It's Basic Math: Spending - Revenue = Deficit
The federal budget is an expression of our country's values. What we choose to spend money on and how much we spend, who we tax and how we collect, and the borrowing we engage in to make up the difference between the two, all reflect the basic math of national priorities.
Government Spending
The federal budget consists of two types of spending. "Discretionary spending" (national defense, education, transportation) is determined through the annual appropriations process in Congress. "Mandatory spending," the largest programs of which are Social Security and Medicare, essentially run on autopilot under formulas set in law. Interest payments on the national debt are also considered mandatory. Discretionary spending has been steadily shrinking as a share of the budget and now makes up less than a third of all federal spending.
$3.96 trillion in Fiscal Year 2017
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A vast majority of the money spent by the federal government is for social insurance programs and national defense. The most well-known domestic spending programs, like for transportation, education, foreign aid, and others actually make up a relatively small part of the budget.
Since Appropriations bills for discretionary spending programs are "must-pass" pieces of legislation (meaning the government shuts down if Congress doesn't pass them every year) legislators spend more time discussing and debating them than any other spending programs. They also have imposed caps on these programs while the rest of the budget is projected to grow faster than the economy over the long term.
Discretionary Spending Primer
The mandatory spending programs grow on autopilot based on pre-set criteria in legislation. Most of the smaller, social safety net programs that are considered mandatory spending tend to grow or shrink depending on the state of the economy. The much bigger spending programs -- Social Security, Medicare and Medicaid -- grow mainly because of changing demographics and health care costs.
Minus
Government Revenue
The other piece of the federal budget is its revenue. Most of the government's revenue comes from the taxes that Americans pay on their income. The individual income tax and payroll taxes (including Social Security, Medicare Hospital Insurance, and Unemployment Insurance) are the largest sources of government revenue. Corporate income taxes are a distant third revenue source.
$3.4 trillion in Fiscal Year 2017
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A majority of Americans pay more in social insurance taxes than they do in income taxes. The tax system is overly complex and has failed to keep pace with changing economic conditions. Consequently, deficits continue to surface year after year, contributing to our mounting national debt. Although officials are often reluctant to acknowledge it, balancing America's budget means addressing the fact that the tax revenue the country currently creates does not come close to covering our nation’s expenses.
Whatever disagreements there may be between those on the right and those on the left about the appropriate size of the federal government, the “correct” level of revenue is that which adequately covers the cost of government spending.
Equals
Annual Budget Deficit
When the government spends more than it takes in, it has to borrow money to make up the difference. In any given year this mismatch equals the budget deficit.
- $559 billion in Fiscal Year 2017
National Debt
If you add up all of the borrowing the U.S, government has done over time you get the national debt, technically called the "gross debt."
U.S. National debt
$19,844,739,708,017
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There are a few ways to measure the national debt. The gross debt has two components: 1) Debt held by the public -- money the government borrows on the open market from domestic or foreign investors; and 2) Intra-governmental debt -- money the government owes itself, as in the Social Security trust fund.
The debt held by the public in more important from an economic perspective because the borrowing done has numerous direct economic impacts and consequences.
The projected growth of this debt held by the public in the future is the main symptom of the nation's fiscal challenge -- where pressure from the growth of certain spending programs will push debt to grow more quickly than the economy can keep up with.
Interest costs are projected to grow more quickly than any other spending item in the budget. That is the direct result of increased borrowing due to the structural mismatch between spending and revenue. As interest costs grow, they will crowd out other spending in the budget. The amount spent is also very sensitive to changes in interest rates. Were interest rates to be higher than projected, spending on interest payments rises substantially.
Why the budget process isn't working
There are many signs that public trust has eroded when it comes to confidence in elected leaders’ budgetary decisions, and it is equally clear that budget reforms would help Congress act in a more fiscally responsible manner. Greater public confidence in the budget process will be necessary to make tough choices on our largest fiscal issues. One way to restore the trust of the American people is to reform the system through which Congress spends taxpayer dollars.
Much of our national debt and chronic deficits result from an underlying structural problem resulting from existing tax and entitlement laws. Therefore, reforming the entitlement system will ultimately be necessary to change America’s fiscal situation, but there are things that can be done immediately to improve the budget process and serve taxpayers more efficiently.
Thursday, March 16, 2017
Congress voted in November 2015 to again suspend the federal debt limit. On March 16, 2017, it went back into effect and was set at the level necessary to include all debt racked up prior to that date ($19.808 trillion). While in the past there has been a debate over whether to attach conditions to a debt ceiling increase, the most recent suspension of the debt ceiling included no such provisions.
Why you need to be involved in the budget process
Good decision-making in government depends upon an informed electorate, so the most important thing we can do to help guide the budget process towards a more sustainable fiscal future is to educate ourselves about the hard budget decisions that we face as a nation. Take steps to stay informed about the past, present, and future of the federal budget, and then get involved with the effort to inform others and make your voices heard by your elected officials.
Try it yourself
Balance the budget
Try your hand at balancing the federal budget with one of our educational exercises and really understand the difficult trade-offs.
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