Here are three long-term changes in the U.S. budget situation, based on the latest fiscal conditions. Budget and economic outlook: 2024 to 2034 From the Congressional Budget Office (February 2024).
First, the major categories of U.S. government spending are changing. Consider this graph that shows federal spending broken down into mandatory, discretionary, and net interest. The vertical axis measures spending as a percentage of GDP. As you can see, over the past half century, the “obligatory” category has risen significantly, the “discretionary” category has fallen significantly, and the “net interest” category, although small, is at its highest level since then. In 1940 his CBO data began.
What are these categories? “Mandatory” spending occurs when the level of spending was predetermined by previous legislation. Just over a third of spending in this category is health-related, such as Medicare, Medicaid, and subsidies to make health insurance more affordable. Just under a third is social security. Other large categories include income support programs such as the Earned Income Tax Credit, Child Tax Credit, and Food Stamps. Other items in this category include retirement programs for government employees and assistance for veterans.
In contrast, the CBO states: Spending on many non-defense activities, such as primary and secondary education, housing assistance, international affairs, and the administration of justice. It also includes spending on specific transportation programs. ”
As I have argued before, the big change here is that the federal government’s role has shifted to paying individuals and not executing and managing projects.
The second long-term change involves the transition between “primary” and overall fiscal deficits. The “primary” budget deficit is the overall deficit less interest payments. As the CBO numbers show, the U.S. government’s projected “primary” budget deficit does not appear to be particularly high by historical standards. However, notice two shifts. First, over the past 50 years, the primary budget deficit has repeatedly increased and decreased, sometimes falling to the level of a primary budget surplus. Looking ahead to the next 10 years, everything will be a primary budget deficit. Second, higher interest payments mean that the gap between the primary deficit and the overall deficit has widened. The danger here is what I call the “interest treadmill,” where high interest payments on past borrowings keep annual deficits high and the total debt increases with the guarantee of even higher interest payments in the future. increase
For a while, starting around 2010, there was some lament among Democratic-leaning politicians and economists that the government did not go “big” when increasing spending in response to the Great Recession. When the pandemic recession hit, some companies decided to go big this time. Personally, I think the government’s fiscal reinforcement during the Great Recession was about right, but the fiscal reinforcement in response to the pandemic recession was too much. But no matter what we judge about the past, we are now facing a bill in the form of high interest payments.
The third major change is the projection that federal tax revenues as a share of GDP will remain fairly close to historical levels over the past half-century, while federal spending will move to higher levels.
The main reasons for the change in spending, as already mentioned, are increased spending on the elderly as baby boomers retire, steady increases in health care costs, and increased interest on previous government borrowings. You have to make some basic choices here. One option is for overall federal spending to increase as the proportion of the U.S. population that is older increases. If we don’t want federal spending as a share of GDP to rise, we need to cut benefits for the elderly, cut other federal spending, or raise taxes. Given that cutting interest payments is not a good idea, the “other spending” that could be cut has already been a shrinking share of the U.S. budget for decades. Raising taxes is no fun, and neither is the ever-increasing federal debt.
When it comes to the federal budget, over the next decade or so we’re headed toward a situation where we either make choices or we’re forced to make choices when we don’t want to.
