Cutting Through the Federal Budget Fog

Like any budget, the federal budget is merely a plan for revenues and expenditures for the fiscal year. While that may sound simple enough, there’s often a cloud of confusion around the federal budget.

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Lawmakers have little “wiggle room” to reduce expenditures. Although cutting federal spending to help balance the budget is frequently a matter of intense debate, the fact is only about a third of government expenditures is discretionary— meaning they can be easily reduced. These comprise spending lawmakers control through annual appropriation acts and can be broken down almost evenly between defense and nondefense expenditures.

The bulk of government spending is actually considered “mandatory,” which is somewhat of a misnomer. These “entitlement” expenditures can, in fact, be reduced, but doing so would be extremely difficult (and probably unpopular).

Government spending exceeds revenue

Increasing Mandatory Spending Will Likely Produce Larger Deficits

Federal deficits hit their highest levels since World War II following the Great Recession. In recent years, the deficit has been getting smaller; however, that trend is expected to change. Why? As the population ages, expenditures on mandatory programs (as a percentage of gross domestic product [GDP]) are projected to increase, and to a lesser extent, net interest on the debt is expected to get larger over time.

In 1966, the government spent 4.5 percent of GDP on mandatory expenses; today, it spends 13.2 percent of GDP on these expenses. As the population ages and lives longer, the Congressional Budget Office (CBO) projects that these programs will grow to represent 14.9 percent of GDP in 2026 if entitlement program payout formulas remain unchanged. And we can expect the costs to continue to rise.

Currently, discretionary spending is constrained by the Budget Control Act of 2011, which placed statutory caps that led to decreased defense and nondefense spending relative to GDP. However, the Bipartisan Budget Act of 2015 modified the automatic spending reductions for 2016 and 2017 and will slow the decrease in discretionary spending relative to GDP over the next couple of years.

Deficits – Not Necessarily a Bad Thing

While federal deficits are definitely a concern, keep in mind that they are an important part of managing through economic cycles. In theory, deficits grow during recessions as the government cuts taxes and increases spending to help stimulate economic activity. During better times, the opposite should occur, resulting in surpluses. However, as the chart shows, the government has run deficits on a fairly consistent basis – in both good times and bad – going back to 1929.

Deficits and surpluses as a percentage of GDP
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