There’s a colossal struggle taking place between both parties in Congress – a war over how to tax and spend. This war has been fought before, and will again. But this time, the war has gone on a long time and seems to be getting worse. Victory is not in sight for either side, because neither side can win a complete victory. Unfortunately, comprise is not an option.
The stakes are enormous. If we don’t make some fundamental changes to U.S. fiscal policy soon, we will be facing some grim circumstances and doing a tremendous disservice to future generations.
An overview of the federal budget bears this out. According to the non-partisan Congressional Budget Office (CBO), this year’s budget for the federal government is $3.66 trillion. Revenues (taxes) will only bring in about $3.19 T, so we are going to run a deficit of around $470 billion.
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% of the total federal budget.
Discretionary spending is $1.18 T for the current fiscal year. This represents about 32% of the federal budget. 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 $2.26 T, or about 62% of the budget. This kind of spending is mostly made up of entitlement programs, which are determined by eligibility rules and not through the budget appropriations process. The largest mandatory program is Social Security, which is represents about 24% of the total federal budget. Other types of mandatory spending are: Medicare, Medicaid, food stamps, unemployment benefits, military and government retirement benefits, and a few other items.
Congress doesn’t decide how much to spend each year in this category, it’s determined by how many people are eligible for benefits. Mandatory spending cannot be cut unless Congress decides to change the eligibility criteria or the dollar amount of benefits. This is something that doesn’t happen very often, and there is usually a big fight when it’s attempted.
Mandatory spending is a ticking time-bomb, 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. The federal General Accounting Office (GAO) projects that without changes, sometime between 2030 and 2040, mandatory spending will exceed all government revenues. Gulp.
Also worrisome is the growing national debt, as interest payments become a larger portion of the budget. The CBO also reports that interest payments will grow from $275 B next year, to $827 B in 2025, and balloon from 6% of the budget to 13-14% of budget. But these numbers could be worse if interest rates rise substantially. In this report the CBO is projecting interest rates of just 2-3.8% the next ten years. Let’s hope they’re right.
Unless Congress makes fundamental changes in our fiscal policy, mandatory spending and payments on the debt will continue to increase unabated, and there will be tremendous pressure to cut vital discretionary spending. The deficit and national debt will spiral out of control, most likely leading to high inflation.
By the way – we can’t grow our way out of this dilemma. These CBO projections all assume a healthy economy. If we have a poor economy sometime in the next ten years (likely), these numbers get worse.
But with both parties in the midst of a fiscal civil war, needed changes won’t come soon. The Republican far right doesn’t want to raise taxes, and are proposing huge spending cuts – mostly to social programs. The far left of the Democrats refuse to change the formulas in mandatory spending areas and appear to be happy to let the deficit continue to skyrocket.
Both parties are acting dishonestly and show no leadership. True leaders know they must act with integrity, and be willing to make difficult and unpopular choices. We cannot continue to allow the national debt to grow unchecked, or refuse to make necessary gradual adjustments (over 25-50 years) in entitlement programs to reign-in mandatory spending. But we also cannot pretend that we can afford a strong military while continuing to cut taxes, or make cold-blooded social spending cuts and maintain a civil society.
We’re getting boxed in – the current direction is unsustainable, and we’ll soon lose the ability to maneuver without great difficulty. It doesn’t have to be this way. There is middle ground and practical solutions. To reasonable people it’s apparent that we need to make adjustments in all of the areas outlined above. Unfortunately reasonable people with courage are a rare commodity in Congress these days.
This is the first of a series of blogs that I plan to write about the economy and U.S. fiscal policy. I am asking my readers to follow along as I first describe the current situation, and then begin to lay out what I think could be an effective bi-partisan comprehensive plan.
Note: No blog next week, I will be cutting and baling hay.
Here are some links to past blogs that are related to this one:
Economic growth: http://www.commonsensecentrist.com/growing-the-economy-the-road-ahead/
Fiscal policy: http://www.commonsensecentrist.com/leadership-not-misleadership/
Deficit reduction: http://www.commonsensecentrist.com/passing-the-buck-really-big-bucks-2/