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Fiscal Year 2008 U.S.
Federal Spending - Cash or Budget Basis.

Note: Chart excludes US$188 billion earmarked towards "activities in Iraq, Afghanistan, and elsewhere in the war on terrorism"

The Budget of the United States Government is the President's proposal to the U.S. Congress which recommends funding levels for the next fiscal year, beginning October 1. Congressional decisions are governed by rules and legislation regarding the federal budget process. House and Senate Budget committees each develop budget resolutions, which set spending limits for the House and Senate committees and for Appropriations subcommittees, which then approve individual appropriations bills to allocate funding to various federal programs.

After Congress approves an appropriations bill, it is sent to the president, who may sign it into law, or may veto it. A vetoed bill is sent back to Congress, which can pass it into law with a two-thirds majority in each chamber. Congress may also combine all or some appropriations bills into an omnibus reconciliation bill. In addition, the president may request and the Congress may pass supplemental appropriations bills or emergency supplemental appropriations bills.

Several government agencies provide budget data and analysis. These include the Government Accountability Office (GAO), Congressional Budget Office, the Office of Management and Budget (OMB) and the U.S.marker Treasury Departmentmarker. These agencies have reported that the federal government is facing a series of important long-term financing challenges. Expenditures related to entitlement programs such as Social Security, Medicare and Medicaid are growing considerably faster than the economy overall, as the population matures.

Budget principles

The U.S. Constitution (Article I, section 9, clause 7) states that "[n]o money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of Receipts and Expenditures of all public Money shall be published from time to time."

Each year, the President of the United States submits his budget request to Congress for the following fiscal year, as required by the Budget and Accounting Act of 1921. Current law ( (a)) requires the president to submit a budget no earlier than the first Monday in January, and no later than the first Monday in February. Typically, presidents submit budgets on the first Monday in February. The budget submission has been delayed, however, in new president's first year when previous president belonged to a different party.

The federal budget is calculated largely on a cash basis. That is, revenues and outlays are recognized when transactions are made. Therefore, the full long-term costs of entitlement programs such as Medicare, Social Security, and the federal portion of Medicaid, are not reflected in the federal budget. By contrast, many business and some foreign governments have adopted forms of accrual accounting, which recognizes obligations and revenues when they are incurred. The costs of some federal credit and loan programs, according to provisions of the Federal Credit Reform Act of 1990, are calculated on a net present value basis.

Federal agencies cannot spend money unless funds are authorized and appropriated. Typically, separate Congressional committees have jurisdiction over authorization and appropriations. The House and Senate Appropriations Committees currently have 12 subcommittees, which are responsible for drafting the 12 regular appropriations bills, which determine amounts of discretionary spending for various federal programs. Appropriations bills must pass both the House and Senate and then be signed by the president in order to give federal agencies legal authority to spend. In many recent years, regular appropriations bills have been combined into "omnibus" bills.

Congress may also pass "special" or "emergency" appropriations. Spending that is deemed an "emergency" is exempt from certain Congressional budget enforcement rules. Funds for disaster relief have sometimes come from supplemental appropriations, such as after Hurricane Katrina. In other cases, funds included in emergency supplemental appropriations bills support activities not obviously related to actual emergencies, such as parts of the 2000 Census of Population and Housing. Special appropriations have been used to fund most of the costs of war and occupation in Iraq and Afghanistan so far.

Budget resolutions and appropriations bills, which reflect spending priorities of Congress, will usually differ from funding levels in the president's budget. The president, however, retains substantial influence over the budget process through his veto power and through his congressional allies when his party has a majority in Congress. The Democratic Party, having won a net increase of seats in both the House and Senate in the November 2006 elections, has controlled both houses of Congress since January 2007.

Federal budget data

Several government agencies provide budget data. These include the Government Accountability Office (GAO), Congressional Budget Office, the Office of Management and Budget (OMB) and the U.S.marker Treasury Departmentmarker. CBO publishes an economic and budget outlook in January, which is typically updated in August. OMB, which is responsible for organizing the President's budget presented in February, typically issues a budget update in July. GAO and Treasury issue Financial Statements of the U.S. Government, usually in the December following the close of the federal fiscal year, which occurs September 30. The Treasury Department also produces a Combined Statement of Receipts, Outlays, and Balances each December for the preceding fiscal year, which provides detailed data on federal financial activities.

Federal budget projections

CBO calculates 10-year baseline projections, which are used extensively in the budget process. Baseline projections are intended to reflect spending under current law, and are not intended as predictions of the most likely path of the economy. During the George W. Bush Administration, OMB presented 5-year projections, but presented 10-year projections in the FY2010 budget submission. CBO and GAO issue long-term projections from time to time.

Major receipt categories

Fiscal Year 2008 U.S.
Federal Receipts

During FY 2008, the federal government collected approximately $2.52 trillion in tax revenue. Primary receipt categories included individual income taxes (45%), Social Security/Social Insurance taxes (36%), and corporate taxes (12%). Other types included excise, estate and gift taxes. Tax revenues have averaged approximately 18.3% of gross domestic product (GDP) over the past 40 years, generally ranging plus or minus 1% from that level.

Tax revenues are significantly affected by the economy. Recessions typically reduce government tax collections as economic activity slows. For example, during FY2009, the U.S. government collected $2.1 trillion, about $400 billion less than the prior year. Individual income taxes declined 20%, while corporate taxes declined 50%. At 15% of GDP, the 2009 collections were the lowest level of the past 50 years.

Major expenditure categories

During FY 2008, the federal government spent nearly $2.98 trillion on a budget or cash basis. Primary expenditure categories (shown in the pie chart in the introduction above) include: Medicare & Medicaid ($682B or 23%), Defense ($613B or 21%) and Social Security ($612B or 21%). Expenditures are classified as mandatory, with payments required by specific laws, or discretionary, with payment amounts renewed annually as part of the budget process.

Over the past 40 years, mandatory spending for programs such as Medicare and Social Security have grown as a share of the budget, while defense and other discretionary categories have declined. Between 1966 and 2006, Medicare and Social Security grew from 16% of the budget to 40%. Defense declined from 43% to 20% of the budget during that period.

However, certain spending for the Iraq and Afghanistan wars, supplemental expenditures such as stimulus bills, and earmarks may not be fully reflected in the budget, as discussed in the debate section below.

Mandatory spending and entitlements

Entitlement Spending Risks
Medicare & Social Security

Social Security and Medicare expenditures are funded by permanent appropriations, and so are considered "mandatory" spending according to the 1997 Budget Enforcement Act (BEA). Social Security and Medicare are sometimes called "entitlements," because people meeting relevant eligibility requirements are legally entitled to benefits. Some programs, such as Food Stamps, are appropriated entitlements. Mandatory spending, according to CBO, equaled 11.2% of GDP in FY2008. Some mandatory spending, such as Congressional salaries, is not part of any entitlement program. Funds to make federal interest payments have been automatically appropriated since 1847. Mandatory spending accounted for 53% of total federal outlays in FY2008, with net interest payments accounting for an additional 8.5%.

Discretionary outlays, which rely on annual appropriations for funding, accounted for 38.0% of total federal outlays in FY2008. Over the past four decades, the proportion of federal outlays spent on mandatory programs has increased on average. Mandatory spending in FY2009 has increased sharply due to extraordinary actions taken in response to severe turmoil in financial markets and an economic recession that began in late 2008.

According to CBO projections (The Long-Term Outlook, Alternative Fiscal Scenario), spending on Social Security is projected to reach 6.1% of GDP and Medicare and Medicaid are projected to total 12.5% of GDP in FY2050. By comparison, federal outlays in FY2007 were 20% of GDP and federal revenues were 18.8% of GDP. In other words, spending on those three programs is projected to take up nearly the same proportion of the economy in FY2050 as all federal revenues in FY2007. Unless these long-term fiscal imbalances are addressed by raising taxes or drastic cuts in discretionary programs, the federal government will at some point be unable to pay its obligations.

As discussed further below, the Medicare Part A (Hospital Insurance) program began to run a deficit in FY 2007 and Social Security follows thereafter in 2017. Both programs are funded by dedicated payroll taxes that do not cover payouts and run increasing deficits for the foreseeable future, placing significant pressure on the budget.

Social Security

OASDI Income and Cost Rates Under Intermediate Assumptions.
Source: 2009 OASDI Trustees Report.

Social Security spending will increase sharply over the next decades, largely due to the retirement of the baby boom generation. The number of workers paying into the program continues declining relative to those receiving benefits. The number of workers paying into the program was 6.1 per retiree in 1960; this declined to 3.3 in 2007 and is projected to decline to 2.1 by 2040.The Congressional Budget Office (CBO) projects that an increase in payroll taxes equivalent to 1.8% of gross domestic product (GDP) would be necessary to put the Social Security program in fiscal balance for the next 75 years. (CBO, The Long-Term Outlook, Dec. 2007)In other words, raising the payroll tax rate to 14.4% during 2009 (from the current 12.4%) or cutting benefits by 13.3% would address the program's budgetary concerns indefinitely; these amounts increase to around 16% and 24% if no changes are made until 2037. Projections of Social Security's solvency are sensitive to assumptions about rates of economic growth and demographic changes.

Since recommendations of the Greenspan Commission were adopted in the early 1980s, Social Security payroll taxes have exceeded benefit payments. In FY2008, Social Security received $180 billion more in payroll taxes and accrued interest than it paid out in benefits. This annual surplus is credited to Social Security trust funds that hold special non-marketable Treasury securities. The Social Security surplus reduces the amount of U.S. Treasury borrowing from the public. The total balance of the trust funds was $2.4 trillion in 2008 and is estimated to reach $3.7 trillion by 2016. At that point, payments will exceed payroll tax revenues, resulting in the gradual reduction of the trust funds balance as the securities are redeemed against other types of government revenues. By 2037, according to some estimates, the trust funds will be exhausted. Under current law, Social Security payouts would be reduced by 24% at that time, as only payroll taxes are authorized to cover benefits.

The present value of unfunded obligations under Social Security as of January 1, 2009 has been estimated at approximately $5.3 trillion. In other words, this amount would have to be set aside today such that the principal and interest would cover the shortfall over the next 75 years. The estimated annual shortfall averages 1.9% of the payroll tax base or 0.7% of gross domestic product.

Various reforms have been debated for Social Security. Examples include reducing future annual cost of living adjustments (COLA) provided to recipients, raising the retirement age, and raising the income limit subject to the payroll tax ($106,800 in 2009).

Medicare and Medicaid

Medicare and Medicaid Spending as % GDP

Spending on Medicare and Medicaid is projected to grow dramatically in coming decades. While the same demographic trends that affect Social Security also affect Medicare, rapidly rising medical prices appear a more important cause of projected spending increases. The CBO has indicated that: "Future growth in spending per beneficiary for Medicare and Medicaid—the federal government’s major health care programs—will be the most important determinant of long-term trends in federal spending. Changing those programs in ways that reduce the growth of costs—which will be difficult, in part because of the complexity of health policy choices—is ultimately the nation’s central long-term challenge in setting federal fiscal policy." Further, the CBO also projects that "total federal Medicare and Medicaid outlays will rise from 4 percent of GDP in 2007 to 12 percent in 2050 and 19 percent in 2082—which, as a share of the economy, is roughly equivalent to the total amount that the federal government spends today. The bulk of that projected increase in health care spending reflects higher costs per beneficiary rather than an increase in the number of beneficiaries associated with an aging population."

President Obama stated in May 2009: "But we know that our families, our economy, and our nation itself will not succeed in the 21st century if we continue to be held down by the weight of rapidly rising health care costs and a broken health care system...Our businesses will not be able to compete; our families will not be able to save or spend; our budgets will remain unsustainable unless we get health care costs under control."

The present value of unfunded obligations under all parts of Medicare during FY 2007 is approximately $34.1 trillion. In other words, this amount would have to be set aside today such that the principal and interest would cover the shortfall over the next 75 years.

Various reform strategies have been debated for Medicare and Medicaid. Examples include comparative effectiveness research, independent review panels, modifying doctor incentives to focus on value rather than fee for service, taxing healthcare benefits paid for by employers, tort reform, prevention of obesity and related expensive conditions, and improved healthcare technology.

Military spending

Defense Spending as % Outlays FY 1950-2007
Defense Spending 2006 - 2010

During FY 2008, the U.S. government spent nearly $800 billion on defense and homeland security, approximately 32% of tax receipts of $2.5 trillion.

  • Department of Defense: $741 billion
  • Homeland Security: $52 billion

The U.S. defense budget (excluding spending for the wars in Iraq and Afghanistan, Homeland Security, and Veteran's Affairs) is around 4% of GDP. According to the CBO, defense spending grew 9% annually on average from fiscal year 2000-2009.

Debate about military spending

Democratic Congressman Barney Frank called for a significant reduction in the defense budget during February 2009: "The math is compelling: if we do not make reductions approximating 25 percent of the military budget starting fairly soon, it will be impossible to continue to fund an adequate level of domestic activity even with a repeal of Bush's tax cuts for the very wealthy. I am working with a variety of thoughtful analysts to show how we can make very substantial cuts in the military budget without in any way diminishing the security we need...[American] well-being is far more endangered by a proposal for substantial reductions in Medicare, Social Security or other important domestic areas than it would be by canceling weapons systems that have no justification from any threat we are likely to face."

Republican historian Robert Kagan has argued that 2009 is not the time to cut defense spending, relating such spending to jobs and support for allies: "A reduction in defense spending this year would unnerve American allies and undercut efforts to gain greater cooperation. There is already a sense around the world...that the United States is in terminal decline. Many fear that the economic crisis will cause the United States to pull back from overseas commitments. The announcement of a defense cutback would be taken by the world as evidence that the American retreat has begun."

U.S. Secretary of Defense Robert Gates wrote in January 2009 that the U.S. should adjust its priorities and spending to address the changing nature of threats in the world: "What all these potential adversaries -- from terrorist cells to rogue nations to rising powers -- have in common is that they have learned that it is unwise to confront the United States directly on conventional military terms. The United States cannot take its current dominance for granted and needs to invest in the programs, platforms, and personnel that will ensure that dominance's persistence. But it is also important to keep some perspective. As much as the U.S. Navy has shrunk since the end of the Cold War, for example, in terms of tonnage, its battle fleet is still larger than the next 13 navies combined -- and 11 of those 13 navies are U.S. allies or partners."

In 2009, the US Department of Defense's annual report to Congress on China's military strength offered several estimates of actual 2008 Chinese military spending. In terms of the prevailing exchange rate, Pentagon estimates range between US$105 and US$150 billion, the second highest in the world after the US.

Budgetary treatment of Iraq & Afghanistan war expenses

Much of the costs for the wars in Iraq and Afghanistan have not been funded through regular appropriations bills, but through emergency supplemental appropriations bills. As such, most of these expenses were not included in the budget deficit calculation prior to FY2010. Some budget experts argue that emergency supplemental appropriations bills do not receive the same level of legislative care as regular appropriations bills. In addition, emergency supplemental appropriations are not subject to the same budget enforcement mechanisms imposed on regular appropriations. Funding for the first stages of the Vietnam War was provided by supplemental appropriations, although President Johnson eventually acceded to Congressional demands to fund that war through the regular appropriations process.

The Congressional Budget Office (CBO) estimates that the President's FY2009 budget proposals would provide $188 billion in budget authority for FY2008.
 CBO estimates that appropriations for operations in Afghanistan and Iraq since 2001 through February 2008 total $752 billion. That would be approximately 4% of federal spending over the period.

Budget authority is legal authority to obligate the federal government. For many war-related activities there may be a long lag between the time when budget authority is granted and when payments (outlays) are made by the U.S. Treasury. In particular, spending on reconstruction activities in Iraq and Afghanistan has lagged behind available budget authority. In other cases, the military uses contracts that are payable upon completion, which can create long lags between appropriations and outlays.

In principle, the Department of Defense (DoD) separates war funding from base funding. In most cases, however, funds for operations in Iraq and Afghanistan use the same accounts as other DoD accounts. This raises challenges to attempts to achieve a precise separation of expenditures on operations in Iraq and Afghanistan from the base defense operations.

Interest expense

Components of interest expense
Budgeted net interest on the public debt was approximately $239 billion in fiscal years 2007 and 2008. This represented approximately 9.5% of government spending. Interest was the fourth largest single budgeted disbursement category, after defense, Social Security, and Medicare.

During FY2008, the government also accrued a non-cash interest expense of $212 billion for intra-governmental debt, primarily the Social Security Trust Fund, for a total interest expense of $454 billion. This accrued interest is added to the Social Security Trust Fund and therefore the national debt each year and will be paid to Social Security recipients in the future. However, since it is a non-cash expense it is excluded from the budget deficit calculation.

Public debt owned by foreigners has increased to approximately 50% of the total or approximately $3.4 trillion. As a result, nearly 50% of the interest payments are now leaving the country, which is different from past years when interest was paid to U.S. citizens holding the public debt. Interest expenses are projected to grow dramatically as the U.S. debt increases and interest rates rise from very low levels in 2009 to more typical historical levels.

Net interest costs paid on the public debt declined from $260 billion in 2008 to $199 billion in 2009 because of lower interest rates. Should these rates return to historical averages, the interest cost would increase dramatically. Historian Niall Ferguson described the risk that foreign investors would demand higher interest rates as the U.S. debt levels increase over time in a November 2009 interview.

Understanding deficits and debt

Deficit and Debt Increases 2001-2009

The annual budget deficit is the difference between actual cash collections and outlays during a given fiscal year, which runs from October 1 to September 30. The U.S. Federal Government collected $2.52 trillion in FY2008, while spending $2.98 trillion, generating a total deficit of $455 billion, which was added to the United States public debt. Since 1970, the U.S. Federal Government has run deficits for all but four years (1998-2001) contributing to a total debt of $10.6 trillion as of January 2009.

The national debt represents the outstanding obligations of the government at any given time, comprising both public and intra-governmental debt, which was $10.9 trillion as of March 1, 2009. Differences between the annual deficit and annual change in the national debt include the treatment of the surplus Social Security payroll tax revenues (which increase the debt but not the deficit), supplemental appropriations for the Iraq and Afghanistan wars, and earmarks.

These differences can make it more challenging to determine how much the government actually spends relative to tax revenues. The increase in the national debt during a given year is a helpful measure to determine this amount. From FY 2003-2007, the national debt increased approximately $550 billion per year on average. For the first time in FY 2008, the U.S. added $1 trillion to the national debt.In relative terms, from 2003-2007 the government spent roughly $1.20 for each $1.00 it collected in taxes. This increased to $1.40 in FY2008 and $1.90 in FY2009.

Understanding on-budget and off-budget deficits

Comparison of Deficits to Change in Debt 2008

Social Security payroll taxes and benefit payments, along with the net balance of the U.S. Postal Service are considered "off-budget." Administrative costs of the Social Security Administration (SSA), however, are classified as "on-budget." The total federal deficit is the sum of the on-budget deficit (or surplus) and the off-budget deficit (or surplus). Since FY1960, the federal government has run on-budget deficits except for FY1999 and FY2000, and total federal deficits except in FY1969 and FY1998-FY2001. In large part because of Social Security surpluses, the total federal budget deficit is smaller than the on-budget deficit.

The surplus of Social Security payroll taxes over benefit payments is invested in special Treasury securities held by the Social Security Trust Fund. Social Security and other federal trust funds are part of the "intergovernmental debt." The total federal debt is divided into "intergovernmental debt" and "debt held by the public."

For example, in FY2008 an off-budget surplus of $183 billion reduced the on-budget deficit of $642 billion, resulting in a total federal deficit of $459 billion. Media often report the latter figure. The national debt increased by $1,035 billion between the end of FY2007 and the end of FY2008.

Causes of change in deficits

2001 vs. 2012

Causes for Changes in CBO Forecasts
The U.S. budget situation has deteriorated significantly since 2001, when the Congressional Budget Office (CBO) forecast average annual surpluses of approximately $850 billion from 2009-2012. The average deficit forecast in each of those years is now approximately $1,215 billion. The New York Times analyzed this roughly $2 trillion "swing," separating the causes into four major categories along with their share:
  • Recessions or the business cycle (37%);
  • Policies enacted by President Bush (33%);
  • Policies enacted by President Bush and supported or extended by President Obama (20%); and
  • New policies from President Obama (10%).

CBO data is based only on current law, so policy proposals that have yet to be made law are not included in their analysis. The article concluded that President Obama's decisions accounted for only a "sliver" of the deterioration, but that he "...does not have a realistic plan for reducing the deficit..."

2008 vs. 2009

The CBO reported in October 2009 reasons for the difference between the 2008 and 2009 deficits, which were approximately $460 billion and $1,410 billion, respectively. Key categories of changes included: tax receipt declines of $320 billion due to the effects of the recession and another $100 billion due to tax cuts in the stimulus bill (the American Recovery and Reinvestment Act or ARRA); $245 billion for the Troubled Asset Relief Program (TARP) and other bailout efforts; $100 billion in additional spending for ARRA; and another $185 billion due to increases in primary budget categories such as Medicare, Medicaid, unemployment insurance, Social Security, and Defense. This was the highest budget deficit relative to GDP (9.9%) since 1945. The national debt increased by $1.9 trillion during FY2009, versus the $1.0 trillion increase during 2008.

Debt relative to gross domestic product (GDP)

2010 Budget: Total Debt $ and % to GDP
GAO Simulation assuming current spending levels continue.
GAO Simulation assuming current spending levels continue.

GDP is a measure of the total size and output of the economy. One measure of the debt burden is its size relative to GDP. In fiscal 2007, U.S. public debt was approximately $5 trillion (36.8 percent of GDP) and total debt was $9 trillion (65.5 percent of GDP.) Public debt represents money owed to those holding government securities such as Treasury bills and bonds. Total debt includes intra-governmental debt, which includes amounts owed to the Social Security Trust Funds (about $2.2 trillion in FY 2007) and Civil Service Retirement Funds. By August 2008, the total debt was $9.6 trillion.

Based on the 2010 U.S. budget, total national debt will nearly double in dollar terms between 2008 and 2015 and will grow to nearly 100% of GDP, versus a level of approximately 80% in early 2009. Multiple government sources including the current and previous presidents, the GAO, Treasury Department, and CBO have said the U.S. is on an unsustainable fiscal path. As the debt ratio increases, the exchange value of the dollar may fall (however other countries, particularly those in the Eurozone also face high debt and there may be no relative change in currency value). Paying back debt with cheaper currency could cause investors (including other governments) to demand higher interest rates if they anticipated further dollar depreciation. Paying higher interest rates could slow domestic U.S. growth.

Higher debt increases interest payments on the debt, which already exceed $430 billion annually as discussed below, or about 15 cents of every tax dollar for 2008. According to the CIA Factbook, only six other countries have debt to GDP ratios over 100% for 2008, the largest of which is Japan at 170%.

Historical analysis of government spending or debt relative to GDP can be misleading, according to the GAO, CBO and Treasury Department. This is because demographic shifts and per-capita spending are causing Social Security and Medicare/Medicaid expenditures to grow significantly faster than GDP. If this trend continues, government simulations under various assumptions project mandatory spending for these programs will exceed taxes dedicated to these programs by more than $40 trillion over the next 75 years on a present value basis. According to the GAO, this will double debt-to-GDP ratios by 2040 and double them again by 2060, reaching 600 percent by 2080. A GAO simulation indicates that Social Security, Medicare, and Medicaid expenditures alone will exceed 20% of GDP by 2080, which is approximately the historical ratio of taxes collected by the federal government. In other words, these mandatory programs alone will take up all government revenues under this simulation.

Budgetary special topics & debates

Stimulus packages

The Economic Stimulus Act of 2008 provided an estimated $170 billion in tax rebates to stimulate the economy. The Congressional Budget Office (CBO) estimated that the Act "would increase budget deficits (or reduce future surpluses) by$152 billion in 2008 and by a net amount of $124 billion over the 2008-2018 period."

The American Recovery and Reinvestment Act of 2009 was passed by the U.S. Congress on 13 February 2009. This nearly $800 billion bill included both spending and tax cuts. The CBO estimates that enacting the bill would increase federal budget deficits by $185 billion over the remaining months of fiscal year 2009, by $399 billion in 2010, by $134 billion in 2011, and by $787 billion over the 2009-2019 period.

Stimulus can be characterized as investment, spending or tax cuts. For example, if the funds are used to create a physical asset that generates future cash flows (e.g., a power plant or toll road), the stimulus could be characterized as investment. Extending unemployment benefits are examples of government spending. Tax cuts may or may not be spent. There is significant debate among economists regarding which type of stimulus has the highest "multiplier" (i.e., increase in economic activity per dollar of stimulus).

Budgetary implications of the 2001 and 2003 tax cuts

A variety of tax cuts were enacted under President Bush between 2001-2003, through the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). Most of these tax cuts are scheduled to expire December 31, 2010. Since CBO projections are based on current law, the projections discussed above assume these tax cuts will expire, which may prove politically challenging. CBO has estimated that extending these cuts would cost the U.S. Treasury nearly $1.8 trillion in the following decade, dramatically increasing federal deficits and exacerbating the entitlement-related risks described above.

Tax policy

Revenue and Expense as % GDP

The appropriate level and distribution of federal taxes has long been a controversial topic. Since the 1970s, some "supply side" economists have contended that lowering taxes could stimulate economic growth to such a degree that tax revenues could rise, other factors being held constant. However, economic models and econometric analysis have found mixed support for the "supply side" theory.

Some economists have called for using "dynamic scoring models," which incorporate feedback effects of tax cuts. CBO has concluded, however, that standard scoring methods incorporate the most important and immediate feedback effects and that attempting to include other feedback effects would lead to speculative results. CBO, and Gregory Mankiw, a Harvard macroeconomist and former head of the Council of Economic Advisors in the George W. Bush administration, have concluded that cuts in federal taxes could stimulate new economic activity that would generate revenues that offset nearly half the cost of the tax cut, if reduced revenues were matched by spending cuts. Offsets when lost revenues were not matched by spending cuts were much lower. In 2007, the U.S. Treasury issued an analysis of dynamic scoring models that implied that only 7% of lost revenues would be offset by revenue feedback effects. These studies suggest that federal tax cuts would dramatically increase deficits.

While total U.S. tax receipts grew from 2004 to 2007 by an average of $189.4 billion per year in current dollars, the studies cited above would conclude that such tax receipts would have been significantly higher had the 2001 and 2003 tax cuts not been made. Income tax revenues in dollar terms did not regain their FY 2000 peak until 2006. Total federal tax revenues relative to GDP have yet to regain their 2000 peak.

Francis Fukuyama summarized these concepts: "Prior to the 1980s, conservatives were fiscally conservative— that is, they were unwilling to spend more than they took in in taxes. But Reaganomics introduced the idea that virtually any tax cut would so stimulate growth that the government would end up taking in more revenue in the end (the so-called Laffer curve). In fact, the traditional view was correct: if you cut taxes without cutting spending, you end up with a damaging deficit. Thus the Reagan tax cuts of the 1980s produced a big deficit; the Clinton tax increases of the 1990s produced a surplus; and the Bush tax cuts of the early 21st century produced an even larger deficit. The fact that the American economy grew just as fast in the Clinton years as in the Reagan ones somehow didn't shake the conservative faith in tax cuts as the surefire key to growth." Former Comptroller General of the United States David Walker stated during January 2009: "You can't have guns, butter and tax cuts. The numbers just don't add up."

In November 2009, The Economist estimated the additional federal tax revenue generated from eliminating certain tax deductions, for the 2013-2014 period. These included: employer-provided health insurance ($215 billion), mortgage interest ($147B), state & local taxes ($65B), capital gains on homes ($60B), property taxes ($33B) and municipal bond interest ($37B). These total $552 billion. A fuel tax of $0.50 cents per gallon would raise another $62 billion. This would reduce the projected deficit at that time by half.

Can the U.S. outgrow the problem?

GAO Comparative Increase in Spend vs. GDP

Some politicians and economists have argued that the U.S. can "grow its way" out of these fiscal challenges. Their argument is that economic growth (driven by tax cuts, productivity improvements, and borrowing) will generate sufficient tax revenue to offset growing entitlement spending. However, the GAO has estimated that double-digit GDP growth would be required for the next 75 years to do so; GDP growth averaged 3.2% during the 1990s. Because mandatory spending growth rates will far exceed any reasonable growth rate in GDP and the tax base, the GAO concluded that the U.S. cannot grow its way out of the problem.


GAO defines "earmarking" as "designating any portion of a lump-sum amount for particular purposes by means of legislative language." Earmarking can also mean "dedicating collections by law for a specific purpose." In some cases, legislative language may direct federal agencies to spend funds for specific projects. In other cases, earmarks refer to directions in appropriation committee reports, which are not law. Various organizations have estimated the total number and amount of earmarks. An estimated 16,000 earmarks containing nearly $48 billion in spending were inserted into larger, often unrelated bills during 2005. While the number of earmarks has grown in the past decade, the total amount of earmarked funds is approximately 1-2 percent of federal spending.

Fraud, waste and abuse

The Office of Management and Budget estimated that the federal government made $98 billion in "improper payments" during FY2009, an increase of 38% vs. the $72 billion the prior year. This increase was due in part to effects of the financial crisis and improved methods of detection. The total included $54 billion for healthcare-related programs, 9.4% of the $573 billion spent on those programs. The government pledged to do more to combat this problem, including better analysis, auditing, and incentives.

2010 Budget Proposal

2010 Budget: Projected Deficits and Debt Increases
President Barack Obama proposed his 2010 budget during February, 2009. He has indicated that health care, clean energy, education, and infrastructure will be priorities. The proposed increases in the national debt exceed $900 billion each year from 2010-2019, following a $2.5 trillion increase in the national debt for FY 2009, more than twice the record $1 trillion increase in 2008.

Tax cuts will expire for the wealthiest taxpayers to increase revenues, returning marginal rates to the Clinton levels. The budget does not include overall reductions to Social Security or Medicare entitlement programs, which represent over 40% of budgeted expenditures. Further, the base Department of Defense budget increases slightly through 2014 (Table S-7), from $534 to $575 billion, although supplemental appropriations for the Iraq War are expected to be reduced. In addition, estimates of revenue are based on GDP growth assumptions that exceed the Blue Chip Economists' consensus forecast considerably through 2012 (Table S-8).

OMB Director Peter Orszag stated in a November 2009 that of the $9 trillion in deficits forecast for the 2010-2019 period, $5 trillion are due to programs from the prior administration, including tax cuts from 2001 and 2003 and the unfunded Medicare Part D. Another $3.5 trillion are due to the financial crisis, including reductions in future tax revenues and additional spending for the social safety net such as unemployment benefits. The remainder are stimulus and bailout programs related to the crisis.

Addressing budgetary challenges

OMB Director Peter Orszag stated in a November 2009 interview: "It's very popular to complain about the deficit, but then many of the specific steps that you could take to address it are unpopular. And that is the fundamental challenge that we are facing, and that we need help both from the American public and Congress in addressing." He characterized the budget problem in two parts: a short- to medium-term problem related to the financial crisis of 2007–2009, which has reduced tax revenues significantly and involved large stimulus spending; and a long-term problem primarily driven by increasing healthcare costs per person. He argued that the U.S. cannot return to a sustainable long-term fiscal path by either tax increases or cuts to non-healthcare cost categories alone; the U.S. must confront the rising healthcare costs driving expenditures in the Medicare and Medicaid programs.

In January 2008, then GAO Director David Walker presented a strategy for addressing what he called the federal budget "burning platform" and "unsustainable fiscal policy." This included improved financial reporting to better capture the obligations of the government; public education; improved budgetary and legislative processes, such as "pay as you go" rules; the restructure of entitlement programs and tax policy; and creation of a bi-partisan fiscal reform commission. He pointed to four types of "deficits" that comprise the problem: budget, trade, savings and leadership.

Harvard historian Niall Ferguson stated in a November 2009 interview: "The United States is on an unsustainable fiscal path. And we know that path ends in one of two ways; you either default on that debt, or you depreciate it away. You inflate it away with your currency effectively." He said the most likely case is that the U.S. would default on its entitlement obligations for Social Security and Medicare first, by reducing the obligations through entitlement reform. He also warned about the risk that foreign investors would demand a higher interest rate to purchase U.S. debt, damaging U.S. growth prospects.

Total outlays in recent budget submissions

Annual U.S. spending 1934-2006 with adjustment for inflation.

The President's budget also contains revenue and spending projections for the current fiscal year, the coming fiscal years, as well as several future fiscal years. In recent years, the President's budget contained projections five years into the future. The Congressional Budget Office (CBO) issues a "Budget and Economic Outlook" each January and an analysis of the President's budget each March. CBO also issues an updated budget and economic outlook in August.

Actual budget data for prior years is available from the Congressional Budget Office and from the Office of Management and Budget (OMB).

Basic budget terms (based on GAO Glossary)

Appropriations"Budget authority to incur obligations and to make payments from the Treasury for specified purposes."

Budget Authority"Authority provided by federal law to enter into financial obligations that will result in immediate or future outlays involving federal government funds."

Outlay"The issuance of checks, disbursement of cash, or electronic transfer of funds made to liquidate a federal obligation." The term "outlays" is usually synonymous with "expenditure" or "spending."

The amount of budget authority and outlays for a fiscal year usually differ because budget authority from a previous fiscal year in some cases can be used for outlays in the current fiscal year. Some military and some housing programs have multi-year appropriations, in which budget authority is specified for several coming fiscal years.

See also


  1. CBO: Letter to the Chairman of the Senate Committee on the Budget. 2/11/2008.
  2. The Federal Credit Reform Act was passed as part of the Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508)
  3. A bill can also be enacted by a Congressional override of a presidential veto, or is automatically enacted if the president takes no action within 10 days after receiving the bill.
  4. CBO-Historical Budget Data
  5. CBO-Monthly Budget Review
  6. CBO-Historical Data tables
  7. GAO Fiscal Briefing-January 2008
  8. U.S. Congressional Budget Office, An Analysis of the President's Budgetary Proposals for Fiscal Year 2010, June 2009.
  9. GAO Citizens Guide
  10. GAO Fiscal Briefing
  11. Concord Slides
  13. 2009 OASDI Trustees Report Pages 3 and 19
  14. 2009 OASDI Trustees Report - Page 9 and 19
  15. Trustees Report Long Range Estimates - Section 5a
  16. AARP Public Policy Institute-Reform Options for Social Security
  17. CBO Testimony
  18. President Obama-Weekly Radio Address - May 16 2009
  19. GAO Fiscal Briefing Page 17
  20. Atul Gawande-The New Yorker-The Cost Conundrum-June 2009
  21. GAO-2008 Report Page 35
  22. CBO-Monthly Budget Review-Sept 09
  23. Barney Frank - The Nation
  24. Robert Kagan - Washington Post
  25. Gates-A Balanced Strategy
  26. Office of the Secretary of Defense - Annual Report to Congress: Military Power of the People's Republic of China 2009 (PDF)[1]
  27. An Analysis of the President’s Budget for Fiscal Year 2009
  28. CBO Letter to Sen. Conrad, Feb. 11, 2008
  29. President's Budget Page 26
  30. GAO Audit Report
  31. Treasury-Major Foreign Holders of Treasury Securities
  32. CBO Monthly Report for September 2009
  33. Charlie Rose Interview-Niall Ferguson-November 3, 2009
  34. Bittle, Scott & Johnson, Jean. "Where Does Money Go?" Collins; New York: 2008.
  35. Treasury Direct
  36. [ National Debt Clock
  37. Treasury Direct
  39. [OMB, Historical Statistics, Table 7.1. available at].
  40. NYT - Americas Sea of Red Ink Was Years in the Making
  41. CBO Monthly Budget Review-October 2009
  42. Bureau of the Public Debt/Treasury Direct-Debt changes from 9/30/08 to 9/30/09
  43. FY 2009 Budget pp. 127-128
  44. Social Security Trust Fund Report, p. 19
  45. U.S. National Debt Clock
  46. 2010 Budget-Summary Tables S-13 and S-14
  47. President's Radio Address - May 16 2009
  48. Samuelson - Risky Deficit Spending
  49. CIA Factbook 2008
  50. GAO Presentation-January 2008
  51. The Nation's Long-Term Fiscal Outlook: September 2008 Update
  52. GAO Presentation-January 2008
  53. CBO Study
  54. CBO-Budgetary Impact of ARRA
  55. Charlie Rose-Interview with Economists Stiglitz and Feldstein-January 2009
  56. CBO Analysis Page 6
  57. CBO Study
  58. Mankiw Study
  59. Washington Post 2007
  60. Washington Post 2006
  62. CBO Historical Tables
  63. Fukuyama Newsweek Essay
  64. IOUSA Movie-DVD-January 2009 Update
  65. The Economist-Stemming the Tide-November 2009
  66. Washington Post
  67. GAO U.S. Fiscal Briefing 1/08
  69. Hooked on handouts - Opinion -
  70. Harvard Briefing Paper
  71. OMB Blog-Improper Payments-November 2009
  72. Auerbach & Gale (Brookings) -Analysis of 2010 Budget
  73. 2010 Budget
  74. Washington Post-Montgomery-Battle Lines Quickly Set Over Planned Policy Shifts
  75. Charlie Rose Show-Peter Orszag Interview-November 3, 2009
  76. Charlie Rose Show-Peter Orszag Interview-November 3, 2009
  77. GAO-U.S. Financial Condition and Fiscal Future Briefing-David Walker-January 2008
  78. Charlie Rose Interview with Niall Ferguson-November 3, 2009]
  79. Historical budgets, from the Congressional Budget Office
  80. Office of Management and Budget website

External links

"Chart talk" examples

One of the best ways to understand the long-term budget risks is through helpful charts. The following sources contain charts and commentary:

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