Budget Basics

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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?

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