Federal Spending and Debt
At the end of 2016, the gross national debt stood at $19.9 trillion, exceeding everything the economy produced in goods and services, as defined by gross domestic product (GDP), by more than 8 percent. Publicly held debt (the debt borrowed in credit markets, excluding the Social Security and Medicare and other government trust funds) is alarmingly high at over 77 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 lawmakers fail to take action and mandatory spending—especially health care spending—is allowed to continue to grow faster than the economy, the level of debt will grow even higher. Current projections show debt levels at almost $10 trillion more just a decade from now if reforms are not enacted.
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 used to pay for more consumption spending. Unlike spending on investments, consumption financed through debt will lower the standard of living for future generations.
Deficits are projected to continue to decline through 2018, primarily because the economy is slowly improving, which brings in additional revenue and lowers spending on countercyclical programs, such as 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, although these statutory caps expire in 2021 and Congress may amend them again or abolish them before then. Lawmakers frequently choose not to live within their means. 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. Starting in 2019, deficits are projected to begin a rapid incline, and by 2027 they are projected to exceed $1.4 trillion annually. Deficit spending does not come cheap. The Congressional Budget Office projects that by the end of 2027 interest on the debt alone will exceed the nation’s defense budget (not including spending on war or other emergencies).
The nation’s long-term fiscal path remains unstable and unsustainable. Total spending has skyrocketed by more than 30 percent since 2004, even after being adjusted for inflation, and some programs have grown far more than that. Defense spending, however, continues to shrink as a portion of the overall budget. Social Security, Medicare, and Medicaid are so large and growing that they are on track to overwhelm the entire federal budget. These major entitlement programs, together with interest on the debt, are driving 70 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 over the next 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 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 by 2038. All other federal spending could cease, and entitlement and interest spending alone would still outpace revenues.
Over the next 75 years, 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. Such figures are unfathomable.
While the Budget Control Act of 2011 (BCA) and sequestration have been modestly successful at restraining the discretionary budget, Congress continues to circumvent these caps and find ways to spend more money. Since the enactment of the BCA, Congress voted to delay the implementation of sequestration in fiscal year (FY) 2013, and voted to increase the cap for both defense and non-defense spending for FY 2014 to FY 2017. Based on this precedent, Congress may look to increase the caps over the remainder of the BCA’s lifespan. Beyond raising the caps, lawmakers also continue to rely on gimmicks like Overseas Contingency Funding, disaster declarations, and other cap adjustments to increase discretionary spending. The FY 2017 Consolidated Appropriations Act added $93 billion in additional spending that was not subject to the already increased spending caps. While some of this spending is legitimate, it should be fully offset within the current budget caps, rather than being added as additional deficit spending.
The spending addiction has been caused in part by the fact that Congress continues to fund too many programs that benefit special interests instead of the American people broadly. Corporate welfare and crony capitalism waste taxpayer dollars by spending them on the narrower agendas of well-connected interest groups. Taxation creates economic distortions. Excess taxation, which goes beyond what is necessary to pay for constitutional government, needlessly wastes valuable taxpayer 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 to meet their own needs or invest in the broader economy. Corporate welfare spending is further morally problematic when government uses resources that belong to the next generation of Americans to fund consumption spending today—in other words, when borrowing makes only current Americans (temporarily) better off, while limiting economic opportunities for future Americans.
Moreover, mandatory or autopilot spending—especially on entitlements—continues to grow nearly unabated. Without any changes, mandatory spending, including net interest, will consume more than three-fourths of the budget in just one decade.
As if this were not problematic enough, Congress’ inability to pass individual appropriations bills, instead relying on continuing resolutions and massive omnibus appropriations acts, has morphed discretionary spending into autopilot mode as well. Congress should immediately restore the regular order budget process and return accountability and oversight to appropriations.
If Washington fails to begin the important reform process, we could one day find ourselves teetering on the edge of a Greece-style meltdown. At that point, the limited options left to lawmakers would be to slash almost all areas of federal spending or to enact massive tax increases, or both. Each of these outcomes could have long-term negative effects on the economy and could take decades to recover from. To prevent such harmful outcomes, lawmakers should eliminate waste, duplication, and inappropriate spending; privatize functions better left to the private sector; and leave areas outside the constitutional purview of the federal government, and best managed on a more local level, to states and localities. Lawmakers should reform entitlement programs so that they become more affordable and sustainable, targeting those with the greatest needs. Congress should also prioritize 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 permanent statutory cap that targets those spending levels necessary to reach balance before the end of the decade.
It is not too late to reverse 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. They should, at a maximum, stick to the overall current law caps and resist the urge to increase them in future years. Increased funding for defense and spending on disasters and emergencies should be within the base budget caps and fully offset with corresponding non-defense cuts. Next, Congress should eliminate federal spending for programs that are unneeded or can hardly be considered core constitutional responsibilities 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 National Endowment for the Arts; and
- Department of Energy (DOE) loan programs and loan guarantees.
Reject Tax Hikes, Pursue Pro-Growth Tax Reform. The fiscal problems currently facing the federal government were created by too much spending, not too little taxes. Anemic economic growth and worsening long-term fiscal projections signal the importance of tax and spending reform—further delay will only exacerbate these problems. The tax code is in dire need of an update. In its current form, the U.S. tax system is economically destructive, overly complex and—unfairly—treats similar taxpayers differently. Responsible tax reform can increase economic prosperity and produce welfare gains for all Americans through increases in job creation, investment, output, and real wages. The basic principles of a good tax system are straightforward. The tax system should: Apply the most efficient and least economically destructive forms of taxation, levy low rates on a broad base that eliminates the double taxation of investment, and be as transparent, predictable, and simple as possible while respecting the core institutions of civil society and protecting the rights to life, liberty, and property. Congress should pursue tax reform in a fiscally responsible way. As spending is driving growing deficits and debt, Congress should reduce and control spending while alleviating the overall tax burden faced by individuals and businesses.
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. Congress should raise Social Security and Medicare retirement ages to account for increased life expectancies and work capacities; transition to a flat, anti-poverty benefit for future beneficiaries so that the programs do not pay the highest benefits to those with the least need; and reduce the payroll tax to allow individuals to save more on their own for retirement and disability.
Moreover, Congress should improve the efficiency and integrity of the broken SSDI system by incorporating a needs-based component so that individuals are not locked into the system for life; encouraging private disability insurance (DI); eliminating non-medical factors from the disability determination process; and ending the government’s role as middleman in privately paid DI representative fees. Congress should also eliminate Supplemental Security Income (SSI) for children.
Changes to Medicare should include transitioning traditional Medicare into a single plan covering both hospital and physician services, an eligibility age that reflects increased life expectancy and greater work capacity, a market-based payment structure that offers more choices and encourages individuals to consider costs when selecting a plan, income-based premium increases to reduce excessive cost growth, and fewer regulatory obstacles.
Congress should control Medicaid cost growth by imposing a per capita and aggregate spending cap. The current one-size-fits-all Medicaid program should focus exclusively on disabled individuals who have unique and complex needs that are not adequately met through other public or private coverage. Able-bodied individuals with low incomes should instead receive direct assistance to purchase health insurance in the private market, which offers better coverage and access than Medicaid.
Finally, Congress should take these programs off autopilot and set a budget for each major entitlement with an obligation to adjust it as necessary to keep each program within budget and protected from insolvency.
Devolve Domestic Programs to 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 freedoms (and responsibilities) of states and localities, and pushing federal spending to its current unsustainable levels. In 2016 alone, the federal government provided more than $143 billion in grants to state and local governments for domestic programs. 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 functions enumerated in the Constitution and perform those well. 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 and are more capable of serving those who need the services most. Government ownership of business also crowds out private investment 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 should be privatized, saving taxpayer money and ultimately providing better services.
Enact Federal Budget Process Reforms. The federal budget process provides the basis for the regular debate of fiscal issues and acts as a guide for legislative action. This framework provides the steps that are necessary for adopting a budget and for adopting or changing legislation. When functioning as it should, the budget process encourages robust debate on fiscal issues and sets in motion negotiations over the trade-offs and considerations for congressional spending and taxation.
Over the past several decades, the budget process has been neglected. Deadlines are often ignored and fiscal constraints are commonly waived or circumvented through the use of budget gimmicks. Instead of driving decision making toward achieving fiscal sustainability, congressional budgets have served as party platforms without implementing meaningful reforms. Congress should immediately adopt several key reforms to enforce budget discipline and to increase transparency and accountability in congressional budgeting.
In an effort to improve oversight and accountability to taxpayers, Congress should discontinue the practice of providing funding to unauthorized agencies and programs. House and Senate rules require that an authorization for a federal activity precede the appropriation that allows agencies to obligate federal funds for that activity. These rules are almost always ignored or waived. In FY 2016 alone, Congress provided $310 billion to programs and activities for which the authorizations had expired. Expiring authorizations provide Congress an important oversight opportunity in which Members can take a close look at the agency and reevaluate the mission and purpose so that the agency can evolve with changing priorities and technology. To eliminate this problem, Congress should no longer appropriate any funds for unauthorized programs. Once programs are reauthorized, funding should be restored, but only at 90 percent of the previously approved level. A penalty of 10 percent of the appropriation would provide Congress with an incentive to perform its oversight function and pass authorization legislation.
Congress should modify current scorekeeping practices so that the full cost of federal programs is accurately reported. Under current scorekeeping rules, it is assumed that benefits derived from federal trust funds, such as Social Security and Medicare Part A, will continue to be paid at the scheduled rate, regardless of the ability of the trust funds to pay them. In short, it assumes that Congress will intervene to ensure that full payments can continue to be made (through transfers) for these programs, but does not report those transfers as a cost to the federal government, as it would in almost all other cases. By assuming that these benefits will continue to be paid in full, current rules ignore the fact that, at some point in the not-too-distant future, these trust funds will face an imbalance that will require cuts to benefit payments, or tax increases, or both. If Congress wishes to infuse additional funds into the trust funds, the scorekeeping rules should reflect the full cost of doing so, and those costs should have to be offset fully.
In order to represent the costs of federal credit programs more accurately, Congress should adopt the use of fair-value accounting for these programs. Currently, the government assumes that federal credit programs are just as safe and reliable as the payout on U.S. Treasury bonds. This underestimates the real market risk associated with certain loans, which is especially true and worrying during economic downturns. Fair-value accounting more accurately confronts Congress with the risks it assumes and the subsidies it provides through credit programs. This is a crucial consideration when considering whether a program is or is not in the public’s best interest.
Congress should enact a statutory spending cap enforced by sequestration. Spending controls are needed to put deficits on a downward trajectory and stabilize the exploding federal debt. While this type of an enforcement mechanism can be effective, it is limited by Congress’ ability to alter statutes and raise caps. To eliminate this concern, Congress should simultaneously begin the process of adopting a balanced budget amendment. This would make the requirement permanent and therefore much harder to alter in subsequent years.
Budget gimmicks should be eliminated from the budget process. Each year, Congress uses largely false savings, known as Changes in Mandatory Programs, to increase discretionary spending by billions of dollars. In addition to that, they allow adjustments for war and other spending that fall outside of the budget caps and are often not solely for the intended purposes, adding tens of billions of dollars in uncapped spending each year. Americans deserve a full accounting of how much Congress is truly spending.
Although Congress must make substantial cuts in current and future spending, it must not compromise its core constitutional responsibility—ensuring that national defense is fully funded to protect America and its interests at home and around the globe.
Facts and Figures
FACT: Government spending and borrowing is out of control, placing an enormous burden on younger generations.
- Deficit spending per household in 2016 was $6,665—meaning that the federal government spent more than $6,000 per household than it received in tax receipts.
- Total federal spending per household reached $30,631 in 2016, and is projected to rise by more than one-fifth to $37,715 per household in 2027.
- 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 dollars), putting the $7,000 deficit on a credit card while already being over $300,000 in debt.
FACT: The U.S. national debt continues to rise at an alarming and unsustainable rate.
- To set aside enough money today to pay the current debt and future unfunded costs just from Social Security and Medicare, each American alive today would owe more than $217,000.
- At $19.9 trillion, the national debt now amounts to $158,000 for every tax-filing household in America.
- Within the next 10 years, the federal government is projected to spend more on interest payments on the national debt than it will on national defense.
FACT: The growing federal debt cannot be addressed in a sustainable fashion without reforming entitlement programs.
- Entitlement programs combined with interest on the debt are projected to drive 80 percent of additional federal spending in the next decade.
- By 2038, entitlement and interest spending is on track to consume all federal revenues. Over the next 75 years, the unfunded liabilities of just Social Security and Medicare is projected to exceed $50 trillion.
Selected Additional Resources
Romina Boccia, “2017 Debt Limit Should Trigger Spending Limit–with Enforcement,” Heritage Foundation Backgrounder No. 3190, February 27, 2017.
Romina Boccia, “A Social Security Primer for the New Administration: Reform Needed Now,” Heritage Foundation Backgrounder No. 3186, January 31, 2017.
Romina Boccia and Adam N. Michel, “Pathways for Pro-Growth, Fiscally Responsible Tax Reform,” Heritage Foundation Backgrounder No. 3219, May 25, 2017.
Justin Bogie and Rachel Greszler, “Massive Spending Bill Fails to Meet Conservative Priorities,” Heritage Foundation Commentary, May 1, 2017.
Rachel Greszler, “Show Me the Math: How to Achieve a Leaner Federal Government,” Heritage Foundation Commentary, March 28, 2017.
The Heritage Foundation, “Blueprint for Balance: A Federal Budget for Fiscal Year 2018,” March 28, 2017.
Robert E. Moffit, “Medicare’s Next 50 Years: Preserving the Program for Future Retirees,” Heritage Foundation Special Report No. 185, July 29, 2016.
Patrick Tyrrell, “Your Household Share of Federal Spending Keeps on Rising. Here’s the Solution,” Heritage Foundation Commentary, April 28, 2017.