United States federal budget

Part of a series of articles on
United States budget and debt topics
Major dimensions
Federal budget · Public debt Expenditures · Taxation Economy · Financial position Military budget
Programs
Medicare · Social Security
Contemporary issues
Political debates · Deficit reduction Health care reform · Social Security debate Subprime mortgage crisis Bush tax cuts · Starve the beast Bowles-Simpson Commission Debt-ceiling crisis
Terminology
Cumulative deficit = Debt Inflation · Balance of payments

Fiscal Year 2011 U.S. Federal Spending – Cash or Budget Basis.

Fiscal Year 2011 U.S. Federal Receipts.

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. Budget committees 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. Treasury Department. These agencies have reported that the federal government is facing a series of important financing challenges. In the short-run, tax revenues have declined significantly due to a severe recession and tax policy choices, while expenditures have expanded for wars, unemployment insurance and other safety net spending. In the long-run, expenditures related to healthcare programs such as Medicare and Medicaid are projected to grow 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 (31 U.S.C. § 1105(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 some new presidents' 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 businesses and some other national 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 that 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 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. Budget authority is the authority provided by federal law to enter into financial obligations that will result in immediate or future outlays involving federal government funds. Outlays refer to the issuance of checks, disbursement of cash, or electronic transfer of funds made to liquidate a federal obligation, and is usually synonymous with "expenditure" or "spending." The term "appropriations" refers to budget authority to incur obligations and to make payments from the Treasury for specified purposes. Some military and some housing programs have multi-year appropriations, in which budget authority is specified for several coming fiscal years.

Federal budget data

Several government agencies provide budget data. These include the Government Accountability Office (GAO), the Congressional Budget Office, the Office of Management and Budget (OMB) and the U.S. Treasury Department. The CBO publishes The Budget and Economic Outlook in January, which is typically updated in August. It also publishes a Monthly Budget Review. The OMB, which is responsible for organizing the President's budget presented in February, typically issues a budget update in July. The GAO and the 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. There is a corresponding Citizen's Guide, a short summary. 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.

Historical tables within the President's Budget (OMB) provide a wide range of data on federal government finances. Many of the data series begin in 1940 and include estimates of the President’s Budget for 2009–2014. Additionally, Table 1.1 provides data on receipts, outlays, and surpluses or deficits for 1901–1939 and for earlier multi-year periods. This document is composed of 17 sections, each of which has one or more tables. Each section covers a common theme. Section 1, for example, provides an overview of the budget and off-budget totals; Section 2 provides tables on receipts by source; and Section 3 shows outlays by function. When a section contains several tables, the general rule is to start with tables showing the broadest overview data and then work down to more detailed tables. The purpose of these tables is to present a broad range of historical budgetary data in one convenient reference source and to provide relevant comparisons likely to be most useful. The most common comparisons are in terms of proportions (e.g., each major receipt category as a percentage of total receipts and of the gross domestic product).

Federal budget projections

The CBO calculates 35-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, the OMB presented five-year projections, but presented 45-year projections in the FY2010 budget submission. The CBO and the GAO issue long-term projections from time to time.

Major receipt categories

Main article: Taxation in the United States

During FY 2011, the federal government collected approximately $2.3 trillion in tax revenue or 15.4% GDP. Primary receipt categories included individual income taxes (47%), Social Security/Social Insurance taxes (36%), and corporate taxes (8%). Other types included excise, estate and gift taxes.

Tax revenues have averaged approximately 18.3% of gross domestic product (GDP) over the 1970-2009 period, generally ranging plus or minus 2% from that level. Tax revenues are significantly affected by the economy. Recessions typically reduce government tax collections as economic activity slows. For example, tax revenues declined from $2.5 trillion in 2008 to $2.1 trillion in 2009, and remained at that level in 2010. During 2009, individual income taxes declined 20%, while corporate taxes declined 50%. At 15.1% of GDP, the 2009 and 2010 collections were the lowest level of the past 50 years.

Tax policy

Revenue and Expense as % GDP.

Tax descriptions

The federal personal income tax is progressive, meaning a higher marginal tax rate is applied to higher ranges of income. For example, in 2010 the tax rate that applied to the first $17,000 in taxable income for a couple filing jointly was 10%, while the rate applied to income over $379,150 was 35%. The top marginal tax rate has declined considerably since 1980. For example, the top tax rate was lowered from 70% to 50% in 1980 and reached as low as 28% in 1988. The most recent changes were the Bush tax cuts of 2001 and 2003, extended by President Obama in 2010, which lowered the top rate from 39.6% to 35%. There are numerous exemptions and deductions, that typically result in a range of 35-40% of U.S. households owing no federal income tax. The recession and tax cut stimulus measures increased this to 51% for 2009, versus 38% in 2007.

The federal payroll tax (FICA) is a flat tax used to fund Social Security and Medicare. For the Social Security portion, employers and employees each pay 6.2% of the workers gross pay, a total of 12.4%. The Social Security portion is capped at $106,800, meaning income above this amount is not subject to the tax. The Medicare portion is also paid by employer and employee each at 1.45% and is not capped. The payroll tax is considered by some to be a form of social insurance rather than a tax, due to the benefits these programs pay to qualified recipients. For calendar year 2011, the employee's portion of the payroll tax was reduced to 4.2% as an economic stimulus measure.

Tax expenditures

The term "tax expenditures" refers to income exemptions or deductions that reduce the tax collections that would be made applying a particular tax rate alone. According to the Center for American Progress, annual tax expenditures have increased from $526 billion in 1982 to $1,025 billion in 2010, adjusted for inflation (measured in 2010 dollars). Economist Mark Zandi wrote in July 2011 that tax expenditures should be considered a form of government spending.

In November 2009, The Economist estimated the additional federal tax revenue generated from eliminating certain tax expenditures, for the 2013-2014 period. These included: income exemptions for employer-provided health insurance ($215 billion); and various income deductions such as mortgage interest ($147B), state & local taxes ($65B), capital gains on homes ($60B), property taxes ($33B) and municipal bond interest ($37B). These total $557 billion. All of these steps together would reduce the projected deficit at that time by nearly half.

The Congressional Joint Committee on Taxation estimated in 2008 the amount of federal tax expenditures for the five year (2008–2012) period. Examples include: Exclusions for healthcare insurance paid for by employers-$680B; reduced tax rate on dividends and long-term capital gains-$668B; deduction for mortgage interest on owner-occupied residences-$444B; exclusions for pre-tax defined benefit or defined contribution pension contributions such as to 401K plans-$554B; deductions for non-business state and local income taxes-$242B; deductions for charitable contributions-$205B; exclusion of benefits under healthcare insurance "cafeteria" plans-$201B; exclusion for interest on state and local government bonds-$147B; exclusion for Medicare benefits-$134B; deduction for real property taxes-$112B; dependent credit for children under 17 years of age-$105B; exclusion for capital gains on sale of primary residence-$90B; and deductions for long-term care and other medical expenses-$68B.

Major expenditure categories

Main article: Expenditures in the United States federal budget

During FY 2011, the federal government spent $3.60 trillion on a budget or cash basis, up 4% vs. FY 2010 spending of $3.46 trillion and up 20% versus FY2008 spend of $2.97 trillion. Major categories of FY 2011 spending included: Medicare & Medicaid ($835B or 24%), Social Security ($725B or 20%), Defense Department ($700B or 19%), non-defense discretionary ($646B or 19%), other ($465B or 12%) and interest ($227B or 6%). Expenditures are classified as mandatory, with payments required by specific laws, or discretionary, with payment amounts renewed annually as part of the budget process. Expenditures averaged 20.6% GDP from 1971 to 2008, generally ranging +/-2% GDP from that level. The 2011 and 2010 spend were both 24.1% GDP, versus 2008 spend of 20.8% GDP.

Mandatory spending and entitlements

Social Security - Ratio of Covered Workers to Retirees

Entitlement Spending Risks

Social Security, Medicare, and Medicaid expenditures are funded by permanent appropriations and so are considered mandatory spending. Social Security and Medicare are sometimes called "entitlements," because people meeting relevant eligibility requirements are legally entitled to benefits, although most pay taxes into these programs throughout their working lives. Some programs, such as Food Stamps, are appropriated entitlements. Some mandatory spending, such as Congressional salaries, is not part of any entitlement program. Mandatory spending accounted for 53% of total federal outlays in FY2008, with net interest payments accounting for an additional 8.5%.

Mandatory spending is expected to increase as a share of GDP. This is due in part to demographic trends, as the number of workers continues declining relative to those receiving benefits. For example, the number of workers per retiree was 5.1 in 1960; this declined to 3.0 in 2010 and is projected to decline to 2.2 by 2030. These programs are also affected by per-person costs, which are also expected to increase at a rate significantly higher than the economy. This unfavorable combination of demographics and per-capita rate increases is expected to drive both Social Security and Medicare into large deficits during the 21st century. Unless these long-term fiscal imbalances are addressed by reforms to these programs, raising taxes or drastic cuts in discretionary programs, the federal government will at some point be unable to pay its obligations without significant risk to the value of the dollar (inflation).

• Medicare was established in 1965 and expanded thereafter. In 2009, the program covered an estimated 45 million persons (38 million aged and 7 million disabled). It consists of four distinct parts which are funded differently: Hospital Insurance, mainly funded by a dedicated payroll tax of 2.9% of earnings, shared equally between employers and workers; Supplementary Medical Insurance, funded through beneficiary premiums (set at 25% of estimated program costs for the aged) and general revenues (the remaining amount, approximately 75%); Medicare Advantage, a private plan option for beneficiaries, funded through the Hospital Insurance and Supplementary Medical Insurance trust funds; and the "Part D" prescription drug benefits, for which funding is included in the Supplementary Medical Insurance trust fund and is financed through beneficiary premiums (about 25%) and general revenues (about 75%). Spending on Medicare and Medicaid is projected to grow dramatically in coming decades. The number of persons enrolled in Medicare is expected to increase from 47 million in 2010 to 80 million by 2030. While the same demographic trends that affect Social Security also affect Medicare, rapidly rising medical prices appear to be a more important cause of projected spending increases. CBO expects Medicare and Medicaid to continue growing, rising from 5.3% GDP in 2009 to 10.0% in 2035 and 19.0% by 2082. CBO has indicated healthcare spending per beneficiary is the primary long-term fiscal challenge. Various reform strategies were proposed for healthcare, and in March 2010, the Patient Protection and Affordable Care Act was enacted as a means of health care reform.
• Social Security is a social insurance program officially called "Old-Age, Survivors, and Disability Insurance" (OASDI), in reference to its three components. It is primarily funded through a dedicated payroll tax of 12.4%. During 2010, total benefits of $713 billion were paid out versus income (taxes and interest) of $781 billion, a $68 billion surplus. An estimated 157 million people paid into the program and 54 million received benefits, roughly 2.91 workers per beneficiary. Since the Greenspan Commission in the early 1980s, Social Security has cumulatively collected far more in payroll taxes dedicated to the program than it has paid out to recipients—nearly $2.6 trillion in 2010. This annual surplus is credited to Social Security trust funds that hold special non-marketable Treasury securities. This surplus amount is commonly referred to as the "Social Security Trust Fund". The proceeds are paid into the U.S. Treasury where they may be used for other government purposes. Social Security spending will increase sharply over the next decades, largely due to the retirement of the baby boom generation. The number of program recipients is expected to increase from 44 million in 2010 to 73 million in 2030. Program spending is projected to rise from 4.8% of GDP in 2010 to 5.9% of GDP by 2030, where it will stabilize. The Social Security Administration projects that an increase in payroll taxes equivalent to 1.8% of the payroll tax base or 0.6% of GDP would be necessary to put the Social Security program in fiscal balance for the next 75 years. Over an infinite time horizon, these shortfalls average 3.3% of the payroll tax base and 1.2% of GDP. 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). Because of the mandatory nature of the program and large accumulated surplus in the Social Security Trust Fund, the Social Security system has the legal authority to compel the government to borrow to pay all promised benefits through 2036, when the Trust Fund is expected to be exhausted. Thereafter, the program under current law will pay approximately 75%-78% of promised benefits for the remainder of the century.

Other spending

Defense Spending 2000–2011.

FY 2010 Estimated Federal Spending per 2011 Budget

• Military spending: The military budget of the United States during FY 2011 was approximately $740 billion in expenses for the Department of Defense (DoD), $141 billion for veteran expenses, and $48 billion in expenses for the Department of Homeland Security, for a total of $929 billion. The U.S. defense budget (excluding spending for the wars in Iraq and Afghanistan, Homeland Security, and Veteran's Affairs) is around 5% of GDP. Adding these other costs places defense spending between 6% and 7% of GDP. The DoD baseline budget, excluding supplemental funding for the wars, has grown from $297 billion in FY2001 to a budgeted $534 billion for FY2010, an 81% increase. According to the CBO, defense spending grew 9% annually on average from fiscal year 2000-2009. 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.
• Non-defense discretionary spending is used to fund the executive departments (e.g., the Department of Education) and independent agencies (e.g., the Environmental Protection Agency), although these do receive a smaller amount of mandatory funding as well. Discretionary budget authority is established annually by Congress, as opposed to mandatory spending that is required by laws that span multiple years, such as Social Security or Medicare. The federal government spent approximately $660 billion during 2010 on the Cabinet Departments and Agencies, excluding the Department of Defense, representing 19% of budgeted expenditures or about 4.5% of GDP. Several politicians and think tanks have proposed freezing non-defense discretionary spending at particular levels and holding this spending constant for various periods of time. President Obama proposed freezing discretionary spending representing approximately 12% of the budget in his 2011 State of the Union address.
• Interest expense: Budgeted net interest on the public debt was approximately $251 billion in FY2011 (6% of spending). During FY2011, the government also accrued a non-cash interest expense of $203 billion for intra-governmental debt, primarily the Social Security Trust Fund, for a total interest expense of $454 billion. Net interest costs paid on the public debt increased from $215 billion in 2010 due to higher debt levels. Should interest rates rise 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. As of January 2012, public debt owned by foreigners has increased to approximately 50% of the total or approximately $5.0 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.

Understanding deficits and debt

Deficit and Debt Increases 2001-2010.

Main article: United States public debt

The annual budget deficit is the difference between actual cash collections and budgeted spending (a partial measure of total spending) during a given fiscal year, which runs from October 1 to September 30. Since 1970, the U.S. federal government has run deficits for all but four years (1998–2001) contributing to a total debt of $15.35 trillion as of January 2012. The fiscal year 2011 "total budget" deficit was $1.296 trillion or 8.7% GDP, similar to the $1.294 trillion or 9.0% GDP in 2010. These deficits are considerably higher than pre-crisis levels, which ranged from a $236 billion (2.4% GDP) surplus in 2000 to a $459 billion (3.2% GDP) deficit in 2008.

The national debt increase during a given year is not the same as the "total budget" deficit commonly reported, due to a variety of accounting complexities involved. 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 as the effects of a severe global financial crisis became apparent. Debt increases rose to $1.88 trillion in 2009 and $1.65 trillion in 2010 as the crisis continued. 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.

The total federal debt is divided into "debt held by the public" and "intra-governmental debt." The debt held by the public refers to U.S. government securities or other obligations held by investors (e.g., bonds, bills and notes), while Social Security and other federal trust funds are part of the intra-governmental debt. As of January 31, 2012 the total debt was $15.4 trillion, with debt held by the public of $10.6 trillion and intragovernmental debt of $4.8 trillion. Debt held by the public as a percentage of GDP rose from 34.7% in 2000 to 40.3% in 2008 and 62.1% in 2010. U.S. GDP was approximately $14.5 trillion during 2010 and an estimated $15 trillion for 2011 based on activity during the first two quarters. This means the total debt is roughly the size of GDP. Economists debate the level of debt relative to GDP that signals a "red line" or dangerous level, or if any such level exists. By comparison, China's budget deficit was 1.6% of its $10 trillion GDP in 2010, with a debt to GDP ratio of 16%.

The CBO reported several types of risk factors related to rising debt levels in a July 2010 publication:

• A growing portion of savings would go towards purchases of government debt, rather than investments in productive capital goods such as factories and computers, leading to lower output and incomes than would otherwise occur;
• If higher marginal tax rates were used to pay rising interest costs, savings would be reduced and work would be discouraged;
• Rising interest costs would force reductions in important government programs;
• Restrictions to the ability of policymakers to use fiscal policy to respond to economic challenges; and
• An increased risk of a sudden fiscal crisis, in which investors demand higher interest rates.

CBO scenarios

CBO-Public Debt Under "Extended" and "Alternate" Scenarios

The CBO reported during June 2011 two scenarios for how debt held by the public will change during the 2010-2035 time period. The "extended baseline scenario" assumes that the Bush tax cuts (extended by Obama) will expire per current law in 2012. It also assumes the alternative minimum tax (AMT) will be allowed to affect more middle-class families, reductions in Medicare reimbursement rates to doctors will occur, and that revenues reach 23% GDP by 2035, much higher than the historical average 18%. Under this scenario, activities such as national defense and a wide variety of domestic programs (excluding Social Security, Medicare, and interest) would decline to the lowest percentage of GDP since before World War II. Under this scenario, public debt rises from 69% GDP in 2011 to 84% by 2035, with interest payments absorbing 4% of GDP vs. 1% in 2011.

CBO estimated in August 2011 that if laws currently "on the books" were enforced without changes, meaning the "extended baseline scenario" described above is implemented along with deficit reductions from the Budget Control Act of 2011, the deficit would decline from 8.5% GDP in 2011 to around 1% GDP by 2021.

The "alternative fiscal scenario" more closely assumes the continuation of present trends, such as permanently extending the Bush tax cuts, restricting the reach of the AMT, and keeping Medicare reimbursement rates at the current level (the so-called "doc fix", versus declining by one-third as mandated under current law). Revenues are assumed to remain around the historical average 18% GDP. Under this scenario, public debt rises from 69% GDP in 2011 to 100% by 2021 and approaches 190% by 2035.

The CBO reported in June 2011: "Many budget analysts believe that the alternative fiscal scenario presents a more realistic picture of the nation’s underlying fiscal policies than the extended-baseline scenario does. The explosive path of federal debt under the alternative fiscal scenario underscores the need for large and rapid policy changes to put the nation on a sustainable fiscal course."

CBO reported in September 2011: "The nation cannot continue to sustain the spending programs and policies of the past with the tax revenues it has been accustomed to paying. Citizens will either have to pay more for their government, accept less in government services and benefits, or both."

Contemporary issues and debates

Main article: Political debates about the United States federal budget

See also: Social Security debate in the United States and Health care reform debate in the United States

Topics frequently in the news in the 2010-2011 time period included: a) the effect of the Bush tax cuts and related extension; b) causes of deficit and debt increases; c) the effects of fraud, waste and earmarks; d) whether a "danger level" of debt exists; and e) the effects of globalization and free trade on employment, among others.

Conceptual arguments

Many of the debates surrounding the United States federal budget center around competing macroeconomic schools of thought. In general, Democrats favor the principles of Keynesian economics to encourage economic growth via a mixed economy of both private and public enterprise, a welfare state, and strong regulatory oversight. Conversely, Republicans generally support applying the principles of either laissez-faire or supply-side economics to grow the economy via small government, low taxes, limited regulation, and free enterprise. Debates have surrounded the appropriate size and role of the federal government since the founding of the country. These debates also deal with questions of morality, income equality and intergenerational equity. For example, Congress adding to the debt today may or may not enhance the quality of life for future generations, who must also bear the additional interest and taxation burden.

Economic growth and employment are key factors driving recent deficits. The Congressional Budget Office (CBO) estimated in October 2011 that approximately one-third of the deficit projected for fiscal year 2012 is due to economic factors, which have caused safety net expenditures to increase and tax revenues to decline with high unemployment.

Causes of change

The U.S. last balanced its budget in 2001. Between 2001 and 2010, spending increased by 5.6% GDP (from 18.2% GDP in 2001 to 23.8% GDP in 2010), while revenues declined by 4.6% GDP (from 19.5% GDP in 2001 to 14.9% GDP in 2010), resulting in a 9.4% GDP deficit. Medicare/Medicaid spending increased by 1.9% GDP and defense spending increased by 1.7% GDP. Individual income tax revenues fell by 3.5% GDP and payroll taxes fell by 0.8% GDP.

Economist Paul Krugman summarized these causes in May 2011: "What happened to the budget surplus the federal government had in 2000? The answer is, three main things. First, there were the Bush tax cuts, which added roughly $2 trillion to the national debt over the last decade. Second, there were the wars in Iraq and Afghanistan, which added an additional $1.1 trillion or so. And third was the Great Recession, which led both to a collapse in revenue and to a sharp rise in spending on unemployment insurance and other safety-net programs."

Effects of allowing current laws to take effect

CBO has estimated that letting current laws take effect would significantly reduce future budget deficits. For example, the Bush tax cuts of 2001 and 2003 (extended by President Obama in 2009) are scheduled to expire at the end of 2012. Other deficit reducers per CBO include allowing other tax cuts enacted in 2009 and 2010 by President Obama to expire in 2012, allowing the alternative minimum tax (AMT) to affect more taxpayers, and reducing Medicare reimbursements to doctors. These and other current laws, if allowed to take effect, reduce the deficit from an estimated 4.7% GDP in 2021 to 1.2% GDP. Total deficit reduction could be as high as $7.1 trillion over a decade if current law is enforced and not overridden.

Healthcare reform

CBO estimated in March 2011 that the Patient Protection and Affordable Care Act, the controversial healthcare legislation passed in 2010, is expected to reduce the deficit $210 billion total between 2012-2021, with revenues of $813 billion partially offset by outlays of $604 billion.

Solving the problem

Report of the National Commission on Fiscal Responsibility and Reform-Public Debt as % GDP Under Various Scenarios

Main article: Deficit reduction in the United States

Strategies

Strategies for addressing the deficit problem may include policy choices regarding taxation and spending, along with policies designed to increase economic growth and reduce unemployment. These policy decisions may be evaluated in the context of a framework:

• Promote economic growth and employment: A fast-growing economy offers the win-win outcome of a larger proverbial economic pie to divide, with higher employment and tax revenues, lower safety net spending and a lower debt-to-GDP ratio.
• Make equitable trade-offs: Many budget choices have win-lose outcomes, reflecting how government revenues are divided, with some benefiting and others incurring costs. For example, taking away benefits from those in or near retirement may be considered inequitable, while phasing out retirement benefits for younger workers may be considered less so.
• Keep short- and long-term issues in perspective: Healthcare cost inflation and an aging population are the primary long-term deficit drivers. Unemployment and various tax and spending policy choices are the primary short-term deficit drivers. Measures to encourage economic growth today can be implemented along with other measures to reduce future deficits.
• Limit or avoid future spending increases: Policy choices may focus on preventing future increases via freezes or reducing annual rates of increase, as federal spending has not declined year-over-year in nominal dollars since at least 1970. Annual growth rates since 2001 in the top three expenditure categories (Healthcare, Social Security, and Defense) are far above the economic growth rate.
• Invest productively: Some spending can be categorized as investments that lower future deficits. For example, if infrastructure, education or R&D investments could make U.S. workers and products more competitive or generate a revenue stream, these could reduce future deficits. Examples might include installing windows that reduce energy costs, toll roads and bridges, or power plants.
• Avoid uncertainty and unnecessary regulation: Complex legislation may create uncertainty regarding future costs of doing business, which affects investment decisions made by businesses and households.
• Implement budget process reforms: Budget rules could be implemented that require new legislation or programs to be funded by either cutting other spending or raising taxes (i.e., "Pay as you go" or PAYGO rules.)

The CBO reported in September 2011 that: "Given the aging of the population and rising costs for health care, attaining a sustainable federal budget will require the United States to deviate from the policies of the past 40 years in at least one of the following ways:

• Raise federal revenues significantly above their average share of GDP;
• Make major changes to the sorts of benefits provided for Americans when they become older; or
• Substantially reduce the role of the rest of the federal government relative to the size of the economy."

During testimony before the Congressional Joint Deficit Reduction Committee in September 2011, CBO Director Douglas Elmendorf counseled members of Congress to make decisions about the role of the federal government, then make policy choices to obtain the revenue necessary to fund those roles, to put the U.S. on a sustainable fiscal path.

Specific proposals

A variety of government task forces, expert panels, private institutions, politicians, and journalists have made recommendations for addressing the deficit and debt:

• President Obama established a budget reform commission, the National Commission on Fiscal Responsibility and Reform, which released a draft report in December 2010. It included various tax and spend adjustments to bring long-run government tax revenue and spending into line at approximately 21% of GDP, with $4 trillion debt avoidance over 10 years.

• President Obama announced a 10-year (2012–2021) plan in September 2011 called: "Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction." The plan included tax increases on the wealthy, along with cuts in future spending on defense and Medicare. Social Security was excluded from the plan. The plan included a net debt avoidance of $3.2 trillion over 10 years. If the Budget Control Act of 2011 is included, this adds another $1.2 trillion in deficit reduction for a total of $4.4 trillion.

• The House of Representatives Committee on the Budget, chaired by Rep. Paul Ryan (R), released The Path to Prosperity: Restoring America's Promise. The Path focuses on tax reform (lowering income tax rates and reducing tax expenditures or loopholes); spending cuts and controls; and redesign of the Medicare and Medicaid programs. It does not propose significant changes to Social Security.

• The Congressional Progressive Caucus (CPC) proposed "The People's Budget" in April 2011, which it claimed would balance the budget by 2021 while maintaining debt as a % GDP under 65%. It proposed reversing most of the Bush tax cuts; higher income tax rates on the wealthy and restoring the estate tax, investing in a jobs program, and reducing defense spending.

• The Peter G. Peterson Foundation solicited proposals from six organizations, which included the American Enterprise Institute, the Bipartisan Policy Center, the Center for American Progress, the Economic Policy Institute, The Heritage Foundation, and the Roosevelt Institute Campus Network. The recommendations of each group were reported in May 2011.

• The Bipartisan Policy Center (BPC) sponsored a Debt Reduction Task Force, co-chaired by Pete V. Domenici and Alice M. Rivlin. This panel created a report called "Restoring America's Future," which was published in November 2010. The plan claimed to stabilize the debt to GDP ratio at 60%, with up to $6 trillion in debt avoidance over the 2011-2020 period. Specific plan elements included defense and non-defense spending freezes for 4–5 years, income tax reform, elimination of tax expenditures, and a national sales tax or value-added tax (VAT).

• Congressmen Jim Cooper (D-TN) and Steven LaTourette (R-OH) proposed a budget in the House of Representatives in March of 2012. While it did not pass the House, it received bi-partisan support, with 17 votes in favor from each party. According to the BPC: "...the plan would enact tax reform by lowering both the corporate and individual income tax rates and raising revenue by broadening the base. Policies are endorsed that improve the health of the Social Security program, restrain health care cost growth, control annually appropriated spending, and make cuts to other entitlement programs." The plan proposes to raise approximately $1 trillion less revenue over the 2013-2022 decade than the Simpson-Bowles and Domenici-Rivlin plans, while cutting non-defense discretionary spending more deeply and reducing the defense spending cuts mandated in the Budget Control Act of 2011. According to the Center on Budget and Policy Priorities, this plan is ideologically to the Right of either the Simpson-Bowles or Domenici-Rivlin plans.

Timing of solutions

How urgently should the U.S. put plans in place to address its budget challenges? Fed Chair Ben Bernanke stated in January 2007: "The longer we wait, the more severe, the more draconian, the more difficult the objectives are going to be. I think the right time to start was about 10 years ago."

Total outlays in recent budget submissions

Annual U.S. spending 1930-2014 alongside U.S. GDP for comparison.

• 2013 United States federal budget - $3.8 trillion (submitted 2012 by President Obama)
• 2012 United States federal budget - $3.7 trillion (submitted 2011 by President Obama)
• 2011 United States federal budget - $3.8 trillion (submitted 2010 by President Obama)
• 2010 United States federal budget - $3.6 trillion (submitted 2009 by President Obama)
• 2009 United States federal budget - $3.1 trillion (submitted 2008 by President Bush)
• 2008 United States federal budget - $2.9 trillion (submitted 2007 by President Bush)
• 2007 United States federal budget - $2.8 trillion (submitted 2006 by President Bush)
• 2006 United States federal budget - $2.7 trillion (submitted 2005 by President Bush)
• 2005 United States federal budget - $2.4 trillion (submitted 2004 by President Bush)
• 2004 United States federal budget - $2.3 trillion (submitted 2003 by President Bush)
• 2003 United States federal budget - $2.2 trillion (submitted 2002 by President Bush)
• 2002 United States federal budget - $2.0 trillion (submitted 2001 by President Bush)
• 2001 United States federal budget - $1.9 trillion (submitted 2000 by President Clinton)
• 2000 United States federal budget - $1.8 trillion (submitted 1999 by President Clinton)
• 1999 United States federal budget - $1.7 trillion (submitted 1998 by President Clinton)
• 1998 United States federal budget - $1.7 trillion (submitted 1997 by President Clinton)
• 1997 United States federal budget - $1.6 trillion (submitted 1996 by President Clinton)
• 1996 United States federal budget - $1.6 trillion (submitted 1995 by President Clinton)

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).

See also

• 2011 U.S. debt ceiling crisis
• Starve the beast (policy)
• Government budget by country
• I.O.U.S.A., documentary film by Patrick Creadon
• Modern Monetary Theory

External links

• Budget of the United States Government and various supplements back to 1941 available on FRASER (Federal Reserve Archival System for Economic Research)
• Citizen's Guide to 2011 Financial Statements of the U.S. by Treasury Dpt.
• Congressional Budget Office
• The Federal Budget from the White House, OMB, includes interactive graphic
• Historical budget statistics, GPO
• 2010 and 2011 Budget Interactive Graphic, The New York Times, February 1, 2010
• Death and Taxes: 2009 A visual representation of the 2009 United States federal discretionary budget.
• Columbia University selective guide for research on the U.S. Federal budget process
• FederalSpending.org "Federal Contracts and Grants"
• The Project on Middle East Democracy's May 2008 Report on the President's Budget Request for FY09 for Democracy, Governance, and Human Rights in the Middle East
• FY 2009 Omnibus Budget Passed by the House 25Feb2009
• FY 2010 Budget Proposal Submitted by The President 26Feb2009
• Brookings Institution - Auerbach & Gale - An Update on the Economic and Fiscal Crises 2009 and Beyond - September 2009
• Gale & Auerbach (Brookings) - Analysis of 2010 Budget
• NYT-Warren Buffet-Op Ed-The Greenback Effect
• Federal Budget Experts at WhoRunsGov at The Washington Post
• Federal Budget (US) collected news and commentary at The New York Times
• Peter G. Peterson Institute-2011 Fiscal Solutions Initiative-Report
• The Federal Budget Process

Recent CBO documents

• Confronting the Nation's Fiscal Policy Challenges - September 13, 2011
• CBO Budget and Economic Outlook - August 2011 Update - CBO outlook for the 2012-2021 periods. Includes a summary and graphical presentations

"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:

• GAO Fiscal Briefing by David Walker
• Perot Charts
• The Heritage Foundation's "Budget Chart Book"
• Peter G. Peterson Foundation Citizen's Guide
• I.O.U.S.A. Movie - 30 Minute YouTube Summary-Narrated by Former GAO Director David Walker
• Concord Coalition-Presentation-Short and Long Term Budget Trends
• Pew Trusts-10 Fiscal Charts

Budget games and simulations

• American Public Media has developed a budget game that allows players to select various policy choices and measure the effect on key economic variables. It is available at APM-Budget Hero Game
• Committee for a Responsible Federal Budget-Stabilize the Debt Simulator