It can seem daunting to grasp some of the problems facing the nation’s finances, especially when government spending is in the trillions, but the core concepts are actually pretty simple to understand. Here, we break down the basic numbers and percentages and put them in context, drawing upon the data and resources of our partners, as well as invaluable sources like the Congressional Budget Office, the Government Accountability Office, and the White House Office of Management and Budget.
Where the Government Gets its Money and How it Spends it
First and foremost to understanding the federal budget is having a sense of how the government takes in money and what it spends it on. This graph shows the basic sources of tax revenues:
As you can see:
- The largest portion (45 percent) of income comes in the form of personal income taxes that individuals pay.
- Taxes paid by individuals and by employers, specifically to support the Social Security system, account for about 34 percent of tax revenues.
- Taxes on business corporations bring in another 14.4 percent.
- Smaller taxes, including sales taxes and the like, account for the rest of the government’s revenues (about 7 percent).
Turning to how the government spends its money, we find:
Here we see that:
- Interest on the debt accounted for 8.5 percent of federal spending.
- Social Security, Medicare and Medicaid make up about 40 percent of government expenditures.
- Defense spending accounted for another 20 percent or so.
- And domestic "discretionary” spending on all sorts of programs such as roadways, national parks and federal student loans, make up about 16%.
Mandatory and Discretionary Spending
This brings us to another key concept in the debate. There are essentially two kinds of federal programs, mandatory and discretionary. Mandatory programs, as the name implies, are payments the government is obligated by law to make. These include interest on the debt and huge programs such as Social Security, Medicare and Medicaid. These programs are also known as entitlements, because when you reach a certain age or drop below a certain income level, you’re entitled to them. These benefits are set by specific formulas, so they’re essentially on autopilot.
Discretionary programs account for almost everything else in the federal budget, from the Pentagon to the post office, education to transportation, national parks to national defense.
As you can see, mandatory spending accounts for well more than half of the federal budget. It's important to keep in mind that the mandatory slice of the pie doesn't account for Social Security and Medicare only, though those entitlements do account for the largest portion of it. However, unlike with entitlement programs and other mandatory spending, with defense and domestic discretionary spending, Normal 0 false false false EN-US X-NONE X-NONE Congress must decide each year how much to spend on these programs.
And entitlements aren’t just the largest part of the federal budget, they’re also the fastest-growing programs, as Americans have increasingly, over time, come to depend on them. Compare spending on entitlements today, to spending in 1970:
Clearly, that's a dramatic increase, but even more so is the projection that entitlements could double in the next decade--further exacerbated by the fact that 78 million baby boomers are expected to retire. Yet because entitlements are so popular and are running on autopilot, there’s very little incentive for Congress to face up to the tough decisions needed to control the budget. Needless to say, this complicates our long-term fiscal problems tremendously.
The Long-Term Challenge
As of September 2008, the federal deficit amounted to $455 billion, while we have accrued a national debt of well over $10 trillion. This is a staggering amount of money, even for a nation as large as ours. Already, we are paying $237 billion, or 8.7 percent of the total budget, on interest on the national debt. Of course, it’s hard to know what such big numbers really mean. But it is possible to get a sense of such an impact by looking at how they're projected to affect us.
As indicated by the orange line above, the Congressional Budget Office projects a cumulative deficit of $2.3 trillion between 2008 and 2018. But this is optimistic because it makes a number of unrealistic assumptions, namely that President Bush’s tax cuts will not be extended when they expire in 2010 and that the Alternative Minimum Tax will not be reformed. That is why the Concord Coalition's "plausible baseline" projecs $7.8 trillion in cumulative deficits between now and 2018.