An Unsustainable Fiscal Course - What Gives?

The United States faces daunting economic and budgetary challenges. Since 2009, government spending has been higher as a percentage of the country's economic output than at any period since World War II. While at the same time, tax revenues are at their lowest levels in 60 years.¹

After enduring one of the worst economic downturns since the Great Depression, federal revenues have plummeted to less than 15 percent of the gross domestic product (GDP).²

Efforts to prevent the collapse of the financial system and to deal with the failure of Fannie Mae and Freddie Mac, the automatic expansion of safety net programs like employment insurance and food stamps to meet rising need, and the February 2009 stimulus package altogether drove federal spending to 25 percent of GDP in 2009 and nearly 24 percent in 2010. Our nation's deficits have reached record levels.²

So is overspending the root of our fiscal troubles? Or do we need to raise tax levels? These questions are at the core of a long-standing partisan debate over how we got ourselves into this financial predicament.

Arguments can be made that policies of both parties have contributed to the huge budget gaps we face today: tax cuts and wars have been factors, as have economic recessions and expanded spending for health care in both Republican and Democratic administrations.1 But playing the blame game does not address the critical question at hand…what can be done to get the federal budget back on track and our nation's debt under control?

In fiscal year 2010, the federal government spent $3.5 trillion of which almost $2.2 trillion was financed by federal tax revenues. The remaining $1.3 trillion was borrowed, and the deficits will ultimately be paid for by future taxpayers.²

Here's a breakout of how the money was spent.

• Medicare/Medicaid/Children's Health Insurance Program (CHIP): $732 billion
• Social Security: $707 billion
• Defense and Security: $705 billion
• Government Services*: $588 billion
• Safety Net Programs: $496 billion
• Interest on Debt: $196 billion

*Government Services include veterans benefits and health care, federal employee retirement benefits, food and drug safety, environmental protection, education, scientific and medical research, infrastructure of roads, bridges and airports, and foreign aid @1%).

Source: 2010 figures from Office of Management and Budget, FY2012 Historical Tables. Percentages may not total 100 due to rounding.

What Lies Ahead?

Over the long term, federal borrowing needs are forecasted to grow, as the gap between revenue and spending widens.

The oldest baby boomers are already eligible for early Social Security retirement benefits and become eligible for Medicare this year. Health care costs will continue to rise as more and more of the population ages, driving up spending. From this point on, the Social Security program is projected to pay out more in benefits than it receives in tax income each year into the future.³

By 2020, Washington could be spending 92 cents of every tax dollar on Medicare, Medicaid, Social Security and interest on the debt alone, leaving just 8 cents on the dollar to pay for all other government services.⁴

As the baby boomer generation retires, spending on entitlements will result in persistent, and eventually unsustainable federal deficits and debt.³

Altering Our Projected Course

There is no debating that addressing our long-term fiscal challenges will require some difficult decisions concerning both federal spending and revenue. To protect America's fiscal future, policymakers will have to substantially restrain growth of spending (including entitlement reforms), raise revenues significantly above their historical share of GDP, or pursue some combination of those two approaches.³

Sources: 1) FactCheck.org, Fiscal Fact Check, July 15, 2011. 2) Policy Basics: Where Do Our Federal Tax Dollars Go? Center on Budget and Policy Priorities. April 15, 2011 3) The Budget and Economic Outlook: An Update, CBO Summary, Congressional Budget Office, August 2011. 4) Jeanne Sahadi, "Running the Government on 8 Cents," CNN Money, January 21, 2011.

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