by MARTIN REGALIA,Chief Economist, U.S. Chamber of Commerce
The decline in deficits in recent years has led some to conclude that our fiscal problems are behind us. However, a quick look at the data on government revenue and outlays, as well as projections for the next decade made by the Congressional Budget Office, suggests that this is clearly not the case.
The budget deficit is projected to bottom out over the next two years at about $416 billion or 2.1% of GDP and then start rising again reaching $1 trillion by 2025. The deficit grows despite increasing tax revenue that approaches $5 trillion or about 18.3% of GDP, about the average from 1980-2007. The main culprit in this deteriorating fiscal picture is rising government spending, which grows from $3.7 trillion to over $6 trillion or from 20.7% of GDP to 22%.
As if the aggregate numbers were not shocking enough, the components of government spending indicate an even bigger problem and a growing loss of control.
Government spending can be broken down into two basic components: discretionary spending and mandatory spending. Discretionary spending represents outlays that are appropriated by Congress each year. In fiscal year 2015, they totaled $1.2 trillion or about 32% of total outlays. This discretionary component can be further broken down into two roughly equal pieces, non-defense discretionary spending and defense spending. Congress generally has more control over discretionary spending because this type of spending must be re-appropriated each year.
The other major component of government spending is mandatory spending. This component is comprised of entitlement spending (Medicare, Medicaid, and Social Security) and interest on the outstanding government debt. In 2015, mandatory spending was $2.5 trillion, or 68.4% of total outlays. Entitlement alone accounted for $2.3 trillion and interest payments were $218 billion.
Mandatory spending is far more problematic from a fiscal policy control perspective because these programs are not authorized or appropriated each year. Once mandatory programs are authorized the spending is essentially on autopilot. In effect, they are contractual agreements with the people who have qualified for these programs, or who hold outstanding government debt. As such, the payments are not under the annual control of Congress.
Congress can certainly change or eliminate mandatory programs, but unlike appropriations-funded programs, mandatory programs operate “as is” unless Congress acts. No periodic event forces Congress to re-evaluate a program and therefore changes are much more difficult to legislate. Congress can control mandatory spending, but legislative inertia means it is much easier to leave these programs alone.
While spending on appropriations is changed annually, and mandatory program spending can be changed if Congress acts, spending on net interest is nearly impossible to alter because it is largely determined by past actions – past deficits resulting in current publicly held debt – and by projections of future market interest rates. Net interest outlays are largely “baked in the cake” and beyond Congress’ control.
The ratio of mandatory spending and discretionary spending is therefore very important, and the fact that mandatory spending, as a percentage of total spending is growing sharply, should be of great concern to people who care about the government’s finances – namely you, the American people.
Just how bad is this lack of control getting? Pretty bad! In 2015, entitlement programs constituted over 62% of total government spending and interest costs added another 6% so together mandatory spending comprised 68.4% of all government outlays.
What is worse is that these programs and debt service are projected to grow sharply. The Congressional Budget Office projects that by 2025 entitlement programs will cost almost $4 trillion and interest costs will be over $750 billion out of total government spending of $6 trillion. That is, mandatory spending will comprise almost 77% of all spending. Indeed, according to CBO projections, this type of spending will use up 92% of every dollar of federal revenue raised in that year.
So the next time you hear someone say that entitlement spending and interest is not a problem just don’t believe them – and don’t vote for them either!