After researching the federal budget, I've decided that I will never again complain about how hard it is to track my own spending. The frustrations of dealing with my homemade spreadsheet are nothing compared to the complexity of the government's annual budget, which not only involves gigantic numbers, but also requires a glossary to interpret its cryptic terminology. Still, as the debate surrounding the debt ceiling continues like a scratched record, it's worth understanding how America spends all that cash.The federal budget is comprised primarily of two types of spending. First, there is "discretionary" spending, a misleading descriptor, as it implies that the government can do without these programs. But that category includes such vital things as law enforcement, transportation, national parks, disaster relief, homeland security and scientific research.
Why then are these programs called "discretionary"? Because Congress -- and more specifically, its appropriations committees -- gets to decide how much money to allocate to each one based on a proposal submitted by the president.
In contrast, "mandatory" spending is not based on hard numbers, but instead relies on formulas. Programs such as Social Security, Medicare, Medicaid and unemployment compensation all have guidelines regarding eligibility and availability of services. Those formulas, as opposed to a hard-and-fast number set down in the budget, determine how much is spent on these programs. As a result, the government may spend more or less depending on how wide or narrow the eligibility requirements are, the types of services offered, and most importantly, the needs of those Americans who qualify for them.
In contrast, "mandatory" spending is not based on hard numbers, but instead relies on formulas. Programs such as Social Security, Medicare, Medicaid and unemployment compensation all have guidelines regarding eligibility and availability of services. Those formulas, as opposed to a hard-and-fast number set down in the budget, determine how much is spent on these programs. As a result, the government may spend more or less depending on how wide or narrow the eligibility requirements are, the types of services offered, and most importantly, the needs of those Americans who qualify for them.
Where the Money Went
Because the 2011 numbers are still unfolding, it's easiest to look at the 2010 budget, which "largely resembles the patterns of recent years," according to the Center on Budget and Policy Priorities (CBPP). (Note that the government organizes its budgets on "fiscal" years that begin Oct. 1, so the following numbers are for fiscal year 2010, which began Oct. 1, 2009).
In fiscal year 2010, the federal government spent $3.5 trillion. The CBPP, a non-profit think tank, provides a useful breakdown of where it went:
- Medicare, Medicaid and Children's Health Insurance Program ($732 billion; 21% total spending)
- Social security ($707 billion; 20% total spending)
- Defense and security ($705 billion; 20% total spending)
- Safety net programs including unemployment benefits, food stamps, school meals, low-income housing assistance, and others that provide aid to families in need, as well as abused and neglected children. ($496 billion; 14% total spending)
- Benefits for federal retirees and veterans ($245 billion; 7% total spending)
- Interest on the debt ($196 billion; 6% total spending)
- Education ($105 billion; 3% total spending)
- Transportation infrastructure ($105 billion; 3% total spending)
- Scientific/medical research ($70 billion; 2% total spending)
- Non-security international ($35 billion; 1% total spending)
- All other programs ($105 billion; 3% total spending)
Roughly 63% of 2010 spending, or $2.2 trillion, was funded through taxes. The remaining 37%, or $1.3 trillion, was money the government borrowed by issuing bonds and other debt. (For a refresher on how bonds work, see my recent article on the debt ceiling).
Paying for What We've Already B! ought
Armed with a somewhat firmer grasp on the budget, I called the CBPP to ask how government spending is impacted by the debt ceiling issue.
"What people often don't realize is that raising the debt limit doesn't signify a decision to spend more," explained Jim Horney, vice president for federal fiscal policies at the CBPP. "It simply allows us to make payments for things already purchased or for goods, services or benefits that we've promised to pay for. These are obligations we've already incurred, the Social Security benefits, payments for defense contractors for airplanes they deliver, payments to federal workers for work they've done, paying the states the amounts we've promised to send to them for education and prisons and so on. Some people think it's like saying we're going to put more on the credit card. It's not. It's like saying we're going to pay the bill."
"What people often don't realize is that raising the debt limit doesn't signify a decision to spend more," explained Jim Horney, vice president for federal fiscal policies at the CBPP. "It simply allows us to make payments for things already purchased or for goods, services or benefits that we've promised to pay for. These are obligations we've already incurred, the Social Security benefits, payments for defense contractors for airplanes they deliver, payments to federal workers for work they've done, paying the states the amounts we've promised to send to them for education and prisons and so on. Some people think it's like saying we're going to put more on the credit card. It's not. It's like saying we're going to pay the bill."
If you agree with Horney that the nation needs to collectively pay its credit card bill, and that reneging on our obligations would be catastrophic for our country's status as the safest investment, you have little choice but to also agree that the debt ceiling has to be raised. But that doesn't answer the difficult question of what America can do to reduce the deficit.
We have two choices. First, we could decrease spending. Most elected officials, regardless of their party affiliation, agree that this needs to happen. Where they disagree is on when to cut spending, and which programs to cut. Generally speaking -- though obviously there are exceptions -- Republicans say they want to reduce spending immediately, while Democrats think the economy is too fragile to absorb the shock that would be caused by the loss of government funds, and instead propose a gradual reduction phased in over a series of years once the economy has improved.
Putting aside the question of timing, it's difficult to identify what programs to shrink. Collectively, health care, social security, and defense repre! sent mor e than 60% of the federal budget, so any substantive spending decrease would have to include cuts from those areas. But do you want to deprive soldiers of necessary equipment? Or tell an impoverished mom that her child can no longer see a doctor?
Higher Taxes? Yay! (OK, Not Really, But ...)
The other side of the coin is increasing income, which governments can do by raising taxes. The U.S. has been cutting them, and the results have been predictable. As Bruce Bartlett, a former Treasury official under President George H. W. Bush, pointed out last week, legislated tax cuts account for $2.8 trillion, or roughly 45%, of the $6.2 trillion revenue decline America has experienced since 2001.
He adds, "According to theCongressional Budget Office, ending all of the tax cuts and allowing scheduled tax increases now in law to take effect would raise revenues by $5.6 trillion between 2012 and 2021, including debt service. That would go a long way toward solving our debt problem."
The reality is that no answer sounds good. At least, not to me. I know that I don't want my country to default on its debts, which means I'm in favor of increasing the debt ceiling.
But the other stuff quickly gets murky and contradictory. I don't want my country to bury itself in debt, which means I support reduced spending. I also don't want my fellow Americans to go without -- without food stamps, housing assistance, health care, Social Security benefits, an effective military -- which means I also support not reducing spending. But I don't want to pay more taxes to continue funding these programs.
In other words, I want it all, and without any personal sacrifice to my bank balance.
When I'm really honest with myself, though, what I want most is to be proud of my country, to know that America has embraced its commitment to its citizens to create the best country we can. To me, that means continuing to fund these vital programs, to create publ! ic schoo ls that equip and empower children to thrive in this competitive global economy, to have prisons that uphold the promise of rehabilitation, to help Americans access safe, decent, affordable housing. In other words, I want my country to do unto others as you would have others do unto you, which may not be explicitly inked into our Constitution, but is implicit in our freedoms and protections.
I'm lucky to have a job and health insurance. But if I needed government assistance, I would want it to be available to me. So I'll put my money where my mouth is and support a tax increase. I don't like it, but I think it's the right thing to do. It's what I would want others to do for me.
Loren Berlin is a columnist at DailyFinance.com. She can be reached at loren.berlin (at) teamaol (dot) com. You can follow her on Twitter @LorenBerlin, and become a fan on Facebook.
We have two choices. First, we could decrease spending. Most elected officials, regardless of their party affiliation, agree that this needs to happen. Where they disagree is on when to cut spending, and which programs to cut. Generally speaking -- though obviously there are exceptions -- Republicans say they want to reduce spending immediately, while Democrats think the economy is too fragile to absorb the shock that would be caused by the loss of government funds, and instead propose a gradual reduction phased in over a series of years once the economy has improved.
Putting aside the question of timing, it's difficult to identify what programs to shrink. Collectively, health care, social security, and defense repre! sent mor e than 60% of the federal budget, so any substantive spending decrease would have to include cuts from those areas. But do you want to deprive soldiers of necessary equipment? Or tell an impoverished mom that her child can no longer see a doctor?
Higher Taxes? Yay! (OK, Not Really, But ...)
The other side of the coin is increasing income, which governments can do by raising taxes. The U.S. has been cutting them, and the results have been predictable. As Bruce Bartlett, a former Treasury official under President George H. W. Bush, pointed out last week, legislated tax cuts account for $2.8 trillion, or roughly 45%, of the $6.2 trillion revenue decline America has experienced since 2001.
He adds, "According to theCongressional Budget Office, ending all of the tax cuts and allowing scheduled tax increases now in law to take effect would raise revenues by $5.6 trillion between 2012 and 2021, including debt service. That would go a long way toward solving our debt problem."
The reality is that no answer sounds good. At least, not to me. I know that I don't want my country to default on its debts, which means I'm in favor of increasing the debt ceiling.
But the other stuff quickly gets murky and contradictory. I don't want my country to bury itself in debt, which means I support reduced spending. I also don't want my fellow Americans to go without -- without food stamps, housing assistance, health care, Social Security benefits, an effective military -- which means I also support not reducing spending. But I don't want to pay more taxes to continue funding these programs.
In other words, I want it all, and without any personal sacrifice to my bank balance.
When I'm really honest with myself, though, what I want most is to be proud of my country, to know that America has embraced its commitment to its citizens to create the best country we can. To me, that means continuing to fund these vital programs, to create publ! ic schoo ls that equip and empower children to thrive in this competitive global economy, to have prisons that uphold the promise of rehabilitation, to help Americans access safe, decent, affordable housing. In other words, I want my country to do unto others as you would have others do unto you, which may not be explicitly inked into our Constitution, but is implicit in our freedoms and protections.
I'm lucky to have a job and health insurance. But if I needed government assistance, I would want it to be available to me. So I'll put my money where my mouth is and support a tax increase. I don't like it, but I think it's the right thing to do. It's what I would want others to do for me.
Loren Berlin is a columnist at DailyFinance.com. She can be reached at loren.berlin (at) teamaol (dot) com. You can follow her on Twitter @LorenBerlin, and become a fan on Facebook.
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