These decreases in revenue collection and increases in spending resulted in higher budget deficits. Central findings of this analysis include the following:
A comparatively small share of federal spending is for direct provision of domestic government goods and services, which many people may think of when considering federal spending. Because this spending is normally about 10% of total federal spending and about 2% of GDP, whereas deficits excluding interest are projected to be 2% to 7% by FY2039, cutting this type of spending alone cannot realistically contain the problem of unsustainable deficits. Transfers and payments to persons and to state and local governments constitute most of federal spending, about 70% or more. Defense spending, accounting for about 20% of federal spending, has declined as a share of output over the past 35 years, but it also tends to vary depending, in part, on the presence and magnitude of international conflicts. Until the recent recession, most types of nondefense spending had been constant or declining as a percentage of output, but spending on programs for the elderly and health care have been rising. The problem with the debt lies not in the past but in the future, as growth in spending for health and Social Security is projected to continue. Reductions in discretionary spending are insufficient to reduce the deficit to a sustainable level, so limiting taxes as a percentage of output or constraining the overall size of the government to current levels would likely require significant cuts in mandatory spending, including entitlement programs such as Social Security, Medicare, and Medicaid. Preserving entitlements would likely require significant increases in taxes, such as raising rates, reducing tax expenditures, increasing other taxes, or introducing new revenue sources. Tax expenditures may be difficult to eliminate, but they may be a reasonable source of new revenue if not used to lower rates. Addressing the eventual Social Security trust fund shortfall largely with tax increases would smooth the burden of accommodating longer lives across both working and retirement years. This argument might apply in part to Medicare and Medicaid issues. Because the federal government provides about one-fifth of the revenue for state and local governments, cutbacks in transfers to these governments may, in part, shift the burden of providing services from the national to subnational governments rather than altering the overall size of government services. Nondefense discretionary funding, although small as a share of the budget and of GDP, is largely the spending that many people think of when they think of the direct provision of goods and services by the federal government. By FY1993, debt held by the public had reached 49.3% of GDP. CBO projects it will stabilize before rising again. Defense, nondefense discretionary, and other mandatory programs are projected to amount to 6.9% of GDP in FY2039. Interest payments also were to fall. Therefore, it is realistic to expect that tax collections would have to rise to restore the path of future deficits to sustainability.
A small share of federal spending is for direct provision of domestic government services, which many people may think of when considering federal spending. Because this spending is normally about 10% of total federal spending and about 2% of gross domestic product (GDP) and deficits are projected to be 2.8% of GDP and rising in the future, cutting this type of spending can make only a limited contribution to reducing the deficit. (Note that direct provision of domestic services by the federal government is smaller than the total of nondefense discretionary spending, about 17% of spending, because it excludes transfers. Discretionary spending is spending that requires appropriations.) Transfers and payments to persons and state and local governments constitute most of federal spending, about 70%. Defense spending, currently accounting for about 20% of spending, has declined over the past 35 years but tends to vary depending, in part, on the presence and magnitude of international conflicts.
Recently, issues concerning the level of federal debt have become a significant source of debate in Congress. As a result of the recent recession (December 2007 to June 2009), along with policies enacted in response to it, federal debt held by the public rose from 36% of GDP in 2007 to 74% in 2014. Although the debt held by the public is projected to be relatively stable over the next decade, the Congressional Budget Office (CBO) projects it will rise to 106% of GDP by 2039. This increase in debt is mainly due to growth in federal spending on health care programs and Social Security, as well as increasing interest payments that typically accompany rising budget deficits. Although spending on these programs is rising, other types of federal spending have remained constant or declined. These trajectories are projected to continue under current policy.
Because reductions in the spending allocated for federal provision of goods and services appear inadequate to reduce the future deficit and debt to a sustainable level, limiting taxes as a percentage of output or constraining the overall size of the government to current levels would likely require significant cuts in transfers, which include entitlement programs such as Social Security, Medicare, and Medicaid.
Preserving entitlements would eventually require increases in taxes; CBO's baseline projection shows spending on Social Security, health, and interest will absorb virtually all revenue collected by 2039, leaving little room for any discretionary and other mandatory spending. Options to put the federal budget on a more sustainable path include raising tax rates, reducing tax expenditures, increasing other taxes, or introducing new revenue sources. Tax expenditures may be difficult to eliminate, but if not used to lower rates they may be a source of additional revenue. If Congress were to address the eventual Social Security trust fund shortfall largely with tax increases, it would smooth the burden of accommodating longer lives across both working and retirement years. This argument might also apply, in part, to Medicare and Medicaid.
The federal government provides about one-fifth of the revenue for state and local governments. Reducing the long-term deficit and debt may require cutbacks in transfers to these governments that could, in part, shift the burden of providing services from the national to subnational governments rather than altering the overall size of government services.