The Federal Budget

The federal government is facing difficult decisions about its finances, with a growing national debt and long-term fiscal problems that could seriously undercut the nation's prosperity.

After several years of decline, the federal deficit is on the rise to a projected $482 billion in 2009. Even more worrisome, the national debt has surged, topping $9.5 trillion. The nation's long-term obligations are staggering, as the baby boom generation retires and begins to strain the Social Security and Medicare systems. Former U.S Comptroller General David Walker, the federal government's auditor, calls the baby boomers' retirement a "demographic tsunami" that will overwhelm the federal budget. By 2040, there will be little money for anything else other than Social Security, Medicare and interest on the debt -- unless something is done.

Deficits, Debts and Decisions
Whenever the federal government spends more than it takes in, it runs a deficit. To pay the bills, the government borrows money by selling Treasury bonds. That borrowing adds to the national debt, which is the total amount the government owes to banks and other governments.

President Bush's budget for 2009 projects a federal deficit of roughly $400 billion. But the national debt has expanded dramatically over the past five years, from $5.8 trillion in 2001 to over $9 trillion in 2008. The CBO actually projects a surplus by 2012, but that projection is based on several assumptions, namely that there will be no major new federal spending programs and that President Bush's tax cuts will expire as scheduled in 2010.

The Bush tax cuts, intended to spur the economy, have been a major focus of the budget debate. Republicans say the two rounds of tax cuts, $1 trillion in 2001 and $350 billion in 2003, have stimulated the economy and thus bring in more revenue in the long run. Democrats say the cuts are a major reason for the deficit.

Other conservative critics have argued that federal spending has risen sharply and needs to be cut back, even considering the wars in Iraq and Afghanistan and the need to improve homeland security. The Iraq Study Group report said the U.S. has spent about $400 billion on Iraq, although it's difficult to measure precisely because the government has paid for most of the war using "supplemental appropriations" outside the normal budget process.

The national debt raises several concerns. One is simply making the payments. Interest payments on the debt now account for 8.5 percent of the total federal budget. That's money that has to be paid (it's like the minimum balance on your credit card) and so isn't available for anything else.

The other concern is that much of the U.S. debt is held by foreign countries, particularly China, who consider Treasury bonds a safe place to park their money. Some foreign policy experts worry that this gives a potential rival too much leverage over the U.S. economy. Others argue that the Chinese economy is dependent on exports to the U.S. and so China can't afford to hurt American consumers.

Discretion and Entitlements
Not everything in the budget can be cut, even if Congress and the president wanted to. Some programs, such as Social Security and Medicare, are "entitlements" the government is obligated by law to provide. Other services, ranging from national defense to national parks, may be vitally important but for budget purposes are still considered "discretionary" (and so are easier to cut). In the early 1960s, two-thirds of the budget was considered discretionary spending. But entitlements have grown dramatically since then, and now only about a third of the federal budget is discretionary spending. Plus, entitlement costs are rising faster than most other areas of the federal budget.

There are two major problems with the main entitlement programs, Social Security and Medicare. One is the sheer size of the baby boom generation: 78 million people. The first baby boomer started drawing a Social Security check in 2008. These programs have "trust funds" designed to buy them more time, but even so, there simply won't be enough workers paying into the systems to cover the costs of retirees who need help.

The second problem is rhealth care costs keep increasing, and are projected to double in the next decade. The costs for Medicare and its sister program for the poor, Medicaid, are linked to trends in the overall health care system -- so the everyone pays for health care, the more these programs will cost. Budget experts say the combination of rising costs and demographics makes Medicare by far the most problematic part of the federal budget.

The entitlement problem will likely continue into the foreseeable future. It isn't that entitlements are completely untouchable -- Congress could change eligibility rules or the formulas by which benefits are spent. But reforming such popular programs is complicated, unpopular and politically dangerous. In effect, today’s budget choices are greatly influenced by budget choices that were made decades ago. (For additional context, see Public Agenda’s issue guides on Social Security and Medicare).

Riding Off Into the Sunset
One reason for both the projected decline in the deficit and for the complexity of the problem is the fact that not all of President Bush's tax cuts are permanent. Many of these cuts will expire (or “sunset,” in congressional jargon), at some point in the future. For example, the federal estate tax is being gradually reduced until it disappears entirely in 2010 -- and then will return at its old level in 2011 unless Congress votes again to remove it.

Why put a sunset provision in a tax law? In general, it's been a compromise between those who believe that tax cuts are the best way of stimulating the economy and those who fear cuts will run up the federal deficit. By making the cuts expire, the government theoretically gets the short-term economic benefit while avoiding the long-term problems. It also reduces the federal government's projections of long-term deficits, since budget officials presume those taxes will come back. As a matter of practical politics, however, it may prove difficult for Congress to reimpose such taxes.

Does a Deficit Matter?
There are different schools of thought on budget deficits. One group of economists suggests that deficits have their uses. Moderate, well-managed deficits can stimulate the economy, because additional government spending will create jobs. Other experts argue that it's a bad idea for anyone, including the government, to borrow money to pay year-to-year bills. When deficit spending gets too big or goes on for too long, that government borrowing inevitably raises interest rates, increasing the cost for such things as car loans and home mortgages, while making it more difficult for businesses to borrow money for expansion. Long-term deficits also cramp the government’s ability to create new programs and respond to new circumstances.

Still another set of economists, though, feel that surpluses and deficits mean little in such a huge economy, and that an undue focus on red ink leads to program cuts or higher taxes, which do greater damage. The administration says that it is dealing with extraordinary circumstances -- a recession and the war on terrorism -- and that something has to give in order to fuel an economic recovery while coping with an emerging threat to our national security.

The administration also points out that the current deficit is less than 2 percent of the total economy. That’s a relatively modest figure, particularly compared to the deficits of the 1980s. Because of that, some (but far from all) economists say this deficit may prove less damaging to the economy.

The Public's View
Surveys show the public divided on some basic questions regarding the federal budget. They are divided, for example, on whether the country's economic agenda should be focused on tax cuts or reducing the deficit. Americans tend to favor increased government spending on domestic programs over holding down the budget deficit, and they are willing to pay more in taxes for some of these programs. In fact, the number of who say taxes are "too high" has declined since the 1990s, and most say the amount they pay is "fair."

In any case, most Americans do seem to focus more on what the government does than how much it spends. Most say wealth should be more evenly distributed but are divided on whether the government should step in with heavy taxes on the rich. Surveys show Americans are split over whether President Bush’s tax cuts should be allowed to expire or made permanent. And government waste is another key issue for the public; Americans, on average, say about half of every tax dollar is wasted.

Public Agenda's focus group report, Facing Up to the Nation's Finances: Understanding Public Attitudes about the Federal Budget, found while the public was uninformed on federal budget issues, they required relatively little information to appreciate the magnitude of the problem. But when it comes to solving the problem, the public's deeply felt cynicism about government is a major barrier that must be addressed before progress can be made.