United States federal budget

U.S. Federal spending and revenue components for fiscal year 2016

The United States federal budget comprises the spending and revenues of the US federal government. The budget is the financial representation of the priorities of the government, reflecting historical debates and competing economic philosophies. The government primarily spends on healthcare, retirement, and defense programs. The non-partisan Congressional Budget Office provides extensive analysis of the budget and its economic effects. It has reported that the U.S. is facing a series of long-term financial challenges, as the country ages and healthcare costs continue growing faster than the economy.[1]

Overview

Federal taxes by type
Annual Federal Deficit as a percent of GDP
Federal spending vs revenue

The budget document often begins as the President's proposal to the U.S. Congress which recommends funding levels for the next fiscal year, beginning October 1 and ending on September 30 of the year following. The fiscal year is named for the year in which it ends. However, Congress is the body required by law to pass appropriations annually and to submit funding bills passed by both houses to the President for signature. 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.[2]

If Congress fails to pass an annual budget, a series of Appropriations bills must be passed as "stop gap" measures. After Congress approves an appropriations bill, it is sent to the President, who may sign it into law, or may veto it (as he would a budget when passed by the Congress). 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 long-run financing challenges, primarily driven by an aging population, rising interest payments, and spending for healthcare programs such as Medicare and Medicaid.[3][1]

During fiscal year 2016, the Federal government received approximately $3.3 trillion in tax and fee revenue and had outlays (spending) of $3.9 trillion; the difference was a $587 billion deficit. Measured as a percentage of gross domestic product (a measure of the size of the economy), revenues were 17.8% GDP, above the historical average (1980-2015) of 17.4% GDP. Outlays of 20.9% GDP were slightly above the average of 20.6% GDP. The deficit of 3.2% GDP was equal to the historical average. After a significant increase primarily due to the Great Recession, the annual deficit returned to its historical average in fiscal year 2014 and is projected to remain around that level until 2019 before slowly rising.[1]

President Donald Trump has proposed policies including significant tax cuts and increased spending on defense. The Committee for a Responsible Federal Budget and Moody's Analytics reported in 2016 that enacting these policies would dramatically increase the annual budget deficits and national debt over the 2017-2026 periods, relative to the current policy baseline, which already includes a sizable debt increase.[4][5]

Budget principles

The U.S. Constitution (Article I, section 9, clause 7) states that "No 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 a 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 the 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 other national 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.[6]

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 the legal budget authority to spend.[7] 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 veto power and through congressional allies when the president's party has a majority in Congress.

Budget authority versus outlays

The amount of budget authority and outlays for a fiscal year usually differ because the government can incur obligations for future years. This means that budget authority from a previous fiscal year can, in many cases, be used for expenditure of funds in future fiscal years; for example, a multi-year contract.

Budget authority is the legal 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 their budget authority is specified for several coming fiscal years.

In the congressional budgeting process, an "authorization" (technically the "authorization act") provides the legal authority for the executive branch to act, establishes an account which can receive money to implement the action, and sets a limit on how much money may be expended. However, this account remains empty until Congress approves an "appropriation", which requires the U.S. Treasury to provide funds (up to the limit provided for in the authorization). Congress is not required to appropriate as much money as is authorized.[8]

Congress may both authorize and appropriate in the same bill. Known as "authorization bills", such legislation usually provides for a multi-year authorization and appropriation. Authorization bills are particularly useful when funding entitlement programs (benefits which federal law says an individual has a right to, regardless if any money is appropriated), where estimating the amount of funds to be spent is difficult. Authorization bills are also useful when giving a federal agency the right to borrow money, sign contracts, or provide loan guarantees. In 2007, two-thirds of all federal spending came through authorization bills.[9]

A "backdoor authorization" occurs when an appropriation is made and an agency required to spend the money even when no authorizing legislation has been enacted. A "backdoor appropriation" occurs when authorizing legislation requires an agency to spend a specific amount of money on a specific project within a specific period of time. Because the agency would be violating the law if it did not do so, it is required to spend the money—even if no appropriation has been made. Backdoor appropriations are particularly vexsome because removing the appropriation requires amending federal law, which is often politically impossible to do within a short period of time. Backdoor authorizations and appropriations are sources of significant friction in Congress. Authorization and appropriations committees jealously guard their legislative rights, and the congressional budgeting process can break down when committees overstep their boundaries and are retaliated against.[10]

Federal budget data

Several government agencies provide budget data. These include the Government Accountability Office (GAO), the Congressional Budget Office (CBO), the Office of Management and Budget (OMB) and the U.S. Treasury Department. The CBO publishes The Budget and Economic Outlook in January, which covers a ten-year window and is typically updated in August. It also publishes a Long-Term Budget Outlook in July and 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).[11]

Federal budget projections

The Congressional Budget Office (CBO) projects budget data such as revenues, expenses, deficits, and debt as part of its "Long-term Budget Outlook" which is released annually. The 2014 Outlook included projections for debt through 2039 and beyond. CBO outlined several scenarios that result in a range of outcomes. The "Extended Baseline" scenario and "Extended Alternative Fiscal" scenario both result in a much higher level of debt relative to the size of the economy (GDP) as the country ages and healthcare costs rise faster than the rate of economic growth. CBO also identified scenarios involving significant austerity measures, which maintain or reduce the debt relative to GDP over time.[12]

The sooner austerity steps are taken (e.g., raising revenues or reducing spending or a combination of both), the smaller those changes can be to maintain or reduce the debt level projected in 2039. For example, under the baseline scenario, stabilizing the ratio of debt to GDP at 74% (its current level) would require non-interest spending cuts and/or tax hikes of 1.2% of GDP annually if implemented in 2015, or 1.5% of GDP annually if begun in 2020. To bring the debt-to-GDP ratio back to its 40-year average of 39%, the austerity measures required would be 2.6% GDP if begun in 2015 and 3.2% GDP if begun in 2020. Over the 1974 to 2013 period, federal spending averaged 20.5% GDP and revenue 17.4% GDP. For scale, a 2% GDP reduction in spending would be approximately a 10% spending cut.[12]

Major receipt categories

During FY2015, the federal government collected approximately $3.25 trillion in tax revenue, up $228B (billion) or 8% versus FY2014. Primary receipt categories included individual income taxes ($1,541B or 47% of total receipts), Social Security/Social Insurance taxes ($1,065B or 33%), and corporate taxes ($344B or 11%). Other revenue types included excise, estate and gift taxes.[1]

FY 2015 revenues were 18.2% of gross domestic product (GDP), versus 17.6% in FY 2014 and 16.8% in FY 2013. Tax revenues averaged approximately 17.4% GDP over the 1980-2015 period, generally ranging plus or minus 2% from that level.[1]

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. From 2008 to 2009, individual income taxes declined 20%, while corporate taxes declined 50%. At 14.6% of GDP, the 2009 and 2010 collections were the lowest level of the past 50 years.[1]

Tax policy

Revenue and Expense as % GDP.

Tax descriptions

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 Bush tax cuts of 2001 and 2003, extended by President Obama in 2010, lowered the top rate from 39.6% to 35%.[13] The American Taxpayer Relief Act of 2012 raised the income tax rates for individuals earning over $400,000 and couples over $450,000. 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.[14] In 2011 it was found that 46% of households paid no federal income tax, however the top 1% contributed about 25% of total taxes collected.[15]

The federal payroll tax (FICA) partially funds 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 $118,500 for 2015, meaning income above this amount is not subject to the tax. It is a flat tax up to the cap, but regressive overall as it is not applied to higher incomes. The Medicare portion is also paid by employer and employee each at 1.45% and is not capped. Starting in 2013, an additional 0.9 percent more in Medicare taxes was applied to income of more than $200,000 ($250,000 for married couples filing jointly), making it a progressive tax overall.

For calendar years 2011 and 2012, the employee's portion of the payroll tax was reduced to 4.2% as an economic stimulus measure; this expired for 2013.[16] Approximately 65% percent of tax return filers pay more in payroll taxes than income taxes.[17]

Tax expenditures

CBO charts describing amount and distribution of top 10 tax expenditures (i.e., exemptions, deductions, and preferential rates)

The term "tax expenditures" refers to income exclusions, deductions, preferential rates, and credits that reduce revenues for any given level of tax rates in the individual, payroll, and corporate income tax systems. Like conventional spending, they contribute to the federal budget deficit. They also influence choices about working, saving, and investing, and affect the distribution of income. The amount of reduced federal revenues are significant, estimated by CBO at nearly 8% GDP or about $1.5 trillion in 2017, for scale roughly half the revenue collected by the government and nearly three times as large as the budget deficit. Since eliminating a tax expenditure changes economic behavior, the amount of additional revenue that would be generated is somewhat less than the estimated size of the tax expenditure.[1]

CBO reported that the following were among the largest individual (non-corporate) tax expenditures in 2013:

In 2013, CBO estimated that more than half of the combined benefits of 10 major tax expenditures would apply to households in the top 20% income group, and that 17% of the benefit would go to the top 1% households. The top 20% of income earners pay about 70% of federal income taxes, excluding payroll taxes.[18] For scale, 50% of the $1.5 trillion in tax expenditures in 2016 was $750 billion, while the U.S. budget deficit was approximately $600 billion.[1] In other words, eliminating the tax expenditures for the top 20% might balance the budget over the short-term, depending on economic feedback effects.

Major expenditure categories

CBO projections of U.S. Federal spending as % GDP 2014-2024

During FY2015, the federal government spent $3.68 trillion on a budget or cash basis, up $182 billion or 5% vs. FY2014 spending of $3.50 trillion. Major categories of FY 2015 spending included: Healthcare such as Medicare and Medicaid ($937B or 25% of spending), Social Security ($882B or 24%), non-defense discretionary spending used to run federal Departments and Agencies ($585B or 16%), Defense Department ($583B or 16%), other mandatory programs such as food stamps and unemployment compensation ($479B or 13%) and interest ($223B or 6%).[1]

Expenditures are classified as "mandatory", with payments required by specific laws to those meeting eligibility criteria (e.g., Social Security and Medicare), or "discretionary", with payment amounts renewed annually as part of the budget process. Around two thirds of federal spending is for "mandatory" programs. CBO projects that mandatory program spending and interest costs will rise relative to GDP over the 2016–2026 period, while defense and other discretionary spending will decline relative to GDP.[1]

Mandatory spending and social safety nets

Social Security – Ratio of Covered Workers to Retirees
Entitlement Spending Risks

Social Security, Medicare, and Medicaid expenditures are funded by more permanent Congressional appropriations and so are considered mandatory spending.[19] 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 59.8% of total federal outlays (net of receipts that partially pay for the programs), with net interest payments accounting for an additional 6.5%. In 2000, these were 53.2% and 12.5%, respectively.[1]

Mandatory spending is expected to continue increasing 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.[20][21] These programs are also affected by per-person costs, which are also expected to increase at a rate significantly higher than economic growth. 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).[22][23] By one estimate, 70% of the growth in these entitlement expenses over the 2016-2046 period is due to healthcare.[24]

Note: CBO estimated in 2010 that policy changes with a 0.6% of GDP annual impact are sufficient to address the 75-year program shortfall. Abbreviations are explained in the chart page. Source: CBO Report-July 2010.

Discretionary spending

Defense Spending 2001–2017.
FY 2013 Estimated Federal Spending per 2013 Budget

Interest expense

CBO reported that net interest on the public debt was approximately $223 billion in FY2015 (6.1% of spending), down from $229 billion in FY2014. A higher level of debt was offset by lower interest rates.[1] During FY2012, the GAO reported a figure of $245 billion, down from $251 billion. Government also accrued a non-cash interest expense of $187 billion for intra-governmental debt, primarily the Social Security Trust Fund, for a total interest expense of $432 billion. GAO reported that even though the national debt rose in FY2012, the interest rate paid declined.[44] Should interest rates rise to historical averages, the interest cost would increase dramatically.

As of January 2012, public debt owned by foreigners has increased to approximately 50% of the total or approximately $5.0 trillion.[45] As a result, nearly 50% of the interest payments are now leaving the country, which is different from past years when interest was paid to U.S. citizens holding the public debt. Interest expenses are projected to grow dramatically as the U.S. debt increases and interest rates rise from very low levels to more typical historical levels.[1]

Understanding deficits and debt

Deficit and Debt Increases 2001-2016.

Relationship of deficit and debt

Intuitively, the annual budget deficit should represent the amount added to the national debt.[46] However, there are certain types of spending ("supplemental appropriations") outside the budget process which are not captured in the deficit computation, which also add to the national debt. Prior to 2009, spending for the wars in Iraq and Afghanistan was often funded through special appropriations excluded from the budget deficit calculation. In FY2010 and prior, the budget deficit and annual change in the national debt were significantly different. For example, the U.S. added $1 trillion to the national debt in FY2008 but reported a deficit of $455 billion. Due to rules changes implemented under President Obama in 2009, the two figures have moved closer together and were nearly identical in 2013 (a CBO reported deficit of $680 billion versus change in debt of $672 billion). For FY2014, the difference widened again, with the CBO reporting a deficit of $483 billion [47] versus a change in total debt outstanding of $1,086 billion.[48]

Debt categories

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 September 30, 2012 the total debt was $16.1 trillion, with debt held by the public of $11.3 trillion and intragovernmental debt of $4.8 trillion.[49] Debt held by the public as a percentage of GDP rose from 34.7% in 2000 to 40.3% in 2008 and 70.0% in 2012.[50] U.S. GDP was approximately $15 trillion during 2011 and an estimated $15.6 trillion for 2012 based on activity during the first two quarters.[51] 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.[52] By comparison, China's budget deficit was 1.6% of its $10 trillion GDP in 2010, with a debt to GDP ratio of 16%.[53]

Risks associated with the debt

Total Debt $ and % to GDP 2000–2015

The CBO reported several types of risk factors related to rising debt levels in a July 2010 publication:

However, since mid to late 2010, the U.S. Treasury has been obtaining negative real interest rates at Treasury security auctions. At such low rates, government debt borrowing saves taxpayer money according to one economist.[55] There is no guarantee that such rates will continue, but the trend has remained falling or flat as of October 2012.[56]

Fears of a fiscal crisis triggered by a significant selloff of U.S. Treasury securities by foreign owners such as China and Japan did not materialize, even in the face of significant sales of those securities during 2015, as demand for U.S. securities remained robust.[57]

Government budget balance as a sectoral component

Sectoral financial balances in U.S. economy 1990-2015. By definition, the three balances must net to zero. Since 2009, the U.S. capital surplus and private sector surplus have driven a government budget deficit.

Economist Martin Wolf explained in July 2012 that government fiscal balance is one of three major financial sectoral balances in the U.S. economy, the others being the foreign financial sector and the private financial sector. The sum of the surpluses or deficits across these three sectors must be zero by definition. Since the foreign and private sectors are in surplus, the government sector must be in deficit.

Wolf argued that the sudden shift in the private sector from deficit to surplus due to the global economic conditions forced the government balance into deficit, writing: "The financial balance of the private sector shifted towards surplus by the almost unbelievable cumulative total of 11.2 per cent of gross domestic product between the third quarter of 2007 and the second quarter of 2009, which was when the financial deficit of US government (federal and state) reached its peak...No fiscal policy changes explain the collapse into massive fiscal deficit between 2007 and 2009, because there was none of any importance. The collapse is explained by the massive shift of the private sector from financial deficit into surplus or, in other words, from boom to bust."[58]

Economist Paul Krugman also explained in December 2011 the causes of the sizable shift from private sector deficit to surplus: "This huge move into surplus reflects the end of the housing bubble, a sharp rise in household saving, and a slump in business investment due to lack of customers."[59]

CBO budget projections

CBO-Public Debt Under "Extended" and "Alternate" Scenarios
Spending for mandatory programs is projected to rise relative to GDP, while discretionary programs decline
Interest to GDP, a measure of debt burden, was very low in 2015 but is projected to rise with both interest rates and debt levels over the 2016-2026 period.

Short-term outlook

CBO reported in October 2014: "The federal government ran a budget deficit of $486 billion in fiscal year 2014...$195 billion less than the shortfall recorded in fiscal year 2013, and the smallest deficit recorded since 2008. Relative to the size of the economy, that deficit—at an estimated 2.8 percent of gross domestic product (GDP)—was slightly below the average experienced over the past 40 years, and 2014 was the fifth consecutive year in which the deficit declined as a percentage of GDP since peaking at 9.8 percent in 2009. By CBO's estimate, revenues were about 9 percent higher and outlays were about 1 percent higher in 2014 than they were in the previous fiscal year."[3]

CBO reported in its February 2014 Budget and Economic Outlook (which covers the 2014-2024 period) that deficits were projected to return to approximately the historical average relative to the size of the economy (GDP) by 2014. CBO estimated that under current law, the deficit would total $514 billion in fiscal year 2014 or 3.0% GDP. Deficits would then slowly begin rising again through 2024 due primarily to the pressures of an aging population and rising healthcare costs per person. The debt to GDP ratio would remain stable for much of the decade then begin rising again toward the end of the 10-year forecast window, from 74% in 2014 to 79% in 2024.[1]

Long-term outlook

The Congressional Budget Office (CBO) reports its Long-Term Budget Outlook annually, providing at least two scenarios for spending, revenue, deficits, and debt. The 2014 Outlook mainly covers the 25-year period through 2039.

The "extended baseline scenario" assumes that the laws currently on the books will be implemented, for the most part. CBO reported in July 2014 that under this scenario: "If current laws remained generally unchanged in the future, federal debt held by the public would decline slightly relative to GDP over the next few years. After that, however, growing budget deficits would push debt back to and above its current high level. Twenty-five years from now, in 2039, federal debt held by the public would exceed 100 percent of GDP. Moreover, debt would be on an upward path relative to the size of the economy, a trend that could not be sustained indefinitely. By 2039, the deficit would equal 6.5 percent of GDP, larger than in any year between 1947 and 2008, and federal debt held by the public would reach 106 percent of GDP, more than in any year except 1946—even without factoring in the economic effects of growing debt."[12]

The "extended alternative fiscal scenario" assumes the continuation of present trends, which result in a more unfavorable debt position and adverse economic consequences relative to the baseline scenario. CBO reported in July 2014 that under this scenario: "[C]ertain policies that are now in place but are scheduled to change under current law are assumed to continue, and some provisions of current law that might be difficult to sustain for a long period are assumed to be modified. Under that scenario, deficits excluding interest payments would be about $2 trillion larger over the first decade than those under the baseline; subsequently, such deficits would be larger than those under the extended baseline by rapidly increasing amounts, doubling as a percentage of GDP in less than 10 years. CBO projects that real GNP in 2039 would be about 5 percent lower under the extended alternative fiscal scenario than under the extended baseline with economic feedback, and that interest rates would be about three-quarters of a percentage point higher. Reflecting the budgetary effects of those economic developments, federal debt would rise to 183 percent of GDP in 2039."[12]

Over the long-term, CBO projects that interest expense and mandatory spending categories (e.g., Medicare, Medicaid and Social Security) will continue to grow relative to GDP, while discretionary categories (e.g., Defense and other Cabinet Departments) continue to fall relative to GDP. Debt is projected to continue rising relative to GDP under the above two scenarios, although the CBO did also offer other scenarios that involved austerity measures that would bring the debt to GDP ratio down.[12]

CBO estimated under the baseline scenario that the U.S. debt held by the public would increase approximately $8.5 trillion between the end of 2014 and 2024. Under a $2 trillion deficit reduction scenario during that first decade, federal debt held by the public in 2039 would stand at 75 percent of GDP, only slightly above the value of 72 percent at the end of 2013. Under a $4 trillion deficit reduction scenario for that decade, federal debt held by the public would fall to 42 percent of GDP in 2039. By comparison, such debt was 35 percent of GDP in 2007 and has averaged 39 percent of GDP during the past 40 years.[12]

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]

CBO baseline for the Trump administration

In January 2017, the Congressional Budget Office reported its baseline budget projections for the 2017-2027 time periods, based on laws in place as of the end of the Obama administration. CBO forecasted that "debt held by the public" would increase from $14.2 trillion in 2016 to $24.9 trillion by 2027, an increase of $10.7 trillion. These increases are primarily driven by an aging population, which impacts the costs of Social Security and Medicare, along with interest on the debt.[61] As President Trump introduces his budgetary policies, the impact can be measured against this baseline.

CBO also estimated that if policies in place as of the end of the Obama administration continued over the following decade, real GDP would grow at approximately 2% per year, the unemployment rate would remain around 5%, inflation would remain around 2%, and interest rates would rise moderately.[61] President Trump's economic policies can also be measured against this baseline.

Contemporary issues and debates

Conceptual arguments

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.[62][63] 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.[64]

Political realities make major budgetary deals difficult to achieve. While Republicans argue conceptually for reductions in Medicare and Social Security, they are hesitant to actually vote to reduce the benefits from these popular programs. Democrats on the other hand argue conceptually for tax increases on the wealthy, yet may be hesitant to vote for them because of the effect on campaign donations from the wealthy. The so-called budgetary "grand bargain" of tax hikes on the rich and removal of some popular tax deductions in exchange for reductions to Medicare and Social Security is therefore elusive.[65]

The Great Recession

Comparison of actual U.S. Federal Spending 2008-2015 versus a trend line based on the 5% average annual increase from 1990-2008.

In the wake of the 2007-2009 U.S. recession, there were several important fiscal debates around key questions:

  1. What caused the sizable deficit increases during and shortly after the Great Recession? The CBO reported that the deficit expansion was mainly due to the economic downturn rather than policy choices. Revenue fell while social safety net spending increased for programs such as unemployment compensation and food stamps, as more families qualified for benefits.[66] From 2008 to 2009, the large deficit increase was also driven by spending on stimulus and bailout programs.[67]
  2. Should the Bush tax cuts of 2001 and 2003 be allowed to expire in 2010 as scheduled? Ultimately, the Bush tax cuts were allowed to expire for the highest income taxpayers only as part of the American Taxpayer Relief Act of 2012.
  3. Should significant deficits be continued or should fiscal austerity be implemented? While the deficit jumped from 2008 to 2009, by 2014 it had fallen to its historical average relative to the size of the economy (GDP). This was due to the recovering economy, which had increased tax revenue. In addition, tax increases were implemented on higher-income taxpayers, while military and non-military discretionary spending were reduced or restrained (sequestered) as part of the Budget Control Act of 2011.

Healthcare reform

The Medicare Trustees reduced their forecast for Medicare costs as % GDP, mainly due to a lower rate of healthcare cost increases.

The CBO has consistently reported since 2010 that the Patient Protection and Affordable Care Act (also known as "Obamacare") would reduce the deficit, as its tax increases and reductions in future Medicare spending offset its incremental spending for subsidies for low-income households. The CBO reported in June 2015 that repeal of the ACA would increase the deficit between $137 billion and $353 billion over the 2016-2025 period in total, depending on the impact of macroeconomic feedback effects. In other words, ACA is a deficit reducer, as its repeal would raise the deficit.[68]

The Medicare Trustees provide an annual report of the program's finances. The forecasts from 2009 and 2015 differ materially, mainly due to changes in the projected rate of healthcare cost increases, which have moderated considerably. Rather than rising to nearly 12% GDP over the forecast period (through 2080) as forecast in 2009, the 2015 forecast has Medicare costs rising to 6% GDP, comparable to the Social Security program.[69]

The increase in healthcare costs is one of the primary drivers of long-term budget deficits. The long-term budget situation has considerably improved in the 2015 forecast versus the 2009 forecast per the Trustees Report.[70]

U.S. healthcare costs were approximately $3.2 trillion or nearly $10,000 per person on average in 2015. Major categories of expense include hospital care (32%), physician and clinical services (20%), and prescription drugs (10%).[71] U.S. costs in 2016 were substantially higher than other OECD countries, at 17.2% GDP versus 12.4% GDP for the next most expensive country (Switzerland).[72] For scale, a 5% GDP difference represents about $1 trillion or $3,000 per person. Some of the many reasons cited for the cost differential with other countries include: Higher administrative costs of a private system with multiple payment processes; higher costs for the same products and services; more expensive volume/mix of services with higher usage of more expensive specialists; aggressive treatment of very sick elderly versus palliative care; less use of government intervention in pricing; and higher income levels driving greater demand for healthcare.[73][74][75] Healthcare costs are a fundamental driver of health insurance costs, which leads to coverage affordability challenges for millions of families. There is ongoing debate whether the current law (ACA/Obamacare) and the Republican alternatives (AHCA and BCRA) do enough to address the cost challenge.[76]

2016 Presidential election

Projected effect of Trump's plans on the debt-to-GDP ratio over ten years, as calculated Moody's Analytics (light blue line) and the Committee for a Responsible Federal Budget (orange line). The black line is the projection under current policy (as calculated by the Congressional Budget Office), which is similar to the CRFB's projection for the policies of Trump's rival, Clinton.[5]

During the 2016 Presidential campaigns, Donald Trump and Hillary Clinton debated additional policies:

Public opinion polls

According to a December 2012 Pew Research Center poll, only a few of the frequently discussed deficit reduction ideas have majority support:

Fewer than 50% support raising the retirement age for Social Security or Medicare, reducing military defense spending, limiting the mortgage interest deduction, or reducing federal funding for low income persons, education and infrastructure.[79]

Proposed deficit reduction

2010 Report of the National Commission on Fiscal Responsibility and Reform-Public Debt as % GDP Under Various Scenarios
Waterfall chart shows cause of change from deficit in 1994 to surplus in 2001, measured as a % GDP. Income tax revenues rose as a % GDP following higher taxes for high income earners, while defense spending and interest fell relative to GDP.

Strategies

There are a variety of proposed strategies for reducing the federal deficit. These may include policy choices regarding taxation and spending, along with policies designed to increase economic growth and reduce unemployment. For example, a fast-growing economy offers the win-win outcome of a larger proverbial economic pie, with higher employment and tax revenues, lower safety net spending and a lower debt-to-GDP ratio. However, most other strategies represent a tradeoff scenario in which money or benefits are taken from some and given to others. Spending can be reduced from current levels, frozen, or the rate of future spending increases reduced. Budgetary rules can also be implemented to manage spending. Some changes can take place today, while others can phase in over time. Tax revenues can be raised in a variety of ways, by raising tax rates, the scope of what is taxed, or eliminating deductions and exemptions ("tax expenditures"). Regulatory uncertainty or barriers can be reduced, as these may cause businesses to postpone investment and hiring decisions.[80]

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 June 2012, Federal Reserve Chair Ben Bernanke recommended three objectives for fiscal policy: 1) Take steps to put the federal budget on a sustainable fiscal path; 2) Avoid unnecessarily impeding the ongoing economic recovery; and 3) Design tax policies and spending programs to promote a stronger economy.[82]

President Barack Obama stated in June 2012: "What I've said is, let's make long-term spending cuts; let's initiate long-term reforms; let's reduce our health care spending; let's make sure that we've got a pathway, a glide-path to fiscal responsibility, but at the same time, let's not under-invest in the things that we need to do right now to grow. And that recipe of short-term investments in growth and jobs with a long-term path of fiscal responsibility is the right approach to take for, I think, not only the United States but also for Europe."[83]

Specific proposals

A variety of government task forces, expert panels, private institutions, politicians, and journalists have made recommendations for reducing the deficit and slowing the growth of debt. Several organizations have compared the future impact of these plans on the deficit, debt, and economy. One helpful way of measuring the impact of the plans is to compare them in terms of revenue and expense as a percentage of GDP over time, in total and by category. This helps illustrate how the different plan authors have prioritized particular elements of the budget.[84]

Government commission proposals

President Obama's proposals

Congressional proposals

Private expert panel proposals

Timing of solutions

There is significant debate regarding the urgency of addressing the short-term and long-term budget challenges. Prior to the 2008-2009 U.S. recession, experts argued for steps to be put in place immediately to address an unsustainable trajectory of federal deficits. For example, 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."[105]

However, experts after the 2008-2009 U.S. recession argued that longer-term austerity measures should not interfere with measures to address the short-term economic challenges of high unemployment and slow growth. Ben Bernanke wrote in September 2011: "...the two goals--achieving fiscal sustainability, which is the result of responsible policies set in place for the longer term, and avoiding creation of fiscal headwinds for the recovery--are not incompatible. Acting now to put in place a credible plan for reducing future deficits over the long term, while being attentive to the implications of fiscal choices for the recovery in the near term, can help serve both objectives."[106]

IMF managing director Christine Lagarde wrote in August 2011: "For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation [deficit reduction] plans. At the same time we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects. So fiscal adjustment must resolve the conundrum of being neither too fast nor too slow. Shaping a Goldilocks fiscal consolidation is all about timing. What is needed is a dual focus on medium-term consolidation and short-term support for growth and jobs. That may sound contradictory, but the two are mutually reinforcing. Decisions on future consolidation, tackling the issues that will bring sustained fiscal improvement, create space in the near term for policies that support growth and jobs."[107]

Total outlays in recent budget submissions

Annual U.S. spending 1930-2014 alongside U.S. GDP for comparison.
Federal, State, and Local spending history.

The budget year runs from October 1 to September 30 the following year and is submitted by the President to Congress prior to October for the following year. In this way the budget of 2013 is submitted before the end of September 2012. This means that the budget of 2001 was submitted by Bill Clinton and was in force during most of George W. Bush's first year in office. The budget submitted by George W. Bush in his last year in office was the budget of 2009, which was in force through most of Barack Obama's first year in office.

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; see the "Historical Budget Data" links on the main page of "The Budget and Economic Outlook."[109] and from the Office of Management and Budget (OMB).[110]

See also

References

  1. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 "The Budget and Economic Outlook: 2017 to 2027". Congressional Budget Office.
  2. ↑ "Policy Basics: Introduction to the Federal Budget Process". February 2016.
  3. 1 2 "Monthly Budget Review for September 2014". Congressional Budget Office.
  4. ↑ Mark Zandi; Chris Lafakis; Dan White; Adam Ozimek (June 2016). "The Macroeconomic Consequences of Mr. Trump's Economic Policies" (PDF). Moody's Analytics. Retrieved November 7, 2016.
  5. 1 2 Fiscal Fact Check: How Do Donald Trump's Campaign Proposals So Far Add Up?, Committee for a Responsible Federal Budget (February 13, 2016).
  6. ↑ The Federal Credit Reform Act was passed as part of the Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508)
  7. ↑ A bill can also be enacted by a Congressional override of a presidential veto, or is automatically enacted if the president takes no action within 10 days after receiving the bill.
  8. ↑ Heniff, Bill and Keith, Robert. The Federal Budget Process. Alexandria, Va.: Capitol.Net, 2009, pp. 10–27.
  9. ↑ Dewhirst, Robert E. and Rausch, John David. "Authorization Bills." In Encyclopedia of the United States Congress. New York: Facts On File, 2007, p. 27.
  10. ↑ Milakovich, Michael E. and Gordon, George J. Public Administration in America. Boston: Wadsworth Cengage Learning, 2013, pp. 348–49.
  11. ↑ Historical Tables: Budget of the U.S. Government 2011
  12. 1 2 3 4 5 6 "The 2014 Long-Term Budget Outlook". Congressional Budget Office.
  13. ↑ "U.S. Federal Individual Income Tax Rates History, 1862-2013 (Nominal and Inflation-Adjusted Brackets)". Tax Foundation.
  14. ↑ "Misconceptions and Realities About Who Pays Taxes".
  15. ↑ McAllister, Shelly (Spring 2013). "America's Storied History Is a Compelling Budget Story". Public Manager. Retrieved September 25, 2015.
  16. ↑ "Publication 15 (2016) Employer's Tax Guide".
  17. ↑ Dara Lind (April 15, 2015). "9 charts that explain taxes in America". Vox.
  18. ↑ "The Distribution of Major Tax Expenditures in the Individual Income Tax System". CBO.
  19. ↑ "Frequently Asked Questions About CBO Cost Estimates". February 14, 2013.
  20. ↑ "Generational Outlook: The Federal Budget Now and in the Future". Concord Coalition. Retrieved January 2, 2017.
  21. ↑ "Covered Workers and Beneficiaries".
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  39. ↑ DOD – Defense Trend Spending Chart – May 7, 2009 Archived February 28, 2010, at the Wayback Machine.
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  51. ↑ "News Release: Gross Domestic Product".
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  55. ↑ Mark Thoma (November 3, 2011) "Negative Real Interest Rates" Economist's View
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