Budget, Spending and the Fiscal Crisis
- January 2014
U.S. deficit and debt:
In its “2013 Long-Term Budget Outlook” (updated October 31, 2013), the Congressional Budget Office (CBO) reported that the federal deficit for Fiscal Year 2013 was $680 billion; the lowest during the Obama administration and less than a trillion dollars for the first time since 2008. In addition, the deficit as a percentage of GDP dropped from almost 10 percent four years ago to just 4 percent in 2013. If current law remains unchanged, the numbers will continue to improve for several years: by 2015 the deficit will shrink to 2 percent of GDP and federal debt will decline from its current 73 percent of GDP to 68 percent.
It would be tempting to take those positive numbers and conclude that our fiscal problems are behind us. In fact, when CBO released its preliminary positive report in May, 2013, a Washington Post blog headline claimed: “CBO says deficit problem is solved for the next 10 years.”
Unfortunately, CBO’s estimates for the end of the 10-year budget window (2013-2023) remain grim. In the October 31st update, CBO projects growing deficits after the few short years of decline: “By 2023 . . . the budget deficit would grow to almost 3 ½ percent of GDP under current law, and federal debt held by the public would equal 71 percent of GDP and would be on an upward trajectory.”
And their long-term projections are worse:
“Under the extended baseline, budget deficits would rise steadily and, by 2038, would push the general debt held by the public close to the percentage of GDP seen just after World War II – without even factoring in the harm that growing debt would case to the economy. . . Incorporating the economic effects of the federal policies that underlie the extended baseline worsens the long term budget outlook . . . . With those effects included, debt under the extended baseline would rise to 108 percent of GDP in 2038.”
The entitlement crisis – out of control spending:
According to CBO, in Fiscal Year 2013 (which ended September 30, 2013), federal revenue totaled $2.774 trillion, the federal government spent $3.454 trillion, and the resulting federal deficit was $680 billion. Revenue increased in 2013 over 2012 numbers, with receipts from individual and corporate income and payroll taxes all higher, and overall spending decreased by $84 billion from the 2012 spending total.
The numbers are straightforward, and it would be easy to argue that the obvious way to address the deficit is to continue to increase revenue and/or reduce spending. But revenue increases have already played a major role: as CNN Money reported last October, 79% of the deficit reduction reported by CBO came from revenue increases (tax hikes and repayments from Fannie Mae and Freddie Mac). Unfortunately, when it comes to federal spending, the obvious solution has been unattainable.
Washington did actually reduce federal spending in the last two years in the so-called “discretionary” spending accounts – those parts of the annual budget that Congress controls through the regular appropriations process (including through “continuing resolutions”). That trend should continue, because discretionary spending through 2021 is subject to spending caps and the across-the-board cuts – the “sequester” – enacted in the 2011 Budget Control Act (BCA).
Unfortunately, even radical reduction in discretionary spending would not solve the long-term debt problem. It wouldn’t even come close. Most federal spending today is in the so-called “entitlement programs” – the automatic “mandatory” spending that does not require Congressional approval and is exempt from the “sequester” cuts. The largest of the mandatory spending programs – Social Security, Medicare, Medicaid, children’s health programs, and interest on the national debt – by themselves consume more than half of all federal spending. And consuming a significant part of the remaining half of available resources are a host of other, smaller entitlement programs: veterans’ benefits, federal retirement, refundable child care credits, Supplemental Nutrition Assistance Program (formerly known as Food Stamps), etc.
In fact, very little annual federal spending is subject to Congressional control and review. According to CBO’s September 19th report: “A distinct pattern in the federal budget since the 1970s has been the diminishing share of spending that occurs through the annual appropriation process. Between 1973 and 2012, discretionary spending fell from 53 percent of total federal spending to 36 percent.”
So, while spending overall decreased by 2.3 percent in 2013 from 2012, Social Security, Medicare and Medicaid outlays rose; by 5 percent, 2 percent, and 6 percent respectively. And the cost of these and the other entitlement programs will continue to grow – all automatically and outside of the control of Congressional appropriations.
The entitlement crisis – out of control demand:
In “A Nation of Takers: America's Entitlement Epidemic” (Templeton Press, 2012), American Enterprise Institute scholar, economist and demographer Nicholas Eberstadt reported disturbing data on the entitlement crisis:
The growth of entitlement payments over the past half-century has been breathtaking. In 1960, U.S. government transfers to individuals totaled about $24 billion in current dollars, according to the Bureau of Economic Analysis. By 2010 that total was almost 100 times as large. Even after adjusting for inflation and population growth, entitlement transfers to individuals have grown 727% over the past half-century, rising at an average rate of about 4% a year … (Wall Street Journal, August 31, 2012)
According to Eberstadt, government transfer payments in 2010 alone were more than $2.2 trillion, equivalent to about $7,200 for every person, and $29,000 for a family of four.
On December 19th, a U.S. News editorial commented on the data in the Eberstadt study, not from the spending perspective, but from the perspective of how many Americans are now receiving government payments:
We can argue about which caused which, but the fact is that the growth of entitlement spending has coincided with an unprecedented decline in the number of working adult men over the last several decades . . . last year more Americans received a steady income from public assistance than were working in the construction, transport, and warehousing or information technology industries. In 2010, more Americans were getting disability checks from the government than were working for any U.S. manufacturer.
Other recent studies confirm the Eberstadt findings. The total number of Americans receiving payments rose from fewer than 94 million in 2000 to 128 million in 2011. As many as 49 percent of American households receive some type of government payment, with more than 35 percent receiving means-tested government assistance. Almost 48 million Americans, more than 23 million households, receive food stamps – that’s 15% of the entire population.
The recent explosion in entitlement spending is partly attributable to the recession, as demand for unemployment compensation and food stamps increased dramatically. However, the demand for government assistance payments is not measurably declining as the economy improves.
And, as means-tested entitlements grow, so does the percentage of Americans drawing federal retirement benefits. According to CBO, soon one-third of Americans will be retired, while the number of workers whose taxes fund retirement programs continues to shrink.
Compounding the problem: as the number of Americans receiving government payments grows, the number paying Federal income taxes falls. Today almost a full 50 percent of tax filers pay no Federal income tax, and some studies claim that more than 40 percent make a net profit from government programs and payments.
The entitlement fiscal cliff:
According to CBO projections, if you add interest on the national debt to the three largest entitlement programs, they will consume more than three-fourths of all available federal tax revenue by 2023, and 97 percent by 2038. According to a Forbes editorial published last November, the numbers are worse; total spending on all entitlement programs in 2013 consumed 92 percent of federal revenues.
If entitlement programs are not structurally reformed, we will have no money to spend on any other programs – including defense – in the very near term. And if growing entitlement programs crowd out spending on all other government programs, there will soon be insufficient revenue to sustain the entitlement programs themselves. The unavoidable result will be drastic cuts in those third-rail social safety net programs, ironically defeating the very purpose of those who oppose reforming the programs today while there is still time.
It is that fiscal crisis that Congress and the President must address. Unfortunately, while many talk about the urgent need for reform, there is no action today to accompany the talk.