CBO

The Federal Government's Budget: Basic Facts You Need To Know

If we're to get even close to balancing the books, "mandatory" spending is in for deep cuts.

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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.)

Figure 1
CBO

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.

Figure 2
CBO

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

Figure 3
CBO

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. 

Figure 4
CBO

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.

That might look like a crazy target, with expenditures never below 22 percent of GDP during the Obama administration. But since 1954, federal revenue has averaged 17.5 percent of GDP, according to White House Office of Management and Budget. And during that six-decade stretch the highest revenue hit was 20.6 percent in 2000, and in recent years revenue hasn't been higher than 17 percent of GDP. So in relative terms the cap probably doesn't go far enough to ensure eliminating the deficit.

But a 19 percent spending ceiling is more politically realistic than 17 percent, so let's stick with the thought experiment. What would Congress actually have to do to target a 19 percent of GDP spending ceiling and eliminate the projected deficit?

For the 2014 budget Congress would have to cut $439.1 billion from total spending, or 12 percent of the estimated $3.6 trillion budget. Over the next 10-years the CBO estimates federal spending of $46.68 trillion, and to meet the 19 percent spending ceiling, Congress would need to reduce that projection $6.14 trillion. Essentially six more sequesters.

Figure 5 shows how much would need to be cut from the budget each year to get to the 19 percent spending ceiling.

Where will those dollars come from? The options are from mandatory spending, discretionary spending, or both.

Theoretically, these cut levels might be reduced if interest on the debt falls because of the spending ceiling. Over the next 10-years, interest payments on the national debt will be growing as a percent of the total budget, from 6.6 percent in 2014 to 14.1 percent in 2023. In nominal terms, discretionary spending is set to grow 17 percent over the next decade, while mandatory spending will grow 36 percent. Meanwhile interest payments on the national debt are set to more than triple over the next 10 years.

It is not guaranteed that debt service payments would fall in coming years relative to projections if the budget were balanced because it is impossible to know how private sector lending and interest rates would respond in the near-term to less federal spending. For the sake of simplicity we'll treat spending for interest on debt as neutral over the next decade and look to apply the cuts just on mandatory and/or discretionary spending.

Figure 5
CBO

Since cutting entitlement spending is hard, let's consider what would happen if Congress only cut discretionary in order to achieve the 19 percent of GDP spending ceiling.

Figure 6 shows discretionary spending—including both defense and non-defense spending—would fall from 32 percent of the budget to 24 percent of the budget (the black area indicates the portion of the budget that would be cut).

Figure 6
CBO

As the graph makes clear, by the end of the decade, the cuts would represent more than half of projected discretionary spending, which is completely untenable. Moreover, if you think the so-called "fiscal cliff" was portrayed as portending the end of the world, imagine what the Big Government lobby will say about a 35 percent cut from projected discretionary spending in 2014 and 36 percent in 2015!

So what if, instead, the necessary annual cuts could be divided between mandatory and discretionary spending? The cuts could be applied to the two categories at the same ratio of their shares of overall spending. For instance if discretionary spending is 35 percent of combined mandatory and discretionary spending for 2014, then 35 percent of the annual cuts would apply to that category. Figure 7 shows how the annual cuts would be distributed by category of spending.

Figure 7
CBO

And to clarify further what the cut sharing would mean, Figure 8 shows the overall portion of discretionary and mandatory spending these cuts would consume.

Figure 8
CBO

Under this cut sharing scenario, discretionary spending would be reduced 13 percent in 2014 and 12 percent in 2015, no doubt raising cries of "social Darwinism" and other taunts from progressives—and likely from many "conservatives" too.  

To call this politically daunting is beyond mild. And that is even before facing the reality that if there was some general agreement to eliminate the deficit by spending cuts that would still leave open the details on which discretionary and mandatory programs would get reduced or shut down.

The best solution to getting spending under control is to reduce both entitlement and discretionary spending. Yet, to put what cutting 12 percent of total spending next year would mean: the $42 billion sequester cut from federal spending in 2013 was just 1.3 percent of combined discretionary and mandatory spending. The $89 billion in 2014 sequester cuts are estimated be 2.4 percent of combined spending. Getting serious about ending the deficit would raise the level political hyperbole to potentially unseen, blood-in-the-streets levels (Sen. Ted Cruz's recent tone-deaf reference to the Bataan Death March aside).

However, it might be accomplished, at a minimum the process of ending the deficit would take true political bravery—or perhaps just good ol' fashion statesmanship.  

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  1. Unintentionally funny headline in Seattle Times today:

    U.S. May not be able to pay its bills [if debt ceiling isn’t raised].

    Yeah, Paul may not be able to pay his credit card monthly payment if he can’t increase the limit on his home equity loan.

    It’s loans all the way down.

    1. I see they’re still counting federal spending as part of GDP, even the part they borrow.

      So if I make 60K and borrow 10K, my income was really 70K?

    2. Start working at home with Google. It’s the most-financialy rewarding I’ve ever done. On tuesday I got a gorgeous BMW after having earned $7439 this last month. I actually started five months/ago and practically straight away was bringin in at least $74, per-hour. visit this site right here http://www.Pow6.com
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    3. Hey, they’re just echoing our Beloved Leader and his insane troll logic. Obama loves to rant about “paying our bills”, when he’s really proposing to run up MORE bills, without even a semblance of a plan to pay those bills. It’s almost as funny as when he denounces Congress for being “irresponsible” when they fail to hand him the blank check he demands.

      1. It looks great, but all this is just a top of an iceberg!! All this future planning and number do not sound trustworthy. Huh, what people will always need is fast and easy lakota cash, let’s be honest with each other =)
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  2. tl;dr We’re fucked.

  3. Ant-ny

    Any chance you could post links to those charts sos I cud read em?

  4. There are only 2 questions that come to mind.

    First, when’s this all going to unravel? Second, what can we do to be prepared when this unravels?

    1. I think there’s two options. One is to put all your assets into real estate. That will protect those assets from any hyper-inflation. Or buy Canadian dollars…although I actually haven’t figured out a way to do this yet.

    2. There may be a third question implied in your second one:

      How can I profit from all this when it unravels?

  5. as long as they play the game propose a budget that’s 13% or so higher than last yr they cut 5% from the already inflated budget and call it a budget cut it will never end. even if they would just freeze the budget at last year it would help the other thing do not penalize a dept that has money left over in there budget it get returned for 2-3 yrs before cutting it would stop reckless last month buying and warehousing like what was found recently theres a lot of new unused items sold as surplus
    every year

    1. 20% of all money not spent at the end of the fiscal year goes towards bonuses for the managers of those funds. The other 80% goes back into the general fund. How’s that for an incentive to save?

      1. How’s that for an incentive to redefine the phrase “money not spent?”

  6. I’m gonna be picky here, but Figure 3 does not show an average of 19%. Revenues are never even expected to be above 18.6%. Is the use of a decimal really that hard? Or better yet, round down…

  7. 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.

    There’s no such thing as “mandatory” spending. If Congress votes to eliminate those programs, they’re gone, assuming enough support to override a presidential veto, or a cooperative president.

  8. Government spending should never grow as a percentage of GDP, and shouldn’t even stay at the same percentage. Government spending as a percentage of GDP should decline every year. The government has a few limited tasks assigned to it. As the rest of the economy grows, the percentage sucked away to fund those tasks should grow smaller every year.

  9. my best friend’s half-sister makes $63 hourly on the internet. She has been out of work for 10 months but last month her pay was $21312 just working on the internet for a few hours. read this post here

    http://www.Works23.com

    1. Yeah, but her jaw is sore.

      1. Not if she does it right. You get a kind of muscle memory of relaxation . . . well . . . Not that I’ve had experience with this.

  10. Where do you get off using “thought experiments” and gobbledygook like math to make a point? Don’t you know you have to make an emotional appeal?

    I mean wont somebody please think of the children! If we fix this now what will they have to do when they’re sitting home soaking up that mandatory spending?

    1. I mean wont somebody please think of the children!

      Funny. Actually, that’s the main reason to get this under control. If we don’t, we saddle future generations with debt owed for crap we were too lazy, selfish, and stupid to pay for ourselves. What’s depressing is that these future generations will simply continue the same policies in hopes of unloading the burden onto *their* children.

  11. which hurts the economy in the long run

    Is there any government official that actually cares about “the long run”?

    1. “Is there any government official that actually cares about “the long run”?”
      So long as the long run = 4 years, yes.

  12. I think we would have a better understanding of the situation, and not get frightened by it irrationally, if we stopped using this misleading and obsolete term “Federal debt,” a holdover from the gold standard days, and instead called that side of the ledger “Federal mirror assets.” For example, Federal deficits track closely to the growth of savings in private pension and retirement assets. Does this happen through a mysterious coincidence, or does it suggest instead that Federal mirror assets serve a useful function in the American economy?

    http://research.stlouisfed.org/fred2/graph/?g=mzu

    1. ….”or does it suggest instead that Federal mirror assets serve a useful function in the American economy?”

      Not to me it doesn’t. Try an argument instead of innuendo.

    2. *Puts two exponential graphs side by side*

      See? Correlation therefore causation!

      How about a growing economy means both more private sector assets and the government getting better borrowing terms?

  13. A minor increase, even 1% in the interest we pay on our debt, would double our debt payments yearly. Meanwhile, gubmint keeps increasing the amount of borrowing, the fed continues to soak up billions a month in toxic mortgages, and we pretend we can fix this.

    I predict we have only a few years before the proverbial SHTF. Unless we stop the train and get off.

  14. Now the million of us who get this somehow need to convince the other 319 million people that the status quo is dooming us to some kind of cluster-fuck in the future (if we’re lucky it may just end up being a slow miserable existence.)
    While this issue is important to have out there for discussion, and I believe it informs more and more people . . . for every person who gets it there’s 2 new suckers in the game to counter them.
    There was this great Indian movie from the 50’s or 60’s about a region in India that went through severe drought and starvation. The only guy who was smart enough to foresee the inevitable shit storm was a Brahmin who stored rice under his house. Pretty soon he was discovered and even with his foresight his lovely neighbors turned on him.
    What a delightful way to begin the weekend!

  15. my best friend’s aunt makes $67 an hour on the laptop. She has been fired from work for 5 months but last month her pay check was $13328 just working on the laptop for a few hours. try here

    ————
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  16. like Elizabeth answered I am amazed that you able to earn $9825 in 4 weeks on the computer. did you read this webpage .,., http://www.Bay35.com

  17. Sounds great, but all this is just a top of an iceberg. All this future planning and number do not sound trustworthy. Huh, what people will always need is fast and easy cash loans, let’s be honest with each other =)

  18. Sadly, the government’s budget is worse than most Americans. And being that most US citizens do not make much money, it’s not a good thing. We have hundreds of people daily looking for fast and easy online loans, some of them with no intentions of repaying them on time.

  19. Sounds good. Govt spending shouldn’t be increased too much on the less important things. Budgeting is an important task and there are few important step which should be taken into consideration while making a budget for any task. The proper distribution of the money and resources among different departments can create a balance among people. One should track his/her spendings regularly. If you are living responsibly and make smarter choices, chances are you will live a happier life.

  20. Great article on the federal govt. budget. I think mandatory spending should be given priority. There should be voting on every important spending and there should be accurate budgeting so that there is no need to borrow a loan. There are many people who are always looking for the best loan options to remove their debts. One of the best installment loans is Frisco loans. It provides many solutions for the people who are looking to overcome their financial worries.

  21. 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.Some financial institution offer 100% loan guarantee and give best service always.

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