Annual Report | October 10, 2010 at 8:42 pm

The Annual Report of the United States

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The United States government is in the midst of a budget crisis.  The federal government has run a deficit—it has spent more than it collected in tax revenues—in all but four fiscal years since 1969, but recent deficits have reached unsustainable levels.  In 2009, the government spent $1.4 trillion more than it raised, the largest nominal deficit in history and the largest as a percentage of GDP since the end of World War II in 1945.  The Congressional Budget Office projects that the fiscal year 2010 deficit of $1.56 trillion, which represents 10.6 percent of GDP, will be greater still.  Total federal debt stood at a whopping 83.4 percent of GDP as of 2009.

And things are getting worse.  Mandatory spending on entitlement programs like Social Security and Medicare is projected to grow to 44 percent of GDP by 2080, which is to say nothing of discretionary spending, which Congress appropriates each year in the annual federal budget.

Why does this matter?  For one thing, deficits imply that the government must borrow money, which raises interest rates and reduces private sector investment and long-term growth.  Foreign governments that finance much of the public debt gain diplomatic leverage over the United States.  In the long run, these and other creditors may stop loaning to the U.S. government, either for political reasons or because they come to consider it a bad credit risk, which could render the government unable to fulfill basic functions. Debt incurred to finance social welfare programs for today’s citizens will have to be paid off by future taxpayers.

Overcoming these problems will require decisive, painful choices by the federal government.  As Erskine Bowles, co-chair of President Obama’s deficit and debt commission, explained in July, it is inconceivable that economic growth will raise the revenues needed to overcome this problem.  To achieve a sustainable budget, he explains, the government must “cut spending or increase revenues” or some combination of the two.  And unless Americans will consent to paying one half of their collective income in taxes, some spending cuts are going to have to occur.

For citizens to hold their leaders accountable for the tough decisions that have to be made in the near future, they must understand the major items in the federal budget itself, how we got into this mess, and what our options are going forward.

Despite public criticism of “pork barrel” spending and foreign aid, these items constitute a minuscule portion of the federal budget.  Instead, the area of greatest concern is spending on the major entitlements: Social Security, Medicare, and Medicaid.  Spending on these programs is expected to skyrocket in the coming decades due to an aging population and the increasing cost of medical care.  The long-term Social Security solvency problem can be avoided if Congress can muster the political will, but there is no obvious solution as to how to limit the growth of public health care spending.  One of the major goals of the recent health care reform legislation was to reduce health spending over the long term, but achieving this will require a discerning and disciplined Congress in the years to come.

While the military budget is not growing nearly as rapidly as spending on entitlements, it represents nearly a fifth of total federal spending and is a perennial target of deficit hawks.  While there is some waste in defense spending that could be eliminated without much consequence, more fundamental cuts will entail a sacrifice of military capabilities.

Smaller but not insignificant budget items include spending on transportation, primarily the interstate highway system, education, the primary goal of which is to induce improvements in public schools at the state level, and scientific research, which subsidizes research ill-suited for the private sector.

A major contributor to the current deficit is the 2009 American Recovery and Reinvestment Act, which has sought largely unsuccessfully to mitigate the effects of the current economic crisis through tax breaks and spending initiatives.  While the federal government maintains a series of safety net entitlements and tax incentives for the benefit of the poor and others hit hard by this and other economic downturns, evidence indicates that the system may be inadequate for the poorest of the poor.

Few would deny that major budgetary overhaul is needed, but there is bound to be debate about exactly how to achieve fiscal sustainability.  We hope this discussion of the major areas of federal spending will convince readers to demand that their elected representatives take decisive action, and that it will provide them with the facts necessary to evaluate proposed solutions.

Eva Lam, Co-editor

Peyton Miller, Co-editor

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