The document discusses the federal budget deficit and its drivers. It notes that the deficit grew significantly from large surpluses in the early 2000s due to tax cuts, defense spending increases, and rising healthcare costs. Making the tax cuts permanent would cost trillions over time. The president's proposed budget would cut domestic programs and Medicaid while extending the tax cuts, worsening deficits. A balanced approach of spending cuts and revenue increases is recommended to reduce deficits in a responsible way.

1. I. Background on the Federal Budget and the Return of Budget Deficits

2. Composition of the Federal Budget in 2005 Center on Budget and Policy Priorities; last revised February 3, 2006.

4. FROM LARGE SURPLUSES TO LARGE DEFICITS IN JUST 5 YEARS Cumulative Surpluses/Deficits, 2002-2011 Source: CBPP calculations based on Congressional Budget Office data. Assumes extension of tax cuts and Alternative Minimum Tax relief.

5. LEGISLATION ADDING TO DEFICITS: MOSTLY TAX CUTS AND DEFENSE Cost, 2002-2011, of legislation enacted since January 2001 Tax Cuts Defense, Homeland Security and International Entitlements Domestic Discretionary (except Homeland Security) 50% 33% 10% 6% Source: CBPP calculations based on Congressional Budget Office data. Assumes extension of tax cuts and Alternative Minimum Tax relief.

6. Average Outlays as Share of the Economy 1975-2005: 21% Outlay Path without Katrina EVEN WITH KATRINA, FEDERAL SPENDING IS BELOW AVERAGE FOR RECENT DECADES Outlays with Katrina Source: CBPP Calculations based on Congressional Budget Office Data

7. COST OF KATRINA EXPENDITURES AND TAX CUTS, 2006-2011 $150 Billion $1.66 Trillion Source: CBPP Calculations based on Congressional Budget Office data.

8. Average Revenues As Share of the Economy 1975-2005: 18.3% 2005 Revenues As Share of the Economy: 17.5% REVENUES AS SHARE OF THE ECONOMY ARE BELOW THEIR HISTORICAL AVERAGE Source: CBPP Calculations based on Congressional Budget Office Data

9. 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: 32%  Or cut every other program except Social Security, Medicare, defense, and homeland security by…...... 56%  Or cut Medicare by……………………………….…....….....….... 66%  Or cut defense spending by ............................................ 45%  Cut Social Security benefits by..................................

11. Source: CBPP long-term deficit estimates assuming continuation of current policy including extension of the tax cuts and continuation of AMT relief. UNDER CURRENT POLICY, DEFICITS WOULD GROW DEEPER IN FUTURE DECADES (Surplus (+)/Deficit(-) as a Percent of GDP)

12. MEDICARE, MEDICAID, AND SOCIAL SECURITY EXPECTED TO RISE RAPIDLY Source: CBO, Long term Budget Outlook, Dec 2005

13. Medicaid Costs Less Than Private Health Insurance Source: Hadley and Holahan, Inquiry, 2004 Estimated 2001 per capita costs of serving Medicaid enrollees with Medicaid vs. private insurance, after adjusting for health differences.

14. MAKING THE TAX CUTS AND AMT RELIEF PERMANENT WOULD COST TRILLIONS Source: CBPP calculations from Congressional Budget Office data Cost of tax cuts with interest, adjusted for inflation

15. THE TAX CUTS AND SOCIAL SECURITY: Costs through the next 75 years Tax Cuts If Made Permanent 75-year Shortfall in Social Security Source: Social Security Trustees Report estimate of Social Security shortfall, CBPP calculation of tax cut costs based on Joint Committee on Taxation estimates

18. Budget Changes Recently Enacted Or Nearing Enactment  But Congress also is expected to complete action in early 2006 on close to $100 billion in tax cuts over five years, so the deficit will further increase.  Cuts in “domestic discretionary” programs – the part of the budget that includes K-12 education, housing, environmental protection, and other areas – of $7 billion, after accounting for inflation, in 2006 alone.  Reductions of $39 billion in “entitlement” programs over five years, such as: Medicaid, which provides health care to low-income and elderly people, children, and people with disabilities; children’s programs, including child support enforcement and foster care; and student loans.

20. AVERAGE VALUE OF TAX CUTS, 2006 Source: Tax Policy Center

21. WHO GAINS FROM THE TWO NEW TAX CUTS THAT TOOK EFFECT JANUARY 1? Source: Tax Policy Center Average tax cuts in 2010, when these tax cuts are fully in effect

24. President’s Proposed Cuts in Domestic Discretionary Funding Grow Deeper Over Time

25. President’s Budget Calls for Large Cuts to Broad Range of Domestic Programs

26. Since 2001, Funding for Domestic Discretionary Programs Has Fallen as a Share of the Economy Domestic Discretionary Funding as a Share of GDP Source: CBPP calculations based on CBO data

27. State General Revenue Other sources, 74% Federal funding, 26% STATES DEPEND ON FEDERAL FUNDING Source: CBPP calculations based on Census data

28. Tax Cuts Cost More Than Most Agency Budgets Source: CBPP calculations from CBO and OMB data 2006 Agency Budgets, Tax Cuts if Fully in Effect in 2006

29. Tax Cuts for Highest-Income 1 Percent of Households Compared with Spending on Administration’s Stated Priorities Source: CBPP calculations from Office of Management and Budget, Joint Committee on Taxation, and Urban-Brookings Tax Policy Center data. Funding levels are those requested in the President’s budget. Tax Cuts for Top 1% Tax Cuts and Spending, 2007 Homeland Security Veterans Affairs Department Education Department

30. Tax Cuts for People With Incomes Over $1 Million Cost More Than All of the Cuts in Domestic Discretionary Programs Would Save Source: CBPP calculations from Office of Management and Budget, Joint Committee on Taxation, and Urban-Brookings Tax Policy Center data. Tax Cuts for Millionaires: $68 Billion Domestic Discretionary Program Cuts: $57 Billion Tax Cuts and Spending Cuts, 2011

31. Source: Joint Committee on Taxation and CBPP Interest cost Revenue loss Estate Tax Repeal Costs Nearly $1 Trillion Over 10 Years Cost, with interest FY 2012-2021

33. The Current Recovery Has Been Weaker Than Average; Only Corporate Profits Have Grown Rapidly Average Real Growth, Current Recovery Average Real Growth, Other Post-World War II Recoveries Source: CBPP calculations based on Commerce Department, Labor Department, and Federal Reserve data.

34. Job Growth Has Been Especially Weak in This Recovery Average Private-Sector Job Growth Source: Bureau of Economic Analysis and CBPP calculations

35. Economic Growth Revenue Growth Economic and Revenue Growth Following 1980s and Recent Tax Cuts and 1990s Tax Increases 1980s 1990s 2000-2011, Administration Estimates Growth Rates, Adjusted for Inflation and Population Growth

36. 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 regarding the effects of unpaid for tax cuts. 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.