46 Federal Budget and Spending
The Federal Budget
The federal budget is the annual statement of the expenditures and tax revenues of the government of the United States. The President proposes a budget to Congress in February. The Congress passes budget acts by September and the President either signs them or vetoes them.
Budget balance = Tax revenues — Outlays
If tax revenues exceed outlays, the government has a budget surplus.
If outlays exceed tax revenues, the government has a budget deficit.
In recent years, the federal government has run a budget deficit. For the 2014 fiscal year, the projected U.S. budget balance is $3,000 billion − $3,627 billion = −$627 billion, that is, a budget deficit of $627 billion. In 2009, the U.S. government experienced its largest budget deficit ever, as the federal government spent $1.4 trillion more than it collected in taxes. This deficit was about 10% of the size of the U.S. GDP in 2009, making it by far the largest budget deficit relative to GDP since World War II.
Personal income taxes ($1,358 billion) and Social Security taxes ($1,031 billion) are the two largest sources of tax revenues. Transfer payments ($2,253 billion) — Social Security benefits, Medicare and Medicaid benefits, unemployment benefits, and other cash benefits paid to individuals and firms — and expenditure on goods and services ($1,152 billion) are the two largest components of government outlays.
Baby boomers will result in a massive increase in the Social Security and Medicare benefits that need to be paid. The government’s Social Security and Medicare obligations are a debt (estimated at $91 trillion) that must be considered when developing a path towards fiscal sustainability. The options for addressing the Social Security and Medicare time-bomb include raising income taxes, raising Social Security taxes, cutting Social Security benefits, and cutting other federal government spending. While all of these options entail major sacrifices, a combination of these measures will lessen the severity of the sacrifices. (21)
Federal Spending
Each year, the government borrows funds from U.S. citizens and foreigners to cover its budget deficits. It does this by selling securities (Treasury bonds, notes, and bills) — in essence borrowing from the public and promising to repay with interest in the future. From 1961 to 1997, the U.S. government has run budget deficits, and thus borrowed funds, in almost every year. It had budget surpluses from 1998 to 2001, and then returned to deficits.
The interest payments on past federal government borrowing were typically 1–2% of GDP in the 1960s and 1970s but then climbed above 3% of GDP in the 1980s and stayed there until the late 1990s. The government was able to repay some of its past borrowing by running surpluses from 1998 to 2001 and, with help from low interest rates, the interest payments on past federal government borrowing had fallen back to 1.4% of GDP by 2012.
National debt is the amount of ou