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How the government raises and spends our money is an expression of our priorities as a nation. It also has huge implications for the health of the economy, which makes it especially critical as the nation continues to struggle out of the economic problems that began in the financial crisis of 2008. Yet there’s another reason why the federal budget is important this election year: it’s heading for trouble. The government’s own budget agencies all use the same word to describe the situation: “unsustainable.” While we’re nowhere near the kind of budget problems that have plagued European nations over the past two years, Europe’s debt struggles are a useful reminder of what can happen to countries that mismanage their money. Over the past two years, we’ve seen Washington strain when dealing with the budget. We’ve had a presidential commission, a congressional “supercommittee,” and a series of showdowns that carried the risk of shutting down the government or even defaulting on the government’s obligations. None of them have produced a real solution. Most policy experts don’t expect the country to make much progress addressing this issue until after the 2012 elections; but after that, many say we won’t be able to ignore this problem forever. The good news is that the experts agree that there are plenty of answers out there – if we’re willing to accept them. There are practical solutions to our fiscal problems whether you’re a liberal, a conservative or a moderate. The trick is acknowledging and accepting the tradeoffs needed to make any of those solutions work.

1.	A deficit happens when the government spends more than it takes in during a given year. This has pretty much been our default setting: the federal government has run a deficit for 36 out of the past 40 years. In 2011, we came up $1.3 trillion short for a $3.6 trillion federal budget.
2.	When the government runs a deficit, it borrows to cover the difference. When you buy a Treasury bond, this is what you’re doing: loaning money to the U.S. government.
3.	The national debt is the total amount the government has borrowed. Every time we run a deficit, we’re adding to the national debt, now well past $15.5 trillion. There are two types of debt you’ll hear policy types talk about.• “Debt held by the public” means money the government owes to others, which means the Treasury bonds that you, banks and foreign investors can buy. In April 2012, this debt stood at about $10.8 trillion.
4.	Economists focus on this kind of debt because it has an impact on the broader economy. Properly managed, some public debt can benefit the economy. If public debt becomes too big, however, the risk is that it “crowds out” other investment; in other words, so much money is going into government borrowing that there isn’t enough for business loans, mortgages and so on.
5.	“Gross debt” is everything the government owes: the public debt plus what the government owes itself. Maybe you didn’t know that one part of the government can owe money to another part, but it’s pretty routine. All told, “intergovernmental debt” was about $4.7 trillion in April 2012. The best-known examples are the Social Security and Medicare trust funds, which is the money the government has borrowed from these programs over the years and must pay back. This kind of debt doesn’t affect the overall economy in the same way as debt held by the public, but the money to pay for Social Security and Medicare for the huge baby boom generation will have to come from somewhere. That means the government will have to shift money from other areas to repay these trust funds, potentially squeezing other priorities.

And yet for all its size and scope, the federal government spends two-thirds of its money on just five things: Social Security, defense, Medicare, Medicaid, and interest on the national debt. Everything else the federal government does, from office supplies to the space program, only takes up a third of the budget. The other key point about federal spending is the difference between “mandatory” and “discretionary” spending. Mandatory programs are required by law, and that includes four out of the five big-ticket items (with the exception of defense). Discretionary spending includes a wide range of important items like education and the environment, but Congress can spend as much or as little as it wants every year. When politicians talk about cutting “non-defense discretionary spending,” they’re talking about that one-third of the budget. On the tax side, if you look at the Revenue Sources chart, you’ll see that most of the government’s revenue is coming from the payroll deductions in your paycheck, both in terms of the income tax that’s withheld and the payroll taxes that support Social Security and Medicare. When it comes to national tax revenue, corporate taxes and other sources of revenue make up relatively small portions of the whole.

When people are out of work and businesses are losing money, they pay fewer taxes, and that means the government’s wallet comes up short as well. Meanwhile, the demands on the government grow. More people need unemployment benefits and other kinds of social services. Plus, in hard times the government usually takes steps to boost the economy, such as cutting taxes or spending money to create jobs (building public works projects, for example). That’s the philosophy behind the “stimulus” package enacted in 2009, and in the bipartisan decision in 2010 to extend the Bush tax cuts for another two years. So, if this was simply a question of going through hard times, there might not be a problem. But the U.S. government routinely doesn’t take in enough money to cover expenses. And the projections are that this is going to get worse, rather than better, because of two long-term trends: an aging population and rising health care costs. As the 78 million baby boomers retire, there will be more people getting benefits from Social Security and Medicare, and fewer people paying in. And since health care costs are consistently rising faster than inflation, Medicare and Medicaid benefits are getting more costly to provide. Since Medicare has both rising health care costs and an increasing number of recipients as the baby boomers retire, it’s going to end up being the toughest problem to solve Both Social Security and Medicare do have “trust funds” designed to ensure that recipients get their benefits, with Medicare able to draw on its funds until 2024 and Social Security until 2033. But we’ll still feel the budget pressure. Since the government used the money in the trust funds for current expenses, it will need to shift money from elsewhere in the budget to repay them. Finally, if we don’t either raise taxes or cut other spending to deal with these trends, we’ll end up paying for them the way we deal with deficits now: by borrowing the money. That means that the national debt will rise, and interest payments will take up an even greater portion of the budget.

1.	The debt could crowd out other investment. It’s essentially supply and demand: if too much money is going into Treasury bonds to keep the government running, then there’s less money for investment in new businesses, stock, real estate and everything else. That could mean a more sluggish economy, higher interest rates and lower incomes in the long run.
2.	Fixed costs, like interest payments, will start to squeeze other priorities for the government. Even under conservative projections, our interest payments are projected to triple over the next 10 years, from $230 billion in 2011 to $604 billion by 2022. That's essentially the equivalent of the minimum balance on your credit card. As baby boomers retire and health care costs rise, spending on Social Security, Medicare and Medicaid will rise too. The Congressional Budget Office projects we'll be spending $3.5 trillion a year on mandatory programs by 2022. That's $1.5 trillion more than we spend on those programs now, and nearly as much as our entire budget in 2011. Unless we raise taxes or change those programs, those costs will inevitably squeeze other programs like defense, law enforcement, education, the environment and everything else that's considered "discretionary."
3.	We won’t have the ability to respond to emergencies. Our current economic troubles are a good example. When the Great Recession hit, we had room to maneuver. We could still afford to spend more to shore up the financial system and stimulate the economy with government spending and tax cuts (and some economists argue we should have spent even more than we did). But if our debt levels soar even higher, we might not be able afford that.
4.	We might have trouble borrowing the money. This is what's been happening to Greece and other countries in Europe: lenders decide a government isn't a good risk, and either refuse to lend or demand much higher interest rates. When that happens, a government has to either raise taxes or cut spending to close its budget gap and persuade lenders it means business. Foreign lenders held $4.5 trillion in U.S. debt in February 2011, and could decide at any point that they'd rather invest their money elsewhere.
5.	None of these things are going to happen in the next couple years, but they’re not all that far off. We’re not Greece or Ireland – our economy is much bigger and healthier, our debt load is still much lower and investors worldwide still believe U.S. Treasury bonds are one of the safest places to park their money. On the other hand, we’re going to start slowly but surely feeling the pressure of bigger interest payments. These are longer-term risks, not immediate ones, but if we don’t do anything to get on a better fiscal track, they can become all too real.

For example, the nonpartisan Congressional Budget Office estimates that our total deficits over the next 10 years could be anywhere from $2.8 trillion to $10.7 trillion. The lower figure assumes Congress allows several things to happen, as planned, including:

• Allowing the Bush tax cuts to expire at the end of 2012.
• Letting more than $1 trillion in automatic spending cuts occur as part of a budget deal reached last year.
• Permitting the health care reform law’s process for controlling health care costs to proceed as planned, including cuts in Medicare payments to doctors and hospitals.

There’s a very good chance, however, that none of these things will happen at all. Both Republicans in Congress and President Obama have called for the Bush tax cuts to be extended (the Republicans for everyone, President Obama for anyone making less than $250,000 a year). The automatic spending cuts face resistance in both parties because of the impact they would have on defense and social programs. And the health care law is highly controversial and facing a constitutional challenge. There are lots of issues to weigh here. The economy is still struggling to climb out of the Great Recession, and federal budget decisions can either help move it forward or hold it back. Controlling health care costs is crucial for managing the budget, but that has implications for millions of patients. On the other hand, you can’t wait until the last minute to solve a debt problem. Debt builds up over time, and the longer you wait to deal with it, the more painful the solutions become. If we start phasing in tax increases or spending cuts over the next few years, they’ll be less dramatic than if we wait until a crisis actually hits. And as nations like Spain, Italy, Greece and Ireland have found, a debt crisis – when lenders decide a government isn’t a good risk, and either refuse to lend or demand much higher interest rates – can happen staggeringly fast. That’s the fundamental question about the budget: it’s not just about making the numbers add up. It’s about assessing values, setting priorities and making tradeoffs. It’s about weighing what we’re willing to pay and what we want to happen to the economy and in the broader society. These are choices that belong to all of us, not just politicians and bankers. And these choices are too important to be made by default.

We’ve tried to borrow our way to prosperity, but we can’t keep that up forever. In fact, income taxes are at historically low levels and our tax code is full of loopholes that keep wealthier people and corporations from paying their fair share. Meanwhile our educational system and our national infrastructure are in dire need of improvement, and if we don’t fix them our economy will suffer in the long term. We need to be willing to raise the money for what we want, and we need to spend it on investments that provide a better foundation for our economy.

This should be done by:

• Letting all or at least some of the Bush tax cuts expire to help reduce the deficit.
• Simplifying our tax system, eliminating tax breaks and tax expenditures that cost the government money and let upper-income people and corporations off the hook.
• Focusing our spending on investments for the future, such as upgrading our roads, bridges and electrical grid, as well as improving education.
• Passing “pay-as-you-go” legislation, meaning that if a spending bill is passed, it must be offset by either a spending cut someplace else in the budget or a raise in taxes to cover the new expenses.

Unless we act now, Social Security and especially Medicare will end up both breaking the budget and failing to serve the elderly when the baby boomers retire en masse. The long-term trends of rising health care costs and an aging population are the real budget problem, not our short-term deficits, which are mostly caused by the struggling economy. We shouldn’t change the rules for people who are already retired (or about to be), but we really have to make some changes or the programs will become unaffordable. The sooner we tackle this, the less traumatic it will be for all Americans.

This should be done by:

• Reducing Social Security benefits for wealthy retirees and setting higher fees and co-payments for higher income retirees on Medicare. These programs should provide security for middle-income and lower-income people – not extra spending money for affluent seniors.
• Raising the cap on Social Security taxes. Right now, payroll taxes are only collected on incomes up to $110,000 per year. That means that workers who make $200,000 and $300,000 a year are paying the same taxes as people who earn much less.
• Gradually pushing back the retirement age and phasing out the policy that lets people start collecting benefits at a lower rate at age 62. When Social Security began in 1935, life expectancy was just under 62. Now, a child born in 2007 can expect to live to nearly 78.
• Enact tough restrictions on health care spending, including limiting payment to doctors and hospitals, discouraging tests and procedures that aren’t proven to be effective, cutting waste and making other basic changes to our health care system.

Federal spending has mushroomed since the 1970s, and government programs are rife with waste and mismanagement. Raising taxes to cover federal spending will just give government more of our hard-earned dollars to spend wastefully. Plus, keeping taxes low helps spur economic growth and allows Americans to keep more of their own money.

This should be done by:

• Extending the Bush tax cuts and reducing taxes on businesses – they are the engine of our economy.
• Cutting growth in government programs and carving out the waste and extra costs, such as outside contractors who charge the government billions of dollars each year.
• Eliminating earmarks and other “pork barrel” add-ons to legislation that allow members of Congress to slip in funding for their pet projects without a vote.
• Shifting more domestic policy responsibilities – areas like Medicaid and education – to states.
• Having the private sector take on tasks like air traffic control and safety inspections. It can handle them more efficiently and at a lower cost.

The Citizens' Solutions Guides are made possible by the generous support of The Dilenschneider Group. "The Federal Budget: A Citizens' Solutions Guide" was written by Scott Bittle, senior fellow at Public Agenda and co-author of Where Does the Money Go? Your Guided Tour to the Federal Budget Crisis. Public Agenda’s Citizens' Solutions Guides are nonpartisan, unbiased resources to help you think through a difficult issue in alternative ways, weighing and evaluating values, priorities, pros, cons and tradeoffs. The Guides can also be used as discussion starters for community and group conversations and in classes. Note that the Citizens' Solutions Guides are meant to help people start thinking and talking about an issue in productive ways — they are not meant to rigidly restrict thinking or dialogue. The perspectives described are not the only ways of dealing with the problem, nor are the viewpoints mutually exclusive in every respect. You can mix and match from different perspectives, or add additional related ideas.

Public Agenda is a national, nonprofit, nonpartisan organization dedicated to strengthening democracy and improving people’s lives. Through research and public engagement, we help leaders, citizens and stakeholders build common ground on solutions to tough public problems like education reform, the environment and healthcare. Public Agenda was founded in 1975 by the social scientist and public opinion expert Dan Yankelovich and former Secretary of State Cyrus Vance, and is based in New York City. Find us on Facebook at facebook.com/PublicAgenda and on Twitter at @PublicAgenda

For more information on the Citizens' Solutions Guides or Public Agenda, contact Allison Rizzolo at (212) 686-6610, ext. 148, or email at arizzolo@publicagenda.org.