Addressing The Deficit PDF Download

A small share of federal spending is for direct provision of domestic government services, which many people may think of when considering federal spending. Because this spending is normally about 10% of total federal spending and about 2% of gross domestic product (GDP) and deficits are projected to be 2.8% of GDP and rising in the future, cutting this type of spending can make only a limited contribution to reducing the deficit. (Note that direct provision of domestic services by the federal government is smaller than the total of nondefense discretionary spending, about 17% of spending, because it excludes transfers. Discretionary spending is spending that requires appropriations.) Transfers and payments to persons and state and local governments constitute most of federal spending, about 70%. Defense spending, currently accounting for about 20% of spending, has declined over the past 35 years but tends to vary depending, in part, on the presence and magnitude of international conflicts. Recently, issues concerning the level of federal debt have become a significant source of debate in Congress. As a result of the recent recession (December 2007 to June 2009), along with policies enacted in response to it, federal debt held by the public rose from 36% of GDP in 2007 to 74% in 2014. Although the debt held by the public is projected to be relatively stable over the next decade, the Congressional Budget Office (CBO) projects it will rise to 106% of GDP by 2039. This increase in debt is mainly due to growth in federal spending on health care programs and Social Security, as well as increasing interest payments that typically accompany rising budget deficits. Although spending on these programs is rising, other types of federal spending have remained constant or declined. These trajectories are projected to continue under current policy. Because reductions in the spending allocated for federal provision of goods and services appear inadequate to reduce the future deficit and debt to a sustainable level, limiting taxes as a percentage of output or constraining the overall size of the government to current levels would likely require significant cuts in transfers, which include entitlement programs such as Social Security, Medicare, and Medicaid. Preserving entitlements would eventually require increases in taxes; CBO's baseline projection shows spending on Social Security, health, and interest will absorb virtually all revenue collected by 2039, leaving little room for any discretionary and other mandatory spending. Options to put the federal budget on a more sustainable path include raising tax rates, reducing tax expenditures, increasing other taxes, or introducing new revenue sources. Tax expenditures may be difficult to eliminate, but if not used to lower rates they may be a source of additional revenue. If Congress were to address the eventual Social Security trust fund shortfall largely with tax increases, it would smooth the burden of accommodating longer lives across both working and retirement years. This argument might also apply, in part, to Medicare and Medicaid. The federal government provides about one-fifth of the revenue for state and local governments. Reducing the long-term deficit and debt may require cutbacks in transfers to these governments that could, in part, shift the burden of providing services from the national to subnational governments rather than altering the overall size of government services.