Federal Spending, Budget, and Debt
In 2015, the national debt reached $18.8 trillion and exceeded 100 percent of everything the economy produced in goods and services, as defined by gross domestic product (GDP). Publicly held debt (the debt borrowed in credit markets, excluding Social Security’s trust fund, for example) is alarmingly high at 74 percent of GDP. These high debt levels were last seen after the U.S. had engaged in wartime spending following World War II. However, if mandatory spending—especially health care spending—continues to grow faster than the economy, then the level of debt will grow even higher.
High federal debt puts the United States at risk for a number of harmful economic consequences, including slower economic growth, a weakened ability to respond to unexpected challenges, and possibly a debt-driven financial crisis. Furthermore, most of the debt issued is to pay for more consumption spending. Unlike spending on investments, consumption financed through debt will lower the standard of living for future generations.
Deficits fell in 2015 primarily because the economy is slowly improving, which brings in additional revenues and lowers spending on countercyclical programs like the Supplemental Nutrition Assistance Program (SNAP or food stamps). Also, discretionary spending caps implemented under the Budget Control Act of 2011 helped restrain the growth in spending. Finally, deficits during the recession were also partly driven by the stimulus bill and other temporary measures.
Lawmakers should not take this short-term and modest deficit improvement as a signal to grow complacent about reining in exploding spending. Deficits are on the rise again, beginning in 2016, and within a decade they are projected to exceed $1 trillion annually. The Congressional Budget Office projects that interest on the debt alone will exceed the nation’s defense budget (not including spending on war or other emergencies) before the end of the decade.
The nation’s long-term spending trajectory remains on a fiscal collision course. Total spending has exploded by 25 percent since 2004, even after inflation, and some programs have grown far more than that. Defense spending, however, is being cut. Social Security, Medicare, and Medicaid are so large and growing that they are on track to overwhelm the federal budget. These major entitlement programs, together with interest on the debt, are driving 85 percent of the projected growth in government spending over the next decade. The Affordable Care Act, or Obamacare, further adds to the problem, increasing entitlement spending by nearly $2 trillion in just 10 years. The long-term unfunded obligations in the nation’s major entitlement programs loom like an even darker cloud over the U.S. economy. Demographic and economic factors will combine to drive spending in Medicare, Medicaid (including Obamacare), and Social Security to unsustainable heights. The major entitlements and interest on the debt are on track to devour all tax revenues in fewer than 20 years.
Over the 75-year long-term horizon, the combined unfunded obligations arising from promised benefits in Medicare and Social Security alone exceed $50 trillion. The federal unfunded obligations arising from Medicaid, and even from veterans’ benefits, are unknown but would likely add many trillions more to this figure. By some estimates, the U.S. federal government’s combined unfunded obligations already exceed $200 trillion in today’s dollars. Figures such as these are simply unfathomable.
While the Budget Control Act of 2011 and sequestration are modestly restraining the discretionary budget, Congress continues to fund too many programs that represent corporate welfare. Corporate welfare and crony capitalism waste taxpayer resources by spending resources taken for the public benefit on a narrower, well-connected interest group instead. Taxation creates economic distortions. Excess taxation, that goes beyond what is necessary to pay for constitutional government, needlessly wastes taxpayer and economic resources. Every dollar spent by the federal government for the benefit of a well-connected interest group is a dollar that is no longer available to American families and businesses to spend and invest to meet their own needs and wants. Corporate welfare spending is especially morally concerning when government spends resources that belong to the next generation of Americans to fund consumption spending today—or, in other words, when spending makes current Americans better off at the expense of future Americans.
Moreover, mandatory or automatic spending—especially on entitlements—continues to grow nearly unabated. Without any changes, mandatory spending, including net interest, will consume three-fourths of the budget in just one decade.
If Washington fails to begin the important reform process, we could one day find ourselves teetering on the edge of a Greece-style meltdown. To forestall such an eventuality, lawmakers should eliminate waste, duplication, and inappropriate spending; privatize functions better left to the private sector; and leave areas best managed on the local level to states and localities. They should change the entitlement programs so that they become more affordable and help those with the greatest needs. Congress should also fully fund national defense—a core constitutional function of government. Lawmakers should build on the success of the Budget Control Act of 2011 by limiting all non-interest spending with a firm cap that targets those spending levels necessary to reach balance before the end of the decade.
It is not too late to solve the growing spending and debt crisis, but the clock is ticking.
Cut Spending Now and Enforce Spending Caps. Congress should cut non-defense discretionary spending, first by enforcing the Budget Control Act’s spending caps with sequestration. Next, Congress should eliminate federal spending for programs that are unneeded or can hardly be considered federal priorities and are more appropriate for state and local governments or the private sector, like federal energy subsidies and loan guarantees to businesses. Examples of areas where cuts can be made include:
- TIGER grants (National Infrastructure Investment Grants);
- The Market Access Program;
- The New Starts Program;
- The Technology Innovation Program; and
- Department of Energy (DOE) loan programs and loan guarantees.
Reject Tax Hikes and Pursue Growth-Oriented Tax Reform. There is a growing consensus that a simpler, flatter tax code—one with fewer, lower marginal rates and only essential deductions—is one of the best ways to promote growth. Heritage analysts favor an even bolder approach with a single rate on spent income. In any case, as long as government must tax, it should do so with the least possible burden on and interference with free-market choices. Higher taxes on small businesses and on investment capital always weaken the economy. Revenue will grow when the economy grows, but higher spending and taxes will reduce growth. The most effective way to spur economic recovery is to increase the incentives that drive growth.
Reform Entitlements. Congress should begin by repealing Obamacare, which would add nearly $2 trillion to federal spending over the decade. The costs of Medicare, Medicaid, and Social Security are on course to overwhelm the federal budget. Every year of delay raises the cost of reform and gives near-retirees less time to adjust their retirement strategies. Lawmakers should restructure these programs by changing the incentives that drive their excessive spending. Then Congress should take these programs off autopilot and set a budget for each major entitlement with an obligation to adjust them as necessary to keep each program within budget and protected from insolvency.
Empower the States and the Private Sector. Since the beginning of the 20th century, the federal government’s domestic activities have expanded well beyond what the Founders envisioned, leading to ever more centralized government, smothering the creativity of states and localities, and pushing federal spending to its current unsustainable levels. Even when Washington allows states to administer the programs, it taxes families, subtracts a hefty administrative cost, and sends the remaining revenues back to state and local governments with specific rules dictating how they may and may not spend the money.
Instead of performing many functions poorly, Congress should focus on the limited set of functions intrinsic to the federal government’s responsibilities. Most highway, education, justice, and economic development programs should be devolved to state and local governments, which have the flexibility to tailor local programs to local needs. Government ownership of business also crowds out private companies and encourages protected entities to take unnecessary risks. After promising profits, government-owned businesses frequently lose billions of dollars, leaving taxpayers to foot the bill. Any government function that can also be found in the yellow pages may be a candidate for privatization.
Reform the Federal Budget Process. The federal budget’s focus on just 10 years ahead diverts lawmakers from dealing with the mounting long-term challenges, such as retirement programs. Likewise, the lack of firm budget controls and enforcement procedures makes fiscal discipline easy to evade. Reforming the budget process is therefore an implicit part of reforming the budget itself. Congress should estimate and publish the projected cost over 75 years of any proposed policy or funding level for each significant federal program. Any major policy change should also be scored over this long-term horizon. In addition to calculating the costs of proposed congressional actions without regard to the economy’s response to those actions (known as “static” scoring), the government should require a parallel calculation that takes that response into account (known as “dynamic” scoring) to make more practical and useful fiscal information available to Congress when it decides whether to pursue certain actions.
Although Congress must make substantial cuts in current and future spending, it must not compromise its first constitutional responsibility: to ensure that national defense is fully funded to protect America and its interests at home and around the globe.
Facts and Figures
- Government spending per household reached $29,867 in 2015 and is projected to rise by over 50 percent in only one decade to $48,088 per household in 2025.
- No American family could spend and borrow as Congress does. If it could, a median-income family with $54,000 in yearly earnings would spend $61,000 in 2013, putting $7,000 on a credit card. This family’s total debt would already be over $300,000.
- To set aside enough money today to pay the current debt and future unfunded costs just from Social Security and Medicare, each person in America today, including their children, would owe more than $210,000.
- At $18.8 trillion, the national debt now amounts to $125,000 for every tax-filing household in America.
Selected Additional Resources
David S. Addington, “Federal Budget: What Congress Must Do to Control Spending and Create Jobs,” Heritage Foundation Issue Brief No. 3538, March 14, 2012.
Romina Boccia, “7 Priorities for the 2016 Congressional Budget Resolution,” Heritage Foundation Issue Brief No. 4635, March 11, 2015.
Romina Boccia, “Debt Limit: Options and the Way Forward,” Heritage Foundation Backgrounder No. 2844, September 18, 2013.
Romina Boccia, “How the United States’ High Debt Will Weaken the Economy and Hurt Americans,” Heritage Foundation Backgrounder No. 2768, February 12, 2013.
Romina Boccia, “A Scary Thought: Could America Become the Next Greece?” originally published in the National Interest, July 16, 2015.
John Gray, “The Appropriations Process: Spending Caps Explained,” Heritage Foundation Issue Brief No. 4434, July 20, 2015.
Paul Winfree, Romina Boccia, Curtis S. Dubay, and Michael Sargent, “Blueprint for Congressional Fiscal Action in the Remainder of 2015,” Heritage Foundation Backgrounder No. 3052, September 2, 2015.