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 Deficit Minded Young American
5 Points Young Americans Should Consider When Voting
- Does the person I’m voting for have a plan? Most members of Congress and candidates talk a lot about the need to reduce our deficit and control the national debt, but few have a realistic plan. Before you head to the voting booth find out which candidates have a plan and see if it makes since. Are they telling you that we can balance the budget by just cutting spending or raising taxes? If so they probably don’t have a realistic plan or a clear understanding of the problem.
- Does my candidate have a plan to create jobs for the future? We all know that jobs are the number one issue with voters this year, but as young Americans you need to think of more than just jobs in the near term. The world we will face is much different than that of our parents. It will be one of increased competition and decreasing resources. Does your candidate have a plan not only to create jobs but the high skilled ones we will need to be competitive with the rest of the world?
- What are they going to do about education? It’s no secret that every day America is falling further behind the rest of the world in education. Our school system is under performing, grossly underfunded and higher education is becoming beyond the reach of most Americans. A high caliber educational system is vital to America continuing to lead in innovation and to providing us with the knowledge we need to perform the high skilled jobs we want to have. Not to mention that we will need these high skilled, high paying jobs if we ever hope to pay down our debt or fund programs like Medicare and Social Security. What is your candidate’s plan to reform our primary education system and make sure that higher education is affordable?
- What is their view on taxes? Do they support extending the Bush era tax cuts? If so remember that those tax cuts are estimated to cost around $3.7 trillion over the next ten years. While we all want taxes to be lower they need to be offset by cuts in spending. Otherwise it’s just a loan, but unlike a regular loan you’ll be paying back money that other people borrowed.
- What is their plan to fix the system? Having solid plans to fix Medicare and Social Security are what is needed to balance our long-term debt problems, but how did we get here. How is it that we are $13 trillion in debt? Why did Congress feel it was okay to be so irresponsible and how did they get away with it? Has your candidate proposed systemic changes like campaign finance reform, term limits, salary deductions for Congress or a PAY-GO bill that covers all spending.
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