CBO Forecast Shows Entitlement and Interest Payments Could Exhaust Federal Revenue by 2025

Can we afford to wait until the turning point comes? By 2025, entitlements plus net interest payments will absorb all — yes, all — of USA Inc.'s revenue, per CBO. Entitlement Spending + Interest Payments Alone Should Exceed USA Inc. Total Revenue by 2025E, per CBO Entitlement Spending + Interest Payments vs. Revenue as % of GDP, 1980 — 2050E a —— Revenue 30% . —o—Entitlement Spending + Net fo pr. Interest Payments 20% eager 10% — poo Total Revenue & Entitlement + Net Interest Payments as % of GDP 0% 1 1 T T T T T T 1980 1990 2000 2010E 2020E 2030E 2040E 2050E Source: Congressional Budget Office (CBO) Long-Term Budget Outlook (6/10). Note that entitlement spending includes federal government expenditures on Social Security, Medicare and Medicaid. Data in our chart is based on CBO’s ‘alternative fisca/ scenario’ forecast, which assumes a continuation of today’s underlying fiscal policy. Note that CBO aiso maintains an ‘extended-baseline’ scenario, which adheres closely to current law. The ailternative fiscal scenario deviates from CBO’s baseline because it incorporates some policy changes that are widely expected fo occur (such as extending the 2001-2003 tax cuts rather than letting them expire as scheduled by current law and adjusting physician payment rates to be in line with the Medicare economic index rather than at fower scheduled rates) and that policymakers have requiarly made in the past. www.kpcb.com USA Inc. | Summary Less than 15 years from now, in other words, USA Inc. — based on current forecasts for revenue and expenses - would have nothing left over to spend on defense, education, infrastructure, and R&D, which today account for only 32% of USA Inc. spending, down from 69% forty years ago. This critical juncture is getting ever closer. Just ten years ago, the CBO thought federal revenue would support entitlement spending and interest payments until 2060 — 35 years beyond its current projection. This dramatic forecast change over the past ten years helps illustrate, in our view, how important it is to focus on the here-and-now trend lines and take actions based on those trends. How would a turnaround expert determine ‘normal’ revenue and expenses? The first step would be to examine the main drivers of revenue and expenses. It’s not a pretty picture. While revenue — mainly taxes on individual and corporate income — is highly correlated (83%) with GDP growth, expenses — mostly entitlement spending — are less correlated (73%) with GDP. With that as backdrop, our turnaround expert might try to help management and shareholders (citizens) achieve a long-term balance by determining “normal” levels of revenue and expenses: CB www.kpcb.com USA Inc. xiii HOUSE_OVERSIGHT_020836