As the federal government’s fiscal year 2013 wheezes to a close without a budget in place for fiscal 2014, here is some basic information everyone should understand.
According to the Congressional Budget Office (CBO), current spending levels are estimated to result in a $560 billion federal deficit in 2014, smaller than last year, but projected to start growing again by 2016.
Deficits can hurt the economy by forcing the government to borrow and add to the national debt owed to the public—presently about $12 trillion, or roughly 72 percent of the whole economy—which hurts the economy in the long run. That same borrowing might cause businesses to delay investing in the economy in case their taxes are raised to pay for the added debt, and creating short-term pain. So, what would it take to actually eliminate the deficit?
Let’s start by considering how much of federal spending is “mandatory” and how much is “discretionary.”
Mandatory spending is what Congress has promised in previous years it would distribute, and it includes things like Medicare, Medicaid, social security, and veterans benefits. According to the CBO’s most recent budget projection (from which all estimates below are derived), mandatory spending is estimated to be $2.2 trillion in the coming year.
As the few attempts to actually reform entitlement spending have shown, this money is very, very hard to cut. Discretionary spending is pretty much everything other than entitlement programs,. For example, it covers most of the defense budget, education spending, bailouts for Wall Street, and erectile dysfunction studies. The CBO projects $1.2 trillion in discretionary spending for 2014, and this is typically where Congress cuts. If at all.
Figure 1 shows that spending is projected to increase from $3.6 trillion in 2014 to $5.8 trillion in 2023. (CBO bases its budget projection on how current law directs spending and the Bureau of Economic Analysis’s model of the economy.)
That’s right, your eyes do not deceive you: mandatory spending is over half of the federal budget, taking up 61 percent in 2014. Meanwhile, defense spending is 16.5 percent and non-defense discretionary spending 15.9 percent of the anticipated 2014 budget.
Total federal spending for 2014 is projected to be 20.9 percent of GDP—meaning the government will spend about a fifth of the whole productive value of the economy. At the same time, revenue is projected to be 17.7 percent of GDP, creating the estimated $560 billon deficit. Figure 2 shows spending growing to 21.8 percent of GDP in 2023 with revenue of 18.5 percent. The gap between the two is the federal deficit.
An important note: 10-year budget estimates like this really are little more than a wild guess at what the economy and political environment will be like in a decade. About the only thing that is for certain from this graph is that the numbers will not be exactly these. Still, they enable us to critique the government’s own projected policy goals on its own terms.
The 19% Spending Ceiling
If Congress wants to eliminate the deficit, a simple way would be to cap spending at the projected revenue to GDP ratio. The CBO projects based on current tax law that over the next decade federal revenues will average about 19 percent of GDP, as shown in Figure 3.
If Congress wants to eliminate the deficit, it could simply create a spending ceiling of 19 percent of GDP. (My colleagues Nick Gillespie and Veronique de Rugy fleshed out the full rationale behind this idea in Reason magazine’s March 2011 issue.) Figure 4 shows how that target based on CBO projected federal revenue would change spending levels.