Federal Budget and the Deficit
The Federal Budget and the Economic Downturn
The economic downturn has severely impacted the federal budget. With millions out of work, income tax revenues are down. The increased use of safety net programs like unemployment insurance, food stamps, and Medicaid health insurance, for example, have boosted costs. Federal government expenditures exceed revenues; the government is running a deficit each year and the accumulated debt is growing. Much of the deficit will disappear when the downturn ends and people are back at work but what do we do now? The deficit is also increased due to the tax cuts of 2001 and 2003 that primarily benefited the wealthy and the wars in Iraq and Afghanistan. Fully 98% of the projected 2012 federal budget deficit is due to these three things: the economic downturn (64%), Bush tax cuts (19%), and wars in the Middle East (15%). But what should we do?
In the late 1990s, the federal budget was in surplus; revenues exceeded expenditures and the national debt was shrinking. Then came the tax cuts of the early 2000’s which reduced revenues by hundreds of billions of dollars and the wars in Iraq and Afghanistan, expensive engagements paid for with IOUs, not tax increases. The surplus turned to deficit. When the economic downturn hit, the already sizable deficits became even larger. The federal debt, the sum of the accumulated deficits, shot up.
As millions of us can testify, the nation’s immediate problem is unemployment. More than one in seven potential workers is either jobless or working fewer hours than they prefer. Putting people back to work, back to paying taxes and using fewer safety net programs will dramatically shrink the deficit. But, unfortunately, most members of Congress are not focused on creating jobs. Instead too many are primarily concerned with the deficit and cutting government spending. (Read “Unemployment is our Nation's Problem, not the Deficit.”) The budget decisions Congress makes will heavily impact all of us. So we must also decide, what is best way for the nation to reduce the deficit and the debt?
What do you want Congress to do?
Before deciding where to cut and how to find more money, first consider current spending patterns. There are three large categories of federal spending. The fourth category is interest payments on the debt, currently 6% of total expenditures.
- Direct spending (59% of federal spending), also called mandatory spending or entitlements. This pays for Social Security, veterans’ pensions, food stamps, Medicare, Medicaid, and other programs.
- Military discretionary spending (19% of federal spending).
- Non-military discretionary spending (16% of federal spending). This pays for much of what we typically consider to be the central work of government: environmental protections, education, the federal courts and prisons, national parks, research, public health, federal law enforcement, and much more.
More information about these federal spending categories
Shrinking the Deficit - Four Options
Here are four options for reducing the deficit. More details about each are provided here. Which ones should Congress choose? Which do you prefer?
- Raise taxes on wealthy households and corporations
- Make further cuts in non-military domestic spending
- Cut military spending
- Cut spending for the major entitlement programs: Social Security, Medicare, and Medicaid