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Federal budget · Public debt |
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Political debates · Deficit reduction |
| Terminology |
| Inflation · Balance of payments |
The Budget of the United States Government is the President's proposal to the U.S. Congress which recommends funding levels for the next fiscal year, beginning October 1. Congressional decisions are governed by rules and legislation regarding the federal budget process. Budget committees set spending limits for the House and Senate committees and for Appropriations subcommittees, which then approve individual appropriations bills to allocate funding to various federal programs.
After Congress approves an appropriations bill, it is sent to the President, who may sign it into law, or may veto it. A vetoed bill is sent back to Congress, which can pass it into law with a two-thirds majority in each chamber. Congress may also combine all or some appropriations bills into an omnibus reconciliation bill. In addition, the president may request and the Congress may pass supplemental appropriations bills or emergency supplemental appropriations bills.
Several government agencies provide budget data and analysis. These include the Government Accountability Office (GAO), Congressional Budget Office, the Office of Management and Budget (OMB) and the U.S. Treasury Department. These agencies have reported that the federal government is facing a series of important financing challenges. In the short-run, tax revenues have declined significantly due to a severe recession and tax policy choices, while expenditures have expanded for wars, unemployment insurance and other safety net spending.[1][2] In the long-run, expenditures related to healthcare programs such as Medicare and Medicaid are projected to grow faster than the economy overall as the population matures.[3][4]
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The U.S. Constitution (Article I, section 9, clause 7) states that "[n]o money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of Receipts and Expenditures of all public Money shall be published from time to time."
Each year, the President of the United States submits his budget request to Congress for the following fiscal year as required by the Budget and Accounting Act of 1921. Current law (31 U.S.C. § 1105(a)) requires the president to submit a budget no earlier than the first Monday in January, and no later than the first Monday in February. Typically, presidents submit budgets on the first Monday in February. The budget submission has been delayed, however, in some new presidents' first year when previous president belonged to a different party.
The federal budget is calculated largely on a cash basis. That is, revenues and outlays are recognized when transactions are made. Therefore, the full long-term costs of entitlement programs such as Medicare, Social Security, and the federal portion of Medicaid are not reflected in the federal budget. By contrast, many businesses and some foreign governments have adopted forms of accrual accounting, which recognizes obligations and revenues when they are incurred. The costs of some federal credit and loan programs, according to provisions of the Federal Credit Reform Act of 1990, are calculated on a net present value basis.[5]
Federal agencies cannot spend money unless funds are authorized and appropriated. Typically, separate Congressional committees have jurisdiction over authorization and appropriations. The House and Senate Appropriations Committees currently have 12 subcommittees, which are responsible for drafting the 12 regular appropriations bills that determine amounts of discretionary spending for various federal programs. Appropriations bills must pass both the House and Senate and then be signed by the president in order to give federal agencies legal authority to spend.[6] In many recent years, regular appropriations bills have been combined into "omnibus" bills.
Congress may also pass "special" or "emergency" appropriations. Spending that is deemed an "emergency" is exempt from certain Congressional budget enforcement rules. Funds for disaster relief have sometimes come from supplemental appropriations, such as after Hurricane Katrina. In other cases, funds included in emergency supplemental appropriations bills support activities not obviously related to actual emergencies, such as parts of the 2000 Census of Population and Housing. Special appropriations have been used to fund most of the costs of war and occupation in Iraq and Afghanistan so far.
Budget resolutions and appropriations bills, which reflect spending priorities of Congress, will usually differ from funding levels in the president's budget. The president, however, retains substantial influence over the budget process through his veto power and through his congressional allies when his party has a majority in Congress.
The amount of budget authority and outlays for a fiscal year usually differ because budget authority from a previous fiscal year in some cases can be used for outlays in the current fiscal year. Budget authority is the authority provided by federal law to enter into financial obligations that will result in immediate or future outlays involving federal government funds. Outlays refer to the issuance of checks, disbursement of cash, or electronic transfer of funds made to liquidate a federal obligation, and is usually synonymous with "expenditure" or "spending." The term "appropriations" refers to budget authority to incur obligations and to make payments from the Treasury for specified purposes. Some military and some housing programs have multi-year appropriations, in which budget authority is specified for several coming fiscal years.
Several government agencies provide budget data. These include the Government Accountability Office (GAO), the Congressional Budget Office, the Office of Management and Budget (OMB) and the U.S. Treasury Department. The CBO publishes The Budget and Economic Outlook in January, which is typically updated in August. It also publishes a Monthly Budget Review. The OMB, which is responsible for organizing the President's budget presented in February, typically issues a budget update in July. The GAO and the Treasury issue Financial Statements of the U.S. Government, usually in the December following the close of the federal fiscal year, which occurs September 30. There is a corresponding Citizen's Guide, a short summary. The Treasury Department also produces a Combined Statement of Receipts, Outlays, and Balances each December for the preceding fiscal year, which provides detailed data on federal financial activities.
Historical tables within the President's Budget (OMB) provide a wide range of data on federal government finances. Many of the data series begin in 1940 and include estimates of the President’s Budget for 2009–2014. Additionally, Table 1.1 provides data on receipts, outlays, and surpluses or deficits for 1901–1939 and for earlier multi-year periods. This document is composed of 17 sections, each of which has one or more tables. Each section covers a common theme. Section 1, for example, provides an overview of the budget and off-budget totals; Section 2 provides tables on receipts by source; and Section 3 shows outlays by function. When a section contains several tables, the general rule is to start with tables showing the broadest overview data and then work down to more detailed tables. The purpose of these tables is to present a broad range of historical budgetary data in one convenient reference source and to provide relevant comparisons likely to be most useful. The most common comparisons are in terms of proportions (e.g., each major receipt category as a percentage of total receipts and of the gross domestic product).[7]
The CBO calculates 35-year baseline projections, which are used extensively in the budget process. Baseline projections are intended to reflect spending under current law, and are not intended as predictions of the most likely path of the economy. During the George W. Bush Administration, the OMB presented five-year projections, but presented 45-year projections in the FY2010 budget submission. The CBO and the GAO issue long-term projections from time to time.
During FY 2010, the federal government collected approximately $2.16 trillion in tax revenue. Primary receipt categories included individual income taxes (42%), Social Security/Social Insurance taxes (40%), and corporate taxes (9%).[8] Other types included excise, estate and gift taxes.
Tax revenues have averaged approximately 18.3% of gross domestic product (GDP) over the 1970-2009 period, generally ranging plus or minus 2% from that level. Tax revenues are significantly affected by the economy. Recessions typically reduce government tax collections as economic activity slows. For example, tax revenues declined from $2.5 trillion in 2008 to $2.1 trillion in 2009, and remained at that level in 2010. During 2009, individual income taxes declined 20%, while corporate taxes declined 50%. At 14.9% of GDP, the 2009 and 2010 collections were the lowest level of the past 50 years.[8][9]
The federal personal income tax is progressive, meaning a higher marginal tax rate is applied to higher ranges of income. For example, in 2010 the tax rate that applied to the first $17,000 in taxable income for a couple filing jointly was 10%, while the rate applied to income over $379,150 was 35%. The top marginal tax rate has declined considerably since 1980. For example, the top tax rate was lowered from 70% to 50% in 1980 and reached as low as 28% in 1988. The most recent changes were the Bush tax cuts of 2001 and 2003, extended by President Obama in 2010, which lowered the top rate from 39.6% to 35%.[10] There are numerous exemptions and deductions, that typically result in a range of 35-40% of U.S. households owing no federal income tax. The recession and tax cut stimulus measures increased this to 51% for 2009, versus 38% in 2007.[11]
The federal payroll tax (FICA) is a flat tax used to fund Social Security and Medicare. For the Social Security portion, employers and employees each pay 6.2% of the workers gross pay, a total of 12.4%. The Social Security portion is capped at $106,800, meaning income above this amount is not subject to the tax. The Medicare portion is also paid by employer and employee each at 1.45% and is not capped.[12] The payroll tax is considered by some to be a form of social insurance rather than a tax, due to the benefits these programs pay to qualified recipients. For calendar year 2011, the employee's portion of the payroll tax was reduced to 4.2% as an economic stimulus measure.[13]
The term "tax expenditures" refers to income exemptions or deductions that reduce the tax collections that would be made applying a particular tax rate alone. In November 2009, The Economist estimated the additional federal tax revenue generated from eliminating certain tax expenditures, for the 2013-2014 period. These included: income exemptions for employer-provided health insurance ($215 billion); and various income deductions such as mortgage interest ($147B), state & local taxes ($65B), capital gains on homes ($60B), property taxes ($33B) and municipal bond interest ($37B). These total $557 billion. All of these steps together would reduce the projected deficit at that time by nearly half.[14]
The Congressional Joint Committee on Taxation estimated in 2008 the amount of federal tax expenditures for the five year (2008–2012) period. Examples include: Exclusions for healthcare insurance paid for by employers-$680B; reduced tax rate on dividends and long-term capital gains-$668B; deduction for mortgage interest on owner-occupied residences-$444B; exclusions for pre-tax defined benefit or defined contribution pension contributions such as to 401K plans-$554B; deductions for non-business state and local income taxes-$242B; deductions for charitable contributions-$205B; exclusion of benefits under healthcare insurance "cafeteria" plans-$201B; exclusion for interest on state and local government bonds-$147B; exclusion for Medicare benefits-$134B; deduction for real property taxes-$112B; dependent credit for children under 17 years of age-$105B; exclusion for capital gains on sale of primary residence-$90B; and deductions for long-term care and other medical expenses-$68B.[15]
According to the Center for American Progress, annual tax expenditures have increased from $526 billion in 1982 to $1,025 billion in 2010, adjusted for inflation (measured in 2010 dollars).[16] Economist Mark Zandi wrote in July 2011 that tax expenditures should be considered a form of government spending.[17]
Comparison of tax rates around the world is difficult and somewhat subjective. Tax laws in most countries are extremely complex, and tax burden falls differently on different groups in each country and sub-national units (states, counties and municipalities) and the types of services rendered through those taxes are also different.
One way to measure the overall tax burden is by looking at it as a percentage of the overall economy in terms of GDP. The Tax Policy Center wrote: "U.S. taxes are low relative to those in other developed countries. In 2006 U.S. taxes at all levels of government claimed 28 percent of GDP, compared with an average of 36 percent of GDP for the 30 member countries of the Organization for Economic Co-operation and Development (OECD)."[18] Economist Simon Johnson wrote in 2010: "The U.S. government doesn’t take in much tax revenue -- at least 10 percentage points of GDP less than comparable developed economies -- and it also doesn’t spend much except on the military, Social Security and Medicare."[19] A comparison of taxation on individuals amongst OECD countries shows that the U.S. tax burden is just slightly below the average tax for middle income earners.[20]
Deficit spending can distort the true total effective taxation. One way to mitigate this distortion is to evaluate spending levels. This approach shows the level of services a country is willing to accept versus what they are willing to pay. In 2010, the Federal government of the USA spent an average of $11,041 per citizen (per capita). This compares to the 2010 World average spending of $2376 per citizen and an average of $16,110 per citizen for the World's 20 largest economies (in terms of GDP). Of the 20 largest economies, only six spent less per citizen: South Korea ($4557), Brazil ($2813), Russia ($2458), China ($1010), and India ($$226). Of the 13 that spent more, Norway and Sweden top the list with per citizen spending of $40908 and $26760 respectively.[21]
In comparing corporate taxes, the Congressional Budget Office found in 2005 that the top statutory tax rate was the third highest among OECD countries behind Japan and Germany. However, the U.S. ranked 27th lowest of 30 OECD countries in its collection of corporate taxes relative to GDP, at 1.8% vs. the average 2.5%.[22] Bruce Bartlett wrote in May 2011: "...one almost never hears that total revenues are at their lowest level in two or three generations as a share of G.D.P. or that corporate tax revenues as a share of G.D.P. are the lowest among all major countries. One hears only that the statutory corporate tax rate in the United States is high compared with other countries, which is true but not necessarily relevant. The economic importance of statutory tax rates is blown far out of proportion by Republicans looking for ways to make taxes look high when they are quite low."[23]
The federal government's expenditures in FY2010 included Medicare & Medicaid ($793B or 23%), Social Security ($701B or 20%), Defense Department ($689B or 20%), non-defense discretionary ($660B or 19%), other ($416B or 12%) and interest ($197B or 6%). Expenditures are classified as mandatory, with payments required by specific laws, or discretionary, with payment amounts renewed annually as part of the budget process. During FY 2010, the federal government spent $3.46 trillion on a budget or cash basis, down 2% vs. FY 2009 but up 16% versus FY2008 spend of $2.97 trillion. Expenditures averaged 20.6% GDP from 1971 to 2008, generally ranging +/-2% GDP from that level. In 2009 and 2010, expenditures averaged 24.4% GDP.[8]
Social Security, Medicare, and Medicaid expenditures are funded by permanent appropriations and so are considered mandatory spending. Social Security and Medicare are sometimes called "entitlements," because people meeting relevant eligibility requirements are legally entitled to benefits, although most pay taxes into these programs throughout their working lives. Some programs, such as Food Stamps, are appropriated entitlements. Some mandatory spending, such as Congressional salaries, is not part of any entitlement program. Mandatory spending accounted for 53% of total federal outlays in FY2008, with net interest payments accounting for an additional 8.5%.[24]
Mandatory spending is expected to increase as a share of GDP. This is due in part to demographic trends, as the number of workers continues declining relative to those receiving benefits. For example, the number of workers per retiree was 5.1 in 1960; this declined to 3.0 in 2010 and is projected to decline to 2.2 by 2030.[25][26] These programs are also affected by per-person costs, which are also expected to increase at a rate significantly higher than the economy. This unfavorable combination of demographics and per-capita rate increases is expected to drive both Social Security and Medicare into large deficits during the 21st century. Unless these long-term fiscal imbalances are addressed by reforms to these programs, raising taxes or drastic cuts in discretionary programs, the federal government will at some point be unable to pay its obligations without significant risk to the value of the dollar (inflation).[27][28]
The annual budget deficit is the difference between actual cash collections and budgeted spending (a partial measure of total spending) during a given fiscal year, which runs from October 1 to September 30. Since 1970, the U.S. federal government has run deficits for all but four years (1998–2001)[48] contributing to a total debt of $14.0 trillion as of December 2010.[49] The fiscal year 2010 "total budget" deficit was $1.29 trillion or 8.9% GDP, down from $1.41 trillion or 10.0% GDP in 2009. These deficits are considerably higher than pre-crisis levels, which ranged from a $236 billion (2.4% GDP) surplus in 2000 to a $459 billion (3.2% GDP) deficit in 2008.[8]
The national debt increase during a given year is not the same as the "total budget" deficit commonly reported, due to a variety of accounting complexities involved. These differences can make it more challenging to determine how much the government actually spends relative to tax revenues. The increase in the national debt during a given year is a helpful measure to determine this amount. From FY 2003-2007, the national debt increased approximately $550 billion per year on average. For the first time in FY 2008, the U.S. added $1 trillion to the national debt as the effects of a severe global financial crisis became apparent. Debt increases rose to $1.88 trillion in 2009 and $1.65 trillion in 2010 as the crisis continued.[50] In relative terms, from 2003-2007 the government spent roughly $1.20 for each $1.00 it collected in taxes. This increased to $1.40 in FY2008 and $1.90 in FY2009.
The total federal debt is divided into "debt held by the public" and "intra-governmental debt." The debt held by the public refers to U.S. government securities or other obligations held by investors (e.g., bonds, bills and notes), while Social Security and other federal trust funds are part of the intra-governmental debt. As of August 31, 2011 the total debt was $14.7 trillion, with debt held by the public of $10.0 trillion and intragovernmental debt of $4.7 trillion.[51] Debt held by the public as a percentage of GDP rose from 34.7% in 2000 to 40.3% in 2008 and 62.1% in 2010.[52] U.S. GDP was approximately $14.5 trillion during 2010 and an estimated $15 trillion for 2011 based on activity during the first two quarters.[53] This means the total debt is roughly the size of GDP. Economists debate the level of debt relative to GDP that signals a "red line" or dangerous level, or if any such level exists.[54] By comparison, China's budget deficit was 1.6% of its $10 trillion GDP in 2010, with a debt to GDP ratio of 16%.[55]
The CBO reported several types of risk factors related to rising debt levels in a July 2010 publication:
The CBO reported during June 2011 two scenarios for how debt held by the public will change during the 2010-2035 time period. The "extended baseline scenario" assumes that the Bush tax cuts (extended by Obama) will expire per current law in 2012. It also assumes the alternative minimum tax (AMT) will be allowed to affect more middle-class families, reductions in Medicare reimbursement rates to doctors will occur, and that revenues reach 23% GDP by 2035, much higher than the historical average 18%. Under this scenario, activities such as national defense and a wide variety of domestic programs (excluding Social Security, Medicare, and interest) would decline to the lowest percentage of GDP since before World War II. Under this scenario, public debt rises from 69% GDP in 2011 to 84% by 2035, with interest payments absorbing 4% of GDP vs. 1% in 2011.[57]
CBO estimated in August 2011 that if laws currently "on the books" were enforced without changes, meaning the "extended baseline scenario" described above is implemented along with deficit reductions from the Budget Control Act of 2011, the deficit would decline from 8.5% GDP in 2011 to around 1% GDP by 2021.[58][59]
The "alternative fiscal scenario" more closely assumes the continuation of present trends, such as permanently extending the Bush tax cuts, restricting the reach of the AMT, and keeping Medicare reimbursement rates at the current level (the so-called "doc fix", versus declining by one-third as mandated under current law). Revenues are assumed to remain around the historical average 18% GDP. Under this scenario, public debt rises from 69% GDP in 2011 to 100% by 2021 and approaches 190% by 2035.[57]
The CBO reported in June 2011: "Many budget analysts believe that the alternative fiscal scenario presents a more realistic picture of the nation’s underlying fiscal policies than the extended-baseline scenario does. The explosive path of federal debt under the alternative fiscal scenario underscores the need for large and rapid policy changes to put the nation on a sustainable fiscal course."[57]
CBO reported in September 2011: "The nation cannot continue to sustain the spending programs and policies of the past with the tax revenues it has been accustomed to paying. Citizens will either have to pay more for their government, accept less in government services and benefits, or both."[60]
Topics frequently in the news in the 2010-2011 time period included: a) the effect of the Bush tax cuts and related extension; b) causes of deficit and debt increases; c) the effects of fraud, waste and earmarks; d) whether a "danger level" of debt exists; and e) the effects of globalization and free trade on employment, among others. Many of the debates surrounding the United States federal budget center around competing macroeconomic schools of thought. In general, Democrats favor the principles of Keynesian economics to encourage economic growth via a mixed economy of both private and public enterprise, a welfare state, and strong regulatory oversight. Conversely, Republicans generally support applying the principles of either laissez-faire or supply-side economics to grow the economy via small government, low taxes, limited regulation, and free enterprise.[61][62] Debates have surrounded the appropriate size and role of the federal government since the founding of the country. These debates also deal with questions of morality, income equality and intergenerational equity. For example, Congress adding to the debt today may or may not enhance the quality of life for future generations, who must also bear the additional interest and taxation burden.[63]
Economic growth and employment are key factors driving recent deficits. The Congressional Budget Office (CBO) estimated in October 2011 that approximately one-third of the deficit projected for fiscal year 2012 is due to economic factors, which have caused safety net expenditures to increase and tax revenues to decline with high unemployment.[64]
The U.S. last balanced its budget in 2001. Between 2001 and 2010, spending increased by 5.6% GDP (from 18.2% GDP in 2001 to 23.8% GDP in 2010), while revenues declined by 4.6% GDP (from 19.5% GDP in 2001 to 14.9% GDP in 2010), resulting in a 9.4% GDP deficit. Medicare/Medicaid spending increased by 1.9% GDP and defense spending increased by 1.7% GDP. Individual income tax revenues fell by 3.5% GDP and payroll taxes fell by 0.8% GDP.[65][66]
Economist Paul Krugman summarized these causes in May 2011: "What happened to the budget surplus the federal government had in 2000? The answer is, three main things. First, there were the Bush tax cuts, which added roughly $2 trillion to the national debt over the last decade. Second, there were the wars in Iraq and Afghanistan, which added an additional $1.1 trillion or so. And third was the Great Recession, which led both to a collapse in revenue and to a sharp rise in spending on unemployment insurance and other safety-net programs."[67]
Strategies for addressing the deficit problem may include policy choices regarding taxation and spending, along with policies designed to increase economic growth and reduce unemployment. These policy decisions may be evaluated in the context of a framework:[68]
The CBO reported in September 2011 that: "Given the aging of the population and rising costs for health care, attaining a sustainable federal budget will require the United States to deviate from the policies of the past 40 years in at least one of the following ways:
During testimony before the Congressional Joint Deficit Reduction Committee in September 2011, CBO Director Douglas Elmendorf counseled members of Congress to make decisions about the role of the federal government, then make policy choices to obtain the revenue necessary to fund those roles, to put the U.S. on a sustainable fiscal path.[73]
A variety of government task forces, expert panels, private institutions, politicians, and journalists have made recommendations for addressing the deficit and debt:
How urgently should the U.S. put plans in place to address its budget challenges? Fed Chair Ben Bernanke stated in January 2007: "The longer we wait, the more severe, the more draconian, the more difficult the objectives are going to be. I think the right time to start was about 10 years ago."[81]
The President's budget also contains revenue and spending projections for the current fiscal year, the coming fiscal years, as well as several future fiscal years. In recent years, the President's budget contained projections five years into the future. The Congressional Budget Office (CBO) issues a "Budget and Economic Outlook" each January and an analysis of the President's budget each March. CBO also issues an updated budget and economic outlook in August.
Actual budget data for prior years is available from the Congressional Budget Office [82] and from the Office of Management and Budget (OMB).[83]
One of the best ways to understand the long-term budget risks is through helpful charts. The following sources contain charts and commentary:
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