A Dummy's Understanding of the US Federal Budget Situation

There’s currently all this buzz about the budget deficit and government shutdowns in the US. I hear it on the radio, I read it in the news, but I have to be entirely truthful and say my understanding of the whole situation is rather superficial. So in an attempt to be an educated citizen, I decided to look into it a bit more, despite knowing I would be taking precious time away from my thesis. I hope it’ll be worth it. I think it will, because what happens to the budget now and in the future will have a huge impact on my generation: as taxpayers, and as recipients of healthcare, social security (if it’s still around by the time we retire), and other potential government benefits.



The Economist released a rather impressing (not to be confused with impressive) visual of the US budget deficit today. The IMF reported this data. Currently it looks like our budget deficit is about 11% of GDP, while gross government debt as a percentage of GDP stands at almost 100 percent. The latter statistic is pretty scary, but I guess when compared to Japan we’re in a much less severe position. On the other hand, the forecast for reducing out deficit to GDP ratio looks rather optimistic. I guess if a solid plan to reduce the deficit is passed and implemented, we can get the ratio down to a little under 8% by next year. But, to use the old cliché, the devil is in the details. I’m more interested in how exactly the deficit will be cut, so I did a little novice research.

Both parties, Democrat and Republican, are adamant about cutting the budget deficit. They just can’t agree on where the cuts should be made. And this is where the groundswell for partisan politics come in, i.e. the finger-wagging and blame-placing. It might help to first look at what our current federal budget looks like.



The creator of this pie chart took the data from the Congressional Budget Office. It is pretty striking that healthcare constitutes almost a quarter of all spending. With social security and defense spending taking up another 2/5 of the federal budget, I’m assuming everything else is lumped under the category of “discretionary spending.” Everything else, as in education, transportation, environment, urban development, veterans’ benefits, state/foreign affairs, etc is under this one category, which constitutes also about 1/5 of the most recent budget spending report. (The percentage has hovered between 12 to 20 percent in recent past years.)

Here’s a link to a nifty little visual the Office of Management and Budget at the White House put out about what the composition of federal spending looks like.
http://www.whitehouse.gov/omb/budget

So it would make sense to make cuts where it would really make a dent right? I mean, if you’re proposing cutting something that constitutes 1% of the entire budget, that’s like throwing dollars into a trillion-dollar vault. It’s not really going to make a difference, and it won’t aid in the goal of reducing the deficit in the long run.

The next step I took was to see what both parties are proposing cutting. This is the schematic I’ve come to after doing some research. The items are presented in descending order of proposed amount to be cut. In other words, the top of the list is where the largest amount of cuts would be made.



I got this information from respective publications released by the Office of Management and Budget at the White House and the House Budget Committee.

What the Republicans are not cutting, that the Democrats are in favor of, are taxes that were extended to households and individuals during the “Bush tax cut era.” The Republicans are in favor of extending these tax cuts. This is significant because if the tax cuts were allowed to expire it would free up revenue. The counterargument is that these tax cuts are necessary to put more spending power in the hands of Americans and encourage economic growth. If we get our budget in order and eliminate unnecessary spending, argues Republicans, we wouldn’t even be discussing the option of getting rid of tax cuts.

This chart is an oversimplification. Yes, these are the areas that both sides respectively are promoting to cut, but it doesn’t reflect the rationale behind them. Many Republicans are motivated by the need to eliminate “wasteful spending” and “earmarks” (do those buzz words ring to you?), or at least it is claimed. Democrats do not want to make substantial cuts to social spending, so programs like Medicare, Social Security, and education in general are receiving similar levels of funding. Both generally agree that defense spending needs to be kept at similar levels—Democrats are willing to dig a little deeper in favor of cuts.

I’m not a super economist so even after reading about this I’m not sure what to make of it. I’m in favor of spending as long as it goes toward social services that will help average Americans, and I’m willing to use my tax dollars for that purpose. What I don’t have is faith in the unwieldy, politicized bureaucracy to allocate revenue in an efficient way. So Paul Ryan’s plan to reduce the size of the government might address this issue, and if it does then I’m for it. I also agree that the deficit needs to be kept under control, because these levels of spending are unsustainable. And when it comes time to pay back what we owe, chances are that we—this current generation entering the workforce—will all still be alive to see our hard earned dollars going to pay back our creditors. And if we’re all complaining about how high taxes are now…imagine that multiplied by a few times over. It doesn’t take a dummy to realize that in times of economic hardship, the taxpayers always come to the rescue, whether they want to or not. In the meantime, I hope both sides come to a consensus long enough to avoid another government shutdown.