Federal spending: From whence comes the deficit?

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Congress has just passed a budget for Fiscal Year 2014. The amount authorized in the budget is $1.012 trillion. This amount covers only federal discretionary spending and does not reflect the reality of what our federal government spends in totality. So, where does all the money come from, and where does it go?

As indicated, the budget amount in the bill is confusing because the federal government is projected to spend a total of $3.777 trillion on all the programs it supports. And it will do this with $3.033 of revenue. This yields a projected deficit of $744 billion. Thus, discretionary spending in the current budget bill is less than one-third of total federal government outlays. According to the CBO, the new budget proposal projects deficit reductions of $85 billion over the next ten years, or an average of $8.5 billion per year. Half of this reduction is actually back end loaded to the last two years of the ten year period. Therefore, the budget bill does little to nothing to reduce federal deficits.

The revenue which the federal government receives is:

  • Income taxes $1.716 trillion
  • Social Security taxes $1.037 trillion
  • Ad valorem taxes $194 billion
  • Business and other revenue $92 billion

The categories where the federal government spends money are:

  • Health care $973 billion
  • Pensions $921 billion
  • Defense $830 billion
  • Welfare $400 billion
  • Interest $222 billion
  • Education $141 billion
  • Transportation $103 billion
  • Other spending $93 billion
  • Protection $58 billion
  • General government $30 billion

The numbers are slightly off due to rounding.

Of the expenses within the pension category, Social Security comprises $0.865 trillion. Within health care, Medicare expenses comprise $530 billion. This totals $1.395 trillion. Compared to the Social Security tax revenues of $1.037 trillion, these two programs yield a deficit of $.0358 trillion, or roughly half of the projected federal deficit for 2014. As previously indicated in these columns, this deficit can be made up readily by eliminating the cap on Social Security taxes. In the meantime, the various trust funds available to finance these gaps are being depleted and will run dry in the not too distant future.

The balance of federal revenue is slightly more than $2 trillion. The balance of federal expenditures is $2.382 trillion. This leaves a deficit of $380 billion. Two-thirds of this deficit comes from interest on the federal debt ($222 billion). The largest of the remaining programs include federal pensions ($140 billion), grants to states for Medicaid ($303 billion), Department of Defense ($597 billion), Veterans benefits ($148 billion), food and nutrition programs including SNAP ($105 billion). Where does one cut in these programs to make up the balance? Is revenue the only way to close the gap?

Estimates of revenue and expenditure for the period 2015-2018 show declining budgets deficits, going from the $744 billion deficit in 2014 to a deficit of $480 billion in 2018. These deficit reductions are far in excess of the savings proposed in the current budget bill. Where do these substantial deficit reductions come from? They come from substantially increasing tax revenues—under the current tax programs. The question must, therefore be, how can we encourage the economy to generate even greater tax revenues to further reduce the deficits in the budget.

It seems that the Congressional gridlock over the budget is misplaced, and is wasting valuable time, energy and political capital, when Congressional emphasis needs to be elsewhere: growing the economy. If Congress can change its focus to economic issues of this kind, perhaps we can do what President Clinton did: balance the budget in a healthy, growing economy.