.15 trillion $1 trillion $0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2011 figures are estimates Source: White House Office of Management and Budget. Inflation-Adjusted Billions of Dollars (2010) growth-federal-spending-revenue Federal Spending Chart 2 2011 Budget Chart Book

4 Federal Spending Grew More Than Ten Times Faster Than Median Income When federal spending grows faster than Americans paychecks, the burden on taxpayers becomes greater. Over the past few decades, middle-income Americans earnings have risen only 27 percent, while spending has increased 299 percent. PERCENT CHANGE OF INFLATION-ADJUSTED DOLLARS (2010) 300% 1970 $890 billion 2009 $3,551 billion 250% +299% 200% 150% Total Federal Spending 100% 50% 0% 1970 1975 1980 1985 1990 1995 2000 2005 2009 Source: U.S. Census Bureau and White House Office of Management and Budget. Median Household Income 1970 $39,732 2009 $50,255 +27% Percent Change of Inflation-Adjusted Dollars (2010) growth-federal-spending Federal Spending Chart 3 2011 Budget Chart Book

5 Federal Spending Is Outpacing Inflation Prices of goods and services normally rise year to year, but federal spending has risen even faster. Although spending grew substantially after 9/11, less than half of the increase can be attributed to defense and homeland security spending. YEAR-TO-YEAR PERCENTAGE CHANGE +17.9% 15% Federal Spending Inflation 10% Average Change in Federal Spending: +5.3% Average Change in Inflation: +2.5% +7.9% +7.4% +6.2% +7.8% +7.4% +9.3% 5% 2010 0% Source: U.S. Bureau of Labor Statistics and White House Office of Management and Budget. Year-to-Year Percentage Change federal-spending-inflation 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Federal Spending Chart 4 2011 Budget Chart Book 1.7%

6 Total Government Spending Has More Than Doubled Since 1965 State and local government spending per household imposes a significant, and growing, burden on taxpayers on top of federal spending. In 1970, median household income was $17,839 greater than total government spending per household, compared to only $2,431 in 2009. PER-HOUSEHOLD SPENDING, IN INFLATION-ADJUSTED DOLLARS (2010) 2009 $50,000 Median household income: $50,255 1965 Per-household spending: $47,824 Median household income: $40,000 $39,732 $30,000 $20,000 $10,000 Per-household spending: $21,893 State and Local Spending Federal Spending $0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: U.S. Census Bureau, White House Office of Management and Budget, and 2011 Economic Report of the President. Per-Household Spending, In Inflation-Adjusted Dollars (2010) total-government-spending Federal Spending Chart 5 2011 Budget Chart Book

7 Mandatory Spending Has Increased Five Times Faster Than Discretionary Spending Only one-third of the federal budget, discretionary spending, is subject to annual budgets. The remainder, mandatory spending, is set on autopilot without congressional debate and has increased more than five times faster than discretionary spending. Most of the current increase is due to entitlement spending. INFLATION-ADJUSTED TRILLIONS OF DOLLARS (2010) $4.0 trillion $3.5 trillion $3.6 trillion $3.0 trillion $2.5 trillion $2.0 trillion $1.5 trillion $1.0 trillion $0.5 trillion $0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2011 figures are estimates Source: White House Office of Management and Budget. Inflation-Adjusted Billions of Dollars (2010) mandatory-discretionary-spending $609 billion Mandatory Spending Discretionary Spending Federal Spending Chart 6 2011 Budget Chart Book

8 Defense Spending Has Declined While Entitlement Spending Has Increased Spending on national defense, a core constitutional function of government, has declined significantly over time, despite wars in Iraq and Afghanistan. Spending on the three major entitlements Social Security, Medicare, and Medicaid has more than tripled. PERCENTAGE OF GDP 10% 8% 6% 7.4% 1976 was the first year entitlement spending exceeded defense spending Entitlements (Social Security, Medicare, Medicaid) 10% 4% 2.5% National Defense 5% 2% Source: White House Office of Management and Budget. Percentage of GDP defense-entitlement-spending 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2011 figures are estimates Federal Spending Chart 7 2011 Budget Chart Book

9 Obama s Budget Would Reduce National Defense Spending Adequate funding for the core defense program is crucial for the military to fulfill its constitutional duty to provide for the common defense. Yet defense spending has fallen below its 45-year historical average despite ongoing operations in Iraq and Afghanistan. DEFENSE SPENDING AS A PERCENTAGE OF GDP 10% 9.5% 8% 6% 6.2% 45-Year Average: 5.2% 5.0% 3.4% 4% 2% Actual Projected 0% 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: White House Office of Management and Budget. Defense Spending as a Percentage of GDP national-defense-spending Federal Spending Chart 8 2011 Budget Chart Book

10 More Than Half of the President s Budget Would Be Spent on Entitlement Programs In combination with other entitlements, such as food stamps, unemployment, and housing assistance, Medicare, Medicaid, and Social Security constitute the lion s share of President Obama s 2012 budget. In contrast, spending on foreign aid represents 2 percent. PERCENTAGE OF THE PRESIDENT S FY2012 BUDGET Entitlement Programs: 58% Social Security: 20% Medicare and Medicaid: 20% Income Security and Other Entitlements: 18% National Defense: 19% Net Interest: 6% All Other Spending: 12% Note: Figures have been rounded. Source: White House Office of Management and Budget. Percentage of the Presidents FY2012 Budget budget-entitlement-programs 50% Foreign Aid: 2% Federal Spending Chart 9 2011 Budget Chart Book Education: 3%

11 Total Welfare Spending Is Rising Despite Attempts at Reform Total means-tested welfare spending (cash, food, housing, medical care, and social services for the poor) has increased 17-fold since the beginning of Lyndon Johnson s War on Poverty in 1964. Though the current trend is unsustainable, the Obama Administration plans to increase future welfare spending rather than enact true policy reforms. WELFARE SPENDING IN INFLATION-ADJUSTED DOLLARS (2010) $900 billion $800 billion $700 billion $600 billion $500 billion $400 billion $300 billion $200 billion $100 billion 1964 War on Poverty begins 1981 Reagan slashes welfare 1996 Reform ends welfare $890 billion $0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: Heritage Foundation calculations based on data from current and previous White House Office of Management and Budget documents and other official government sources. Spending in Billions of Dollars (2010) welfare-spending Federal Spending Chart 10 2011 Budget Chart Book

12 Runaway Spending, Not Inadequate Tax Revenue, Is Responsible for Future Deficits The main driver behind long-term deficits is government spending not low revenues. While revenue will surpass its historical average of 18.0 percent of GDP by 2021, spending will shoot past its historical average of 20.3 percent, reaching 26.4 percent in the same year. PERCENTAGE OF GDP 30% 25% 20% 15% Spending Revenue 24.7% 14.8% 26.4% 18.4% Averages for 1960 2009: 20.3% Spending 18.0% Revenue Projected 10% 1960 1970 1980 1990 2000 2010 2021 Source: Heritage Foundation calculations based on Congressional Budget Office data. Percentage of GDP runaway-spending-tax-revenue Federal Spending Chart 11 2011 Budget Chart Book

Federal Revenue The tax burden in America is climbing and will reach record levels without policy changes. Top 1% 2% 5% United States: 39% 38% 21% 30.2% 29.3% OECD Average 28.2% 27.6% 27.2% 41.6%

14 Taxes per Household Have Risen Dramatically Though the economic downturn has temporarily lowered overall tax revenues, the tax burden on Americans is still high. INFLATION-ADJUSTED DOLLARS (2010) $25,000 $24,147 $18,400 $20,000 $11,295 $17,959 Current levels higher than 1994 $15,000 $10,000 $5,000 $0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: U.S. Census Bureau and White House Office of Management and Budget. Inflation-Adjusted Dollars (2010) taxes-per-household Federal Revenue Chart 1 2011 Budget Chart Book

15 The Top 10 Percent of Earners Paid 70 Percent of Federal Income Taxes Top earners are the target for new tax increases, but the U.S. tax system is already highly progressive. The top 1 percent of income earners paid 38 percent of all federal income taxes in 2008, while the bottom 50 percent paid only 3 percent. Forty-nine percent of U.S. households paid no federal income tax at all. PERCENTAGE OF FEDERAL INCOME TAXES (2008) Bottom 50% 26% 50% This Level of Income Earners... Top 1% 2% 5% 6% 10% 11% 25%... Paid This Proportion of the Federal Income Tax in 2008. 38% 21% 11% 16% 11% 3% Source: Tax Foundation and Internal Revenue Service. Percentage of Federal Income Taxes (2008) top10-percent-income-earners Federal Revenue Chart 2 2011 Budget Chart Book

16 Federal Revenues Have More Than Tripled Since 1965 Overall tax revenues have risen despite a recent decline due to the recession. Congress cut income taxes and the death tax in 2001 and capital gains taxes and dividends in 2003, yet revenues continued to surge even after the tax cuts were passed. INFLATION-ADJUSTED DOLLARS (2010) $3.0 trillion $2.15 trillion $2.5 trillion $2.0 trillion Total Revenue $1.5 trillion $944 billion $1.0 trillion $0.5 trillion Individual Income Taxes Corporate Taxes $196 billion Inflation-Adjusted Billions of Dollars (2010) federal-government-revenues $0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: White House Office of Management and Budget. 2011 figure estimated Federal Revenue Chart 3 2011 Budget Chart Book

17 Federal Revenues by Source Most federal revenues come from individuals. Personal income taxes provide the largest portion of total tax revenues, though some of this is small-business income. Social Security and Medicare payroll taxes are the second-largest source. PERCENTAGE OF TOTAL FEDERAL REVENUE (2010) Individual ($898.5 billion) Payroll Taxes ($864.8 billion) 41.6% 40.0% Corporate: 8.9% ($191.4 billion) Customs Duties, Misc.: 5.6% ($121.2 billion) Excise: 3.1% ($66.9 billion) Estate and Gift: 0.9% ($18.9 billion) Source: Congressional Budget Office. Percentage of Total Federal Revenue (2010) federal-revenue-sources Federal Revenue Chart 4 2011 Budget Chart Book

18 Tax Receipts Return to Historical Average The overall tax burden on Americans is measured as a share of gross domestic product (GDP). Since World War II, tax receipts have averaged around 18 percent of GDP. Receipts have fallen due to the recession, but as the economy recovers, they will rise above the average level by the end of the decade. TAX RECEIPTS AS A PERCENTAGE OF GDP 24% 22% 20% 20.4% 20.6% Tax Revenue 19.3% 18% 16% 14% 14.4% 30-Year Average: 18.0% 14.9% 12% 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: White House Office of Management and Budget. Tax Receipts as a Percentage of GDP current-tax-receipts Federal Revenue Chart 5 2011 Budget Chart Book

19 Increasing Tax Rates Does Not Necessarily Lead to Higher Income Tax Receipts Tax cuts can create incentives for individuals to generate more income, which can generate more revenue. The most dramatic decline in the top individual income tax rate, from 70 percent to 28 percent, occurred during the Reagan Administration, during which tax receipts remained relatively constant as a share of the economy. PERCENTAGE OF GDP 100% 91% 80% Top Individual Tax Rate 70% 60% 40% 20% 7.8% Individual Tax Receipts as % of GDP 9.4% 50% 9.2% 28% 39.6% 7.7% 35% 6.3% Source: White House Office of Management and Budget and the Tax Foundation. Percentage of GDP income-tax-receipts 0% 1960 1970 1980 1990 2000 2010 2011 figures estimated Federal Revenue Chart 6 2011 Budget Chart Book

20 U.S. Corporate Tax Rate Is Uncompetitive High U.S. federal and state corporate tax rates make it difficult for businesses to compete internationally. While other countries are reducing corporate tax rates, the U.S. is virtually tied with Japan for the highest and has maintained rates significantly and consistently higher than the average of industrialized nations. COMBINED CORPORATE TAX RATES 40% United States: 39% 35% 30% 32.9% 31.9% 30.7% 30.2% 29.3% OECD Average 28.2% 27.6% 27.2% 26.2% 26.0% 26.0% 25% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Organisation for Economic Co-operation and Development. Combined Corporate Tax Rates (2000-2010) corporate-tax-rate Federal Revenue Chart 7 2011 Budget Chart Book

21 Total Tax Burden Is Rising to Highest Level in History Taxes are projected to increase rapidly under various policy scenarios. If the 2001 and 2003 tax cuts expire and more middle-class Americans are required to pay the alternative minimum tax (AMT), taxes will reach unprecedented levels. The tax burden will climb even if those tax breaks are extended. President Obama s budget, which cuts some taxes and raises others, also increases the overall tax burden. PERCENTAGE OF GDP 28% 26% 24% 22% Highest Tax Burden in U.S. History: 20.6% (2000) Tax Cuts Expire Obama s Budget Permanent Tax Cuts and Fix AMT 20% 18% 16% 30-Year Historical Tax Burden: (1981 2010): 18% 14% 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 Source: Heritage Foundation calculations based on Congressional Budget Office and White House Office of Management and Budget data. Percentage of GDP total-tax-burden Federal Revenue Chart 8 2011 Budget Chart Book

Debt and Deficits Excessive spending has created record levels of deficits and debt, and the worst is yet to come. $14.29 trilion $188.7 bilion 09:+$2.6 trillionportugal: 71% Italy: 98% Greece: 109.6% Actual Projected ilion U.K.: 61.3% Compar are to o nations levelsof

24 National Debt Set to Skyrocket In the past, wars and the Great Depression contributed to rapid but temporary increases in the national debt. Over the next few decades, runaway spending on Medicare, Medicaid, and Social Security will drive the debt to unsustainable levels. PERCENTAGE OF GDP 350% 344% 300% 250% 200% 150% World War II War on Terrorism 100% 50% World War I The Great Depression 108.6% 100% 0% 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Source: Heritage Foundation calculations based on data from the U.S. Department of the Treasury, Institute for the Measurement of Worth, Congressional Budget Office, and White House Office of Management and Budget. Percentage of GDP national-debt-skyrocket Debt and Deficits Chart 1 2011 Budget Chart Book

25 Each American s Share of National Debt Is Growing As Washington continues to spend more than it can afford, future generations of taxpayers will be on the hook for increasing levels of debt. The amount of debt per citizen will skyrocket. INFLATION-ADJUSTED DOLLARS (2010) $300,000 2050: $279,738 $250,000 $200,000 2044: $206,771 $150,000 $100,000 2032: $103,827 $50,000 $0 2011: 1970: $31,871 $6,291 Projected 1970 1980 1990 2000 2010 2020 2030 2040 2050 Source: U.S. Census Bureau and Congressional Budget Office (Alternative Fiscal Scenario). Inflation Adjusted Dollars (2010) national-debt-burden Debt and Deficits Chart 2 2011 Budget Chart Book

26 Obama s Budget Would Send Federal Debt to Levels Not Seen Since World War II In 2008, publicly held debt as a percentage of the economy (GDP) was 40.3 percent, nearly four points below the postwar average. Since then, the debt has increased more than 50 percent, and the President s FY 2012 budget would more than double it to 87.4 percent by 2021. DEBT AS A PERCENTAGE OF GDP 120% 108.7% 100% 87.4% 80% 60% 40% Average, 1946 2010: 43.8% 20% 0% Source: Congressional Budget Office and White House Office of Management and Budget. Debt as a Percentage of GDP obama-budget-debt 40.3% Debt and Deficits Chart 3 2011 Budget Chart Book Obama s Budget 1940 1950 1960 1970 1980 1990 2000 2010 2020

27 Obama s Budget Worsens Debt Problem, but The Heritage Plan Solves It Spending in the President s budget proposal for 2012 would drive the debt to 87 percent of the economy by 2021. In contrast, Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity solves the debt problem through strong budget reforms, lowering debt to 58 percent of GDP in just 10 years. DEBT AS A PERCENTAGE OF GDP 90% 80% 70% 87.4% PRESIDENT OBAMA S BUDGET 60% 50% 40% 26.1% Average, 1981 2010: 40.6% 58.2% HERITAGE PLAN 30% 20% 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: President s Budget: Congressional Budget Office and White House Office of Management and Budget; Heritage Plan: Calculations by the Center for Data Analysis based on current projections, data provided by the Peter G. Peterson Foundation, and CDA policy models. Debt as a Percentage of GDP obama-budget-worsens-debt Debt and Deficits Chart 4 2011 Budget Chart Book

Page 28 Obama s Budget Would Deepen Already Unprecedented Deficits The President is responsible for submitting an annual budget to Congress and has the authority to veto legislation, including irresponsible spending. Most Administrations have run small but manageable deficits, but President Obama s unprecedented budget deficits pose serious economic risks. BUDGET DEFICITS AS A PERCENTAGE OF GDP, BY ADMINISTRATION 0% 1% 2% Kennedy Johnson 1.0% 0.9% Nixon Ford Reagan Bush Clinton Bush Obama 0.1% 1.6% 2.4% 3% 4% Carter 3.5% 5% 3.2% 4.3% 4.3% 6% 7% 8% 8.3% (est.) Source: White House Office of Management and Budget. Budget Deficits As A Percentage of GDP, By Administration budget-create-deficits Debt and Deficits Chart 5 2011 Budget Chart Book

29 Federal Budget Deficits Will Reach Levels Never Seen Before in the U.S. Recent budget deficits have reached unprecedented levels, but the future will be much worse. Unless entitlements are reformed, spending on Medicare, Medicaid, and Social Security will drive deficits to unmanageable levels. PERCENTAGE OF GDP 70% 60% 61.5% 50% 40% 30% 20% 10% 9.9% Average Historical Deficit: 3.0% 0% 2.4% 10% 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2084 Source: Congressional Budget Office (Alternative Fiscal Scenario). Percentage of GDP federal-budget-deficits Debt and Deficits Chart 6 2011 Budget Chart Book

30 Rising Deficits Drive U.S. Debt Limit Higher, Faster Congress first placed a statutory limit on total federal debt in 1917, in the Second Liberty Bond Act. Since 1962, Congress has altered the debt limit through 74 separate measures, raising it 10 times since 2001. Since 1990, the debt limit has been raised a total of $10.1 trillion, but nearly half of that increase has occurred since September 2007. U.S. DEBT LIMIT $15 trillion $10 trillion $14.29 trillion Change from 2007 to 2009: +$2.6 trillion Change from 2009 to 2010: +$1.9 trillion (largest annual dollar increase) $5 trillion 1940: $50 billion 1946 1953: $275 billion 1997 2002: $5.95 trillion 1990: $4.1 trillion (largest percentage increase: +33%) $0 1940 1950 1960 1970 1980 1990 2000 2010 Source: Congressional Research Service and White House Office of Management and Budget (Table 7.3, Historical Tables). Billions of Dollars increases-us-debt-limit Debt and Deficits Chart 7 2011 Budget Chart Book

31 U.S. Debt on Track to Fuel Economic Crisis Countries like Greece and Portugal have suffered or are anticipating financial crises as a result of mounting debt. If the U.S. continues federal deficit spending on its current trajectory, it will face similar economic woes. PROJECTED U.S. PUBLICLY HELD DEBT AS PERCENTAGE OF GDP 200% 150% Portugal: 71% Italy: 98% Greece: 109.6% Japan: 178% 100% 50% 0% U.K.: 61.3% 2000 2005 2010 2015 2020 2025 2030 2035 Comparisons are to other nations 2008 levels of debt. Source: Organisation for Economic Co-operation and Development and Congressional Budget Office (Alternative Fiscal Scenario). Percentage of GDP us-debt Debt and Deficits Chart 8 2011 Budget Chart Book

32 Net Interest Spending Will More Than Triple Over the Next Decade As the national debt grows, interest payments will consume more and more of the federal budget, even without interest rate increases. Under the President s budget, the national debt would double and real net interest costs would more than triple over the next decade. INFLATION-ADJUSTED DOLLARS (2010) $800 billion $773.9 billion $600 billion $400 billion $282.4 billion $188.7 billion $200 billion Actual Projected $0 1990 1995 2000 2005 2010 2015 2020 Source: White House Office of Management and Budget and Congressional Budget Office. Inflation-Adjusted Billions of Dollars (2010) budget-net-interest-spending Debt and Deficits Chart 9 2011 Budget Chart Book

33 In One Year, Spending on Interest on the National Debt Is Greater Than Funding for Most Programs In 2010, the U.S. spent more on interest on the national debt than it spent on many federal departments, including Education and Veterans Affairs. BILLIONS OF DOLLARS (2010) $800 $600 $666.7 $400 $414.0 $200 $173.1 $129.5 $108.3 $92.9 $0 Department of Defense Interest Expense Department of Labor Department of Agriculture Department of Veterans Affairs Department of Education Source: White House Office of Management and Budget. Billions of Dollars (2010) interest-spending Debt and Deficits Chart 10 2011 Budget Chart Book

Entitlements Medicare, Medicaid, and Social Security spending is on course ANNUAL SPENDING (2011) to explode, placing enormous pressure on the budget. 14.7% 6.0% 3.5% 16.9% 6.1% 4.2% 1 ense Actual Revenue Total Spending Discretionary Spending Cuts Alone Are Not an Adequate Substitute for Entitlement Reform Annual spending on entitlement programs is massive compared to other federal Cutting discretionary spending is a necessary step, but cuts to foreign aid alone Afghanistan will not close the deficit. Entitlement spending must be reined in. TotalSpending,W ith No Defense Entitlem Spending ents Beginning (Medicare,Medicaid, in 2012 SocialSecurity,and other mandatory programs) $2.4 trillion GlobalWar on Terrorism $159.3 billion $28 Note:Figure for entitlem ents includes netinterest.w ithoutnetinterest,the totalis $2.2 trilion Source:W hite House Office ofmanagementand Budget. AnnualSpending (2011) discretionary-spending-cuts Entitlem ents Chart

36 Entitlements Will Consume All Tax Revenues by 2049 If the average historical level of tax revenue is extended, spending on Medicare, Medicaid and the Obamacare subsidy program, and Social Security will consume all revenues by 2049. Because entitlement spending is funded on autopilot, no revenue will be left to pay for other government spending, including constitutional functions such as defense. PERCENTAGE OF GDP 25% 2049: Entitlements 18.2% of GDP Tax Revenue Tax Revenue 30-Year Average Tax 20% Revenue: 18.0% 24.2% Social Security 15% 10% 5% 3.9% Medicaid, Obamacare Subsidy Program Medicare 0% 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 Source: Congressional Budget Office. Percentage of GDP entitlements-historical-tax-levels Entitlements Chart 1 2011 Budget Chart Book

37 Entitlement Spending Will More Than Double by 2050 Spending on Medicare, Medicaid and the Obamacare subsidy program, and Social Security will soar as 78 million baby boomers retire and health care costs climb. Total spending on federal health care programs will triple. PERCENTAGE OF GDP 20% 16.9% 18.2% Total 15% 10% 5% 0% 8.3% 4.2% 1.5% 2.7% 2005 10.3% 4.8% 1.9% 3.6% 2010 12.1% 5.2% 2.8% 4.1% 2020 14.7% 6.0% 3.5% 5.2% 2030 6.1% 4.2% 6.6% 2040 5.9% 4.7% 7.6% 2050 Social Security Medicaid, Obamacare Subsidy Program Medicare Source: Congressional Budget Office. Percentage of GDP entitlement-spending-double Entitlements Chart 2 2011 Budget Chart Book

38 Medicare Spending Is Adding to Future Deficits Faster Than Other Program Spending Entitlement spending is the main cause of long-term runaway deficits. While reform must address spending within each program, Medicare is the largest driver due to the effects of an aging population and rising health care costs. PERCENTAGE OF GDP 15% 12% 9% 6% 3% Other Non-Interest Spending Medicare Social Security Medicaid, Obamacare Subsidy Program 0% 2010 2015 2020 2025 2030 2035 2040 2045 2050 Source: Congressional Budget Office (Alternative Fiscal Scenario). Percentage of GDP. medicare-spending-deficits Entitlements Chart 3 2011 Budget Chart Book

39 Without Entitlement Reform, Federal Spending Could Consume One-Half of the Economy by 2056 The major entitlements Medicare, Medicaid, the Obamacare subsidy program, and Social Security are on track to push spending to unsustainable levels. These programs must be reformed in order to improve the long-term budget outlook. PERCENTAGE OF GDP 60% 50% 2056: 50.1% 53.7% 40% 30% 20% 10% 0% 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 Source: Congressional Budget Office (Alternative Fiscal Scenario). Percentage of GDP entitlements-consume-economy Actual Revenue Average Revenue, 2000 2009: 18.0% Net Interest Entitlements Chart 4 2011 Budget Chart Book All Other Spending Defense Social Security Medicaid, Obamacare Subsidy Program Medicare

40 Letting Tax Cuts Expire Will Not Balance the Budget Some argue for allowing the 2001 and 2003 tax cuts to expire, including subjecting the middle class to the alternative minimum tax in order to balance the budget. Under this scenario, unaffordable deficit spending would still continue, and economic growth and job creation would suffer. PERCENTAGE OF GDP 35% Historical Revenue: 18.0% Revenue Total Spending 30% 25% 20% 15% 10% 5% Deficit Spending Net Interest All Other Spending Defense Social Security Medicaid, Obamacare Subsidy Program Medicare 0% 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 Source: Congressional Budget Office. Percentage of GDP repealing-tax-cuts Entitlements Chart 5 2011 Budget Chart Book

41 Hiking Taxes to Pay for Entitlements Would Require Doubling Tax Rates The cost of Medicare, Medicaid, and Social Security is rising substantially. Paying for this spending solely through federal income tax increases would require more than a twofold increase of current tax rates, even for the lowest tax bracket. MARGINAL INCOME TAX RATES 100% 88% 88% 80% 63% 66% 66% 60% 47% 40% 20% 10% 19% 25% 25% 35% 35% 0% 2010 2050 2082 Lowest Bracket 2010 2050 2082 Middle Bracket 2010 2050 2082 Highest Bracket 2010 2050 2082 Corporate Taxes Source: Congressional Budget Office. Marginal Income Tax Rates entitlements-double-tax-rates Entitlements Chart 6 2011 Budget Chart Book

42 Taxing the Wealthy to Cover Future Deficits Won t Work Some argue for taxing only the wealthy to raise revenues and reduce federal deficits. However, hiking taxes on these taxpayers would increase their tax rates to mathematically impossible levels. To close the 2035 deficit, the top two rates would increase to 139 percent and 150 percent, and in 2050 they would reach 206 percent and 223 percent. CURRENT TAX RATE AND TAX RATE NECESSARY TO CLOSE DEFICIT 250% 200% 150% SECOND-HIGHEST BRACKET 206% 139% HIGHEST BRACKET 150% 223% 100% 50% 33% 65% 35% 70% 0% Current Rate 2021 2035 2050 Current To Close Future Deficits Rate 2021 2035 2050 To Close Future Deficits Source: Internal Revenue Service and Congressional Budget Office (Alternative Fiscal Scenario). Current tax rate and Tax rate necessary to cover deficit tax-wealthy-deficits Entitlements Chart 7 2011 Budget Chart Book

43 Balancing the Budget Without Cutting Spending Would Cause Taxes to Skyrocket America is running massive deficits, and a balanced budget requirement is often considered a way to rein in red ink. Without serious entitlement and other spending reforms, the level of taxes required to balance the federal budget would reach economically stagnating levels. PERCENTAGE OF GDP 30% 25% 20% 15% 10% 5% Actual Spending Revenue With Balanced Budget 30.8% Net Interest All Other Spending Social Security Medicaid, Obamacare Subsidy Program Medicare 0% 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 Source: Heritage Foundation calculations based on Congressional Budget Office data (Alternative Fiscal Scenario). Percentage of GDP balancing-budget Entitlements Chart 8 2011 Budget Chart Book

44 Discretionary Spending Cuts Alone Are Not an Adequate Substitute for Entitlement Reform Annual spending on entitlement programs is massive compared to other federal spending priorities. Cutting discretionary spending is a necessary step, but cuts to foreign aid alone or pulling out of Afghanistan will not close the deficit. Entitlement spending must be reined in. ANNUAL SPENDING (2011) Entitlements (Medicare, Medicaid, Social Security, and other mandatory programs) $2.4 trillion Global War on Terrorism $159.3 billion Foreign Aid $28.6 billion NASA $19.5 billion Corporation for Public Broadcasting $516 million Notes: Figure for entitlements includes net interest. Without net interest, the total is $2.2 trillion. Figure for Corporation for Public Broadcasting reflects the annualized level provided by the continuing resolution (P.L. 111 242). Source: White House Office of Management and Budget. Annual Spending (2011) spending-cuts Entitlements Chart 9 2011 Budget Chart Book

45 Even Eliminating Vital Defense Spending Completely Would Not Solve the Entitlement Spending Problem Long-term deficits are the result of unsustainable levels of spending on entitlement programs. Rather than tackle them directly, some would cut defense. But even if spending on this crucial national priority was eliminated completely, entitlements would continue to drive deficits to unmanageable levels. PERCENTAGE OF GDP 35% 30% 25% 20% 15% 10% 5% 0% Defense Actual Revenue Total Spending Total Spending, With No Defense Spending Beginning in 2012 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Source: Heritage Foundation calculations based on Congressional Budget Office data. Historical Revenue: 18% Net Interest All Other Spending Social Security Medicaid, Obamacare Subsidy Program Medicare Percentage of GDP defense-spending-entitlement-spending-problem Entitlements Chart 10 2011 Budget Chart Book

46 The Alternative: Saving the American Dream By rapidly lowering total federal spending, Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity would balance the budget by 2021 and keep it there permanently, without raising taxes. REVENUE AND SPENDING AS A PERCENTAGE OF GDP 35% 30% CURRENT PROJECTIONS Spending 35.2% 35% 30% HERITAGE PLAN 25% 20% Revenue 19.3% 25% 20% Spending 18.5% 15% 15% Revenue 17.7% 10% 2010 2015 2020 2025 2030 2035 Source: Current projections: Congressional Budget Office (Alternative Fiscal Scenario). Heritage Plan: Calculations by the Center for Data Analysis based on data provided by the Peter G. Peterson Foundation. For more information, go to savingthedream.org. Revenue and Spending as a Percentage of GDP saving-american-dream 10% 2010 2015 2020 2025 2030 2035 Entitlements Chart 11 2011 Budget Chart Book

47 The Heritage Plan Would Reverse Trajectory of Unsustainable Debt Without significant spending reforms, the national debt is projected to reach 185 percent of GDP by 2035. Under the Heritage plan, federal spending would be reduced by about half, which would dramatically lower the debt to 30 percent. PUBLICLY HELD DEBT AS A PERCENTAGE OF GDP 200% By 2023, our national debt is 150% projected to reach 100 percent of the economy 100% 185% CURRENT PROJECTIONS 50% 0% 2010 2015 2020 2025 2030 2035 Source: Current projections: Congressional Budget Office (Alternative Fiscal Scenario). Heritage Plan: Calculations by the Center for Data Analysis based on data provided by the Peter G. Peterson Foundation. For more information, go to savingthedream.org. Publicly Held Debt as a Percentage of GDP heritage-plan-debt 30% Entitlements Chart 12 2011 Budget Chart Book HERITAGE PLAN

48 The Heritage Plan Keeps Spending Low and Ends Deficits Without Raising Taxes Bold, transformational reforms are needed to solve America s spending crisis. The Heritage Plan achieves this through spending, entitlement, and tax reforms. It reduces the size of government, encourages personal fiscal responsibility, and fosters economic growth. It balances the federal budget by 2021 and keeps revenue at 18.5 percent of the economy. REVENUE AND SPENDING AS A PERCENTAGE OF GDP 25% 20% 15% 10% Total Spending Total Revenue Balanced Budget by 2021 Net Interest Defense All Other Spending 5% Entitlements 0% 2010 2015 2020 2025 2030 2035 Source: Current projections: Congressional Budget Office (Alternative Fiscal Scenario). Heritage Plan: Calculations by the Center for Data Analysis based on data provided by the Peter G. Peterson Foundation. For more information, go to savingthedream.org. Revenue and Spending as apercentage of GDP heritage-plan-fiscal Entitlements Chart 13 2011 Budget Chart Book

49 Technical Notes The charts in this book are based primarily on data available as of March 2011 from the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO). The charts using OMB data display the historical growth of the federal government to 2010 while the charts using CBO data display both historical and projected growth from as early as 1940 to 2084. Projections based on OMB data are taken from the White House Fiscal Year 2012 budget. The charts provide data on an annual basis except where calculations are made for Administration averages. Debt limit data are based on the limit in effect at the end of the calendar year. All spending and revenue data are based on a fiscal year. For simplicity, these are displayed as calendar years in the charts. Prior to 1976, the fiscal year was from July 1 to June 30. Following that year, the current format of October 1 to September 30 was implemented. In the charts, the transition is omitted for clarity. Also, in all charts in which spending or revenue is measured by taxpayer, taxpayers are counted as the number of individual income tax returns filed (according to data from the Internal Revenue Service) per year. Thus, married couples that both work but file a joint return are counted as a single combined-income unit. Most of the data are adjusted for inflation in 2010 dollars. Specific information regarding data sources is indicated at the bottom of each chart. Charts designating Presidential Administrations begin with the fiscal year in which the Administration presented its first budget. In the case of 2009, an atypical year in which much was spent before the Administration s first fiscal year budget (FY2010), all revenue and spending up to the CBO January 2009 Budget and Economic Outlook is attributed to President Bush. All revenue and spending thereafter is attributed to President Obama.

Authors Emily Goff Research Assistant Thomas A. Roe Institute for Economic Policy Studies Kathryn Nix Policy Analyst Center for Health Policy Studies and Thomas A. Roe Institute for Economic Policy Studies John Fleming Senior Data Graphics Editor

Our national debt equals nearly 70 percent of GDP and is rapidly growing. Medicare and Social Security face $40 trillion in long-term unfunded obligations. We cannot leave these burdens for our children and grandchildren. We must begin now to solve these problems. In Saving the American Dream, experts at The Heritage Foundation offer a detailed plan to redesign entitlement programs, simplify taxes, make health care affordable, and end government overreach. The result? The Heritage plan would balance the budget within 10 years and keep it balanced permanently. Together, let us seize the moment, change our country s course, and save the American Dream. Dr. Edwin J. Feulner, President, The Heritage Foundation See the complete plan plus many ways to share it with charts, videos, and more at SavingTheDream.org.

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