US Budgets and Debt: A Non-Political Primer

U.S. Budgets and Debt are key issues in the Presidential Race. Budgets, of course, represent priorities and choices. Just as elections do. I thought a quick recap of budget and debt might be helpful to each of us as we cut through the election rhetoric and try to evaluate various proposals for the future.

The U.S. fiscal year ends September 30th. The budget for the 2012 fiscal year ending in four weeks is expected to generate a deficit of $1.3 trillion. Our total revenue is $2.5 trillion, yet we willl spend $3.8 trillion. Our current debt is roughly $16 trillion and growing.

Revenue comes primarily from taxes:  50% from individual income taxes, 10% from corporate income taxes and 30% from payroll taxes.  Expenses are grouped into three major categories: Mandatory programs, Discretionary Programs and Interest.

The chart above shows the relative amounts spent on various items. Mandatory expenses, including social security, medicare,  medicaid  and federal pensions, account for 56% of the expenses. 37% of expenses are “discretionary” expenses, of which 20% is defense spending and 17% is everything else. “Everything else” includes education, transportation, veterans’ benefits, environment and others. Fortunately, interest rates are at historical lows, so interest on the $16 trillion of debt is “only” 7% of total expenses.

Hopefully, this provides some perspective on where the dollars come from and where they go currently.

Annual deficits of $1.3 trillion are not sustainable. You may recall that in 2010, the National Commission on Fiscal Responsibility and Reform (often called the Simpson-Bowles Commission) was formed to review and propose changes. The bipartisan committee delivered their final recommendations on December 1, 2010.

Their proposal was designed to save $4 trillion (through program cuts and revenue increases) over the next decade. Its five main “steps” were:

  • $200 billion reduction per year in discretionary spending, which included defense cuts of 15% and cutting the federal work force by 10%
  • $100 billion in increased tax revenues including an increase in gasoline taxes and restricting certain tax deductions
  • Controlling health care costs
  • Reducing entitlements, including farm subsidies, federal pensions and student loan subsidies.
  • Modifying social security to raise the payroll tax and retirement age.

Unfortunately, the commission fell short of the supermajority of 14 or 18 votes to approve the report and send it to Congress for a vote.  

A year ago, Congress voted to raise the nation’s debt ceiling (to $16.4 trillion). At that time, they established a super committee to identify at least $1.2 trillion in savings and submit them to Congress for a vote. If there was no approval, then automatic reductions of $100 billion per month would start as of 1/1/13. The supercommittee was unable to reach a budget deal last November and Congress has not moved forward with its own plan. Now, the automatic cuts scheduled for January represent part of the current “fiscal cliff”. The other part is the planned expiration of the Bush tax cuts.

There is much at stake in this election. Budgets and Debt are key issues. I hope this information helps.