Having trouble understanding the federal budget? Do you shutdown when you hear politicians talking about ways to cut the deficit? Is it hard to understand cutting the budget when you don’t really know how the government spends your money? Here is a quick overview of the budget and key terms. Now you’ll know if your representatives actually understand what they’re talking about.
The federal budget basically breaks down into two types of spending:
- Mandatory (money that has already been committed) which includes Medicare, Medicaid, Social Security (the three together are often referred to as entitlements) and other items such as unemployment compensation and veterans benefits. Also included in this category is interest on the money we borrow, currently the fastest growing part of the budget.
- Discretionary (money that we have control over, Congress sets the amount we spend on an annual basis) is broken down into two categories – defense and non-defense. Non-defense includes most government programs and departments. The Department of Energy, Education, Agriculture and Transportation are all included. Another item included in that 13% is the money the government spends to help spur innovation though research and development.
Common Myths about government spending
- Foreign Aid makes up a significant part of the budget. In reality it’s less than 1%. The US State Department, who is primarily responsible for administering aid, budget is around $50 billion.
- The government spends most of our money on wasteful programs and departments. While there certainly is waste in the discretionary budget – according to the Government Accountability Office (GAO) there is about $200 billion in duplicative programs, the largest line item is Social Security.
- We could balance the budget by getting rid of non-defense discretionary spending. From the chart above you can see that discretionary spending only makes up about 16% of the budget or about $610 billion. This year we will run a deficit around $1.1 trillion. Cutting all non-defense discretionary spending only gets you about 1/3 of the way there.
The future of the budget
- As mandatory spending programs continue to grow we will see what is commonly referred to as “crowding out.” Where Medicare, Medicaid, Social Security and interest creep into spending on other programs and don’t allow us to spend what we would like to or need to on other programs.
- By 2025 we will be looking at a situation where Medicare + Medicaid + Social Security + interest = Revenues (taxes). What will we do when these are the only programs we can fund?
If you’ve been paying attention to the debate over the deficit in Washington you’re probably sick of the banter and confused as to what is really going on and what a solution to our deficit should look like.
Over the past year we’ve seen a flood of deficit reduction plans and playground-like squabbles between politicians. What plan is best? Which side is right? What should I be concerned about? If you’re in the Millennial Generation there a plenty of things you should want to see in a plan. We can’t tell you which side is right or wrong but here is a list of some things that we believe every Millennial should be looking for in a plan.
- Creating Growth – Millennials, probably the hardest hit by the recession, are unemployed or underemployed at rate of more than 35%. We need jobs and those that are underemployed need better jobs. Many of us who are entering the workforce or have been in it for a few years are losing some of the most formative years of our careers. Resulting in missed opportunity, lower lifetime wages, less savings and a lower standard of living. We’re going to be expected to take over the workforce someday and many of us are not getting the experience we need. A plan has to address this. It’s going to have to find a way to create growth in an era of reduced spending. It’s going to be tough but look for plans that are being creative and thinking outside the box.
- Controlling Long term Costs – We certainly would not argue with the need to reduce spending in the near term, but let’s not be too extreme our real issues are in the long term. Mainly due to costs from Medicare and down the road Social Security. Health care costs are skyrocketing and we’ll be spending tens of trillions over the coming decades. We have to either find ways to control the growth of costs or change how Medicare and Medicaid work. This is not an option. More and more people will be entering a system that is not equipped to handle them. If we do nothing these programs will cease to exist. We just won’t have the money to support them.
- Back to the Basics – America didn’t just become the number one country in the world by chance. Working in conjunction with the spirit and work ethic of its people were a set of policies and priorities that helped create growth and prosperity. Policies like investing in education, infrastructure and research. In all of these categories America is losing ground to the rest of the world. An educated population, sound infrastructure and support for R&D are all things companies look for when deciding where to locate. The US needs to be the best place in the world to locate a business.
o Our infrastructure has fallen from 7th in quality to 25th over the last 10 years.
o Our students rank 25th in math and 21st in science test scores.
o While we reduce our spending on research & development. Countries like China, India and Brazil are increasing what they spend.
- Forward thinking – Please, please, please let’s think beyond the next election. The world in changing so fast and we’re just not keeping up. Just like our most recent debt-fueled recession was not like the previous ones, the world Millennials live in will not be like their parents. We are living in a more globalized, competitive world where you are not just competing for business or a job from the guy next door; you’re competing with the guy in another country. Let’s be creative here. The same old policies are not going to cut it. We need new thinking.
- Reducing Waste & Creating Efficiency – Whether you believe that the government is too large or too small there is no denying its role in your life. Our government has become a wasteful, inefficient, bureaucratic behemoth. There is a lot of savings in reducing waste and creating efficiency. A lot! We suggest starting with this Government Accountability Office report.
- Revamping the Tax Code – America’s tax code was not written by average citizens, economist or rational individuals. It was written by politicians, corporations and lobbyists. It creates advantages for some and disadvantages for other. Over the years it has grown to thousands of pages. Its incentive system is out of whack and puts our country and businesses at a disadvantage. Look for a plan that seeks to broaden the tax base, reduces exemptions and lowers rates overall. It will not only collect more money but will encourage proper behaviors.
- Understand the Basics of the Federal Budget – This is probably not at the top of your to do list but it’s an important aspect of making decisions on who and what plan to support. We’re not asking you to become a budget expert just know where the government spends your money. We’ve broken it down for you here.
The federal budget is a hot topic these days in Washington. Both parties are using it as a platform for political posturing for the upcoming 2012 elections. From the media coverage our debt has been getting it would seem that the debate is moving along and we’re getting closer to some sort of deal. While there certainly are some promising discussions, Democrats and Republicans for the most part have retreated to their standard positions. Republicans saying that there will not be tax increases and Democrats refusing to touch Medicare and Social Security. Last week while attending a forum on our debt made up of elected officials, former elected officials and thought leaders it was amazing to see both parties called for a stop to the partisan attacks and demonizing then proceed to attack and demonize the other side.
Below are a few things that we believe need to happen to make real forward progress in the debate over our debt.
1. Elected officials need to understand their role as educators.
Politicians are very good at explaining their position and snapping off one-liners against the other side, but seem to have forgotten their role in educating their constituents about the tough choices we face. Many Americans have got the message that our fiscal path is unsustainable but still don’t understand the basics of the federal budget. Politicians need to explain to their constituents where the money goes. Most Americans still don’t understand what we spend entitlements vs. defense or education. Providing Americans with the basic facts will help in explaining the trade-offs we will need to make.
2. We need to engage in inter-generational dialogue or “Generationship.”
Much of the talk in Washington has been around bipartisanship and the trade-offs between Democrats and Republicans. In the end the trade-offs are not going to be between political parties but between the generations. There is going to have to be discussion between baby boomers and their children, the benefits they will want and the taxes their children will need to pay in order to finance those benefits. We will need to restructure the budget in a way that is fair to multiple generations, not just seniors, otherwise in 10 years you could see a revolt from Millennials who feel constrained and weighed down by the promises and obligations made by those before them.
3. We need to re-frame the debate from spending cuts and tax increases to talking about what we want America to look like in the future.
The budget is more than just a document of numbers. Where the government spends our money is a reflection the values of this country. Do we want low taxes and reduced benefits that place more responsibility on the individual or do we want benefits like we have today that will result in higher taxes? We also need to think about the kinds of jobs and industry we want. How will we make sure we are competitive against other countries? Do we need to spend more on infrastructure, innovation and education? Once we have a vision of what we want our country to be then we can start discussing how we get there. We may discover that we need to spend more in some areas while eliminating others all together.
- In 2011 the US borrowed $1,316,000,000,000 trillion. A little less then we borrowed in 2010 at over $1,400,000,000,000 trillion.
- Both years that was more than enough to cover our discretionary spending. Which means we borrowed to fund most government services including defense, education, infrastructure, energy and research & development.
- Without changes to current fiscal policies public debt* will reach 200% of GDP by 2038.
- In 2010 publicly held debt rose from $7,600,000,000,000 to $9,000,000,000,000.
- Gross debt was at nearly $15,000,000,000,000 by the end of 2011.
- Interest payments on our debt are predicted to rise from $196 billion to $917 billion in 2021. That’s assuming that countries don’t begin to demand higher yields on our debt. We think that number will be closer to $1 trillion in 2021.
- To put interest into perspective the US spent $477 billion on all discretionary programs and $835 billion on defense in 2011.
- Medicare and Medicaid, by far our largest problem in terms of the debt, are expected to cost taxpayers around $38 trillion over the next 50 years
- Over the long haul Social Security is about $9.2 trillion short, requiring the government to come up with $114 billion a year on average to cover the gap
- In reality the US government has a debt of over $76,000,000,000,000 including unfunded liabilities*
*Public debt is what the government has borrowed through the sale of treasury bonds. Gross includes what the government has borrowed from itself, mainly from social security.
* An unfunded liability is a debt the government has with no way to pay for. Typically this term refers to Medicare and parts of Social Security. “But I pay a lot of taxes for both those!” You’re right. These programs got this way do mostly to mismanagement by the government and our politicians promising more than they knew that could deliver.
Sources: Office of Management and Budget, Financial Report of the United States Government
Right now the deficit debate in Washington is hotter than ever. If you’re like most Americans you’re already turned off by the partisan politics that have come along with it. So out of habit you’ll tune out what is being said and hope it goes away. After all Baseball starts in April and Football will hopefully pick up again in September, but as a Young American you should be paying particular attention to what is being said right now. Currently politicians are forming opinions and taking stances that will affect the rest of your life.
Just the other week Paul Ryan (R-WI), Chairman of the House Budget Committee released $35 billion in proposed cuts to the budget. Those cuts included about $5 billion from the Department of Energy, $12 billion from transportation and $13 billion from defense. Then later in the week the House Appropriations Committee Chairman Harold Rogers (R-KY), released more specific cuts. That included $899 million from the Office of Energy Efficiency and Renewables, $1.1 billion of the Office of Science, $2 billion from job training programs and $74 million from the FBI. This all lead to the house passing cuts that would total $60 billion this year. Among the cuts are an end to funding the Corporation for Public Broadcasting (PBS), a 15% cut to college Pell Grants, an end to funding for AmeriCorps and a 40% cut to programs that fight AIDS, malaria and hunger.
Are these the right cuts to be making? Maybe or maybe not, but at any rate Millennials need to come to the table and start joining the conversation. Making the wrong cuts could put our generation at a serious competitive disadvantage in the future. You should also be aware that Congress is only currently looking at non-defense discretionary programs that amount to about 14% of the budget. To understand how small that really is consider that the combination of defense and Medicare make up about 42%.
So what is the right plan? Well some excellent proposals have been put on the table. A few of the most talked about include The President’s Fiscal Commission, Paul Ryan’s Roadmap for America and Domenici-Rivlin plan. There are a lot of great ideas in all these plans and any one of them would be better then inaction, but a Millennial solution needs to go further. As a generation growing up in a world where we will be competing with countries like China, India and Brazil we will need a plan that is pro-growth – And not just through tax reform. A plan where the government makes strategic investments, cuts waste, tackles entitlements and overall becomes more efficient. We need a plan that paints a picture of where America wants to be in 5, 10, 20 years and lays out a map with turn-by-turn directions that shows us how to get there. A plan that gives Millennials the opportunity that we grew up hearing about, the same opportunity our parents had.
Young Americans need to be weary of politicians that cut blindly to satisfy their base, or one’s who refuse to cut to satisfy theirs. Millennials are coming of age in a different world. We will be facing issues and competition like this country has never seen and we have to make sure we are prepared. There is no way that we will have the tax base to support older generations and pay down our $14 trillion-plus debt if we don’t have the growth and innovation that has made this country what it is today.
PAYGO legislation (short for pay-as you-go) was first enacted in 1991 and let to expire 2002. It received its name because it required Congress to make sure they had a way to pay for the bills they passed, either by increases in taxes or cuts in spending to other areas. Under PAYGO the deficit went from 4.5% of GDP in 1991 to a 2.4% surplus in 2000. In 2002 the last year of the first PAYGO bill deficits returned at $158 billion.
On February 12, 2010 President Obama signed the Statutory Pay-As-You-Go Act of 2010 into law. It was part of a package that also increased the debt limit on the nation’s credit card. In case you’re wondering that limit is now $14.294 trillion. The ultimate back card!
Just by its name PAYGO seems like a responsible piece of legislation passed by Congress to ensure they stop borrowing from our future. That is until you read the fine print and see the back door that Congress has left themselves.
PAYGO ONLY applies to NEW direct spending and revenue (tax) legislation. It does not apply to direct spending or revenue legislation that has already been passed. Direct spending also called mandatory spending, is what we spend on entitlement programs like Social Security and Medicare. Other example would be federal employee retirement and unemployment compensation.
So where’s Congress’s back door? Well, PAYGO does not apply to discretionary spending. In other words the federal budget. That encompasses pretty much every government agency. That’s right, Congress passed a law that doesn’t really require them to pay for anything! This would be equivalent to your deciding that you needed to cut expenses in your personals life. So you decided to freeze all mandatory or direct spending such as food and rent. But because you like to have a good time and not pay for it, all other spending such as beer, clothes, video games and other entertainment would not be subject to your spending freeze. Then you would pass along that debt to your children. You can see how this would not work for you, but somehow it works just fine for Congress.
So next time you hear a politician talking about how responsible they were for passing PAYGO, remember they’re really not.
Help us urge Congress to extend PAYGO to ALL spending so that we can really start bringing the deficit down.
Source: Congressional Research Service