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Federal Budget

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"In thinking about our financial problems, the crucial first step is to understand how we got in this position.  If we are not clear on what caused the problem, we will have a hard time solving it."

Federal Spending and the Debt

If we are to pass along to our kids and grand kids a nation with at least as much opportunity as was passed to us, we must get out fiscal house in order.

Many difficult decisions must be made, but I believe that Congress must remember that every dollar it spends is either taken from a taxpayer who earned it or borrowed – with interest – for future generations to repay. We cannot correct all of the mistakes of the past at once, but we have to get started now at putting the country on a fiscally responsible path.

In thinking about our financial problems, the crucial first step is to understand how we got in this position.  If we are not clear on what caused the problem, we will have a hard time solving it.

What is your money spent on?

Federal spending is generally divided into three categories: mandatory, discretionary, and net interest.

The next chart gives us a closer look at spending.  It shows defense and non-defense spending per person.

In 1962 we spent about $2,000 per American to defend the country, and that is roughly the same that we are spending today.  By contrast, non-defense spending has gone from $2,000 per American in 1962 to $10,000 per person today.

The obvious conclusion is that defense did not cause our enormous debt, and defense cuts cannot bring our budget into balance.

Let's talk a little about those entitlements. The reason it is called “mandatory spending” is that once the criteria for the program is set as far as who is eligible and what benefits they receive, the benefits must be paid for everyone who qualifies, regardless of the total cost.  That is also the reason they are known as entitlements – everyone who meets the qualifications is “entitled” under law to receive the benefit.

Discretionary Spending- Discretionary spending is provided through annual appropriations bills and must be approved by the Congress each year.  It is often further divided into defense and non-defense categories. According to the Congressional Research Service, 47 percent of the total budget was discretionary spending in 1962, and it remained the largest portion of federal spending into the 1970's. Since then, mandatory spending has increased at a much faster rate than discretionary spending.  Today, discretionary spending makes up about 30 percent of the entire budget.

Net Interest - Net interest is the only part of future spending that cannot be reduced by legislative action because it is money that must be paid to service the U.S. debt.  Net interest payments today make up over six percent of the federal budget, but that percentage could increase if interests rates rise.  Unfortunately, many economists predict that those rates could rise dramatically over the next decade.



Future Projections
With no changes, spending on Medicare, Medicaid, and Social Security will continue to rise and consume more of the federal budget.  The future cost of these programs is being driven by a combination of several factors:
  1. Families are having fewer children, which means fewer taxpayers; 
  2. 78 million baby boomers are hitting retirement age and collecting entitlement benefits; 
  3. New retirees are living longer lives; 
  4. And health care costs continue to rise.  
All of this will leave future generations with a crushing debt burden.



Medicare

Some people may believe that they are just receiving the Medicare benefits they have paid for with their taxes.  However, according to a 2011 study by the Urban Institute, a couple with two earners making an average wage receives benefits worth three times what they paid into Medicare over their working life.  If there is only one earner in the family, the couple receives a benefit that is nearly six times what was paid through taxes.  In fact, Medicare costs have jumped over 65 percent over the last ten years, more than any other major program.


Social Security

It is often said that Social Security does not contribute to the federal deficit, but this is not true.  Since 2010, Social Security has had to pay more money out in benefits than it receives in tax revenue.  To make up for this shortfall, Social Security redeems IOUs from the federal government that are being paid back with additional interest.  In 2011, Social Security IOUs earned $114 billion in interest.  The only way to redeem these IOUs is through taxes and borrowing from general revenue.  

Defense Spending

Defense is the first job of the federal government, and I think the first money the federal government spends should be for national security. Only 15 percent of total federal spending goes to pay for our military.  By comparison, it was about 50 percent in the early 1960's. 

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