I applaud the budget deal reached in Congress this past week (brokered by former Speaker John Boehner – pictured). Not because it’s a good bill that addresses the long-term financial problems of the U.S., but because it spares the country another government shutdown (a bad idea), and it forestalls America from defaulting on its debt (an incredibly bad idea). It’s also good to see both parties work together – we’re all sick of gridlock. Compromise is not a dirty word – it’s how we all make our lives work.
This bill is not perfect, but it takes the pressure off Congress until March 2017, and with new leadership in the U.S. House of Representatives, perhaps Congress can start working on some solutions that will address the significant fiscal challenges the U.S. is facing.
My regular readers know that I think the biggest long-term threat to the economy is our enormous national debt. America’s current Debt to GDP ratio of 104% has only been higher during WWII. I believe in balancing the budget over the business cycle, but we continue to run deficits even in non-recession years.
The fundamental problem is simple: We spend more than our income – a lot more. It has to stop. This isn’t rocket science, it’s Economics 101. We either need to cut spending, raise taxes, or grow the economy much faster (to generate more taxes), or a combination of all three. The only other choice is to keep running huge deficits that we will be passing on unfairly to future generations.
In two of my blogs last month, I wrote about growing the economy and tax reform. In this blog I will focus on spending. Federal spending is divided into three groups: Mandatory spending, discretionary spending, and interest on debt. For now, the interest paid is much smaller than the other two groups at about 6.7% of total federal government revenues, but it is projected to double in the next ten years as the national debt continues to grow.
Discretionary spending for 2015 is projected to be about 36.7% of federal revenues. The military accounts for 55% of all discretionary spending, leaving the other 45% for things like: Veterans’ benefits, education, transportation, research, agriculture, international affairs, environment, and other items. All discretionary spending is determined through the annual appropriations process in Congress, which sets the amount of spending for all programs.
Mandatory spending is mostly made up of entitlement programs, which are determined by eligibility rules and not through the budget appropriations process. All mandatory spending is projected to equal 70.7% of all federal revenues in 2015. The largest mandatory program is Social Security, which is represents about 27% of total federal revenues. Other types of mandatory spending are: Medicare, Medicaid, food stamps, unemployment benefits, military and government retirement benefits, and a few other items.
For those not doing the math, these three types of spending add up to 114% of revenues, or a deficit $426 billion. Going forward, it gets worse. Mandatory spending is projected to be 77.4% of all federal revenues in 2025, and without changes to entitlement programs, mandatory spending is projected to exceed 100 percent of all government revenues sometime in the 2030s. This means no tax dollars left over for anything else in the budget. The only option to keep the government funded will be a substantially larger national debt.
The reason for this huge growth in mandatory spending is because our country is aging. By 2030, there are projected to be more than 74 million Americans 65 and older. That’s a growth rate of 85% from the 40 million seniors in 2010. Expenditures for Social Security and Medicare are now about half of all federal government spending, and will grow rapidly as the number of seniors swell.
To make matters worse, over the past 50 years Congress has continued to pass mandatory spending laws granting generous benefits without enough regard for demographic trends or deficits, and without sufficient tax revenue to pay for them.
So why doesn’t Congress act now and make the necessary adjustments to mandatory spending that gets our financial house in order for the long term? Mainly it’s politics, and both parties are to blame. Democrats refuse to make adjustments to any entitlement spending, and some even want to expand eligibility and benefits for mandatory programs. Most Republicans have signed a pledge to never raise taxes – those who do are brutally attacked. When both parties do reach a rare compromise like this week, they only nibble at the edges of the problem, and put off needed long-term solutions that will get U.S. finances back on track.
Thanks to a lot of irresponsible legislation, unrealistic expectations have been set in place. Trying to renege on long-term benefits promised to taxpayers is politically impossible. Trying to raise taxes to pay for these benefits is almost as difficult. Legislators who try to be responsible and balance the budget can have a very difficult time getting or staying elected. Many voters are turned off or outraged by talk of tax increases or spending cuts to their pet programs. Consequently, few politicians are willing to face these hard truths.
But a lack of courage and will to make needed changes are not in keeping with American tradition. We must restore fiscal responsibility. The humongous and growing national debt threatens our security and greatly reduces our flexibility to address the challenges of today and tomorrow. We need a viable long-term comprehensive fiscal plan that will prepare us for opportunities and a better future.
So, while it’s good to see Congress compromise and get something done, they need to keep working hard to create policies that address underlying problems and not just treat the symptoms. We need leaders who are willing to tell painful truths and tackle the difficult challenges we face if we want to keep America safe, allow us to thrive, and continue to build a better society.
Links to related blogs:
Growing the Economy: http://www.commonsensecentrist.com/fiscal-policy-and-growing-the-economy/
Needed Tax Reform: http://www.commonsensecentrist.com/needed-tax-reform/
Possible Solutions for Fixing Social Security: http://www.commonsensecentrist.com/possible-solutions-for-fixing-social-security/
Options for Fixing Medicare Spending: http://www.commonsensecentrist.com/options-for-fixing-medicare-spending/