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Often one hears the declaration that "federal taxes are too high", and "federal spending is out of control". Yet when questioned, these same people would not contemplate making any actual reduction in benefits for any of these near-sacred items. When you point out that very nearly 3/4 of federal spending goes to spending on these items, and so, according to them are not cuttable, they are surprised.
If one considers 3/4 of federal spending uncuttable, that means that one could at most cut federal spending and taxes by 25%. As for what is in that 25%, most of it (18%) is in the Non-defense Discretionary Category -- see section non154. The other 7% is in the Mandatory Spending categories, mostly means-tested mandatory spending programs other than Supplemental Security Income (SSI). (See the top part of Table T145.1 in section non145 for a list of means-tested mandatory spending programs). I'll leave it to the reader to judge how much these items should be cut.
One would think from listening to the garbage on talk radio that a huge proportion of federal spending goes to education and the Education Department, Commerce Department, foreign aid, welfare programs for the working-age poor like food stamps and ADC [1], The Corporation for Public Broadcasting, and The National Endowment For the Arts. And if one could overcome liberal resistance to cutting these programs, then federal spending could be substantially reduced. However, those agencies and programs combine to less than _____% of total federal spending. ((verify)).
note 1 -- ADC- Aid to Families With Dependent Children has been replaced by TANF - Temporary Aid For Needy Families.
One also hears the attitude expressed by retirees or near - retirees that maybe SS and Medicare benefits need to be cut for the next generation, but don't cut my benefits, because I've been paying into the system for 30 or 40 years, and so I'm entitled. But in fact, the SS system has been funded on an entirely pay - as - you - go basis, with current payroll taxes being spent on two things: {1} benefits for the current elderly generation and currently disabled, and {2} on current general federal programs. None has been saved for anyone's future. See section non88 for more on the myth that we're entitled to a return of principle and interest on all that we've paid into the system. (Or even worse is the notion that we have been paying "premiums" into a "social insurance" program, and now we're entitled to collect benefits all out of proportion to the premiums we have been paying).
Table T151.1, which is straight from Table F13 p. 137 {161} from E&B0199.pdf provides another view of the past growth of these three hard - core entitlements -- Social Security, Medicare, and federal employees (both civilian and military) pensions.
==============================================
Table T151.1
(From E&B0199.pdf Table F-13)
Outlays for Entitlements and Other Mandatory Spending,
Fiscal Years 1962-1998 (As a percentage of GDP)
Total
ORAD-Other Entitlements
Retirement Sum Of And Other
Social And These Mandatory
Security Medicare Disability Three Spending
-------- -------- -------------- ------ ----------
1962 2.5% 0.0% 0.5% 3.0% 6.1%
1970 2.9 0.7 0.7 4.3 7.2
1980 4.3 1.2 1.2 6.7 10.7
1990 4.3 1.9 1.1 7.3 11.0
1998 4.5 2.5 1.0 8.0 11.2
ORAD (Other Retirement and Disability) is almost entirely federal
employee (both civilian and military) pensions.
Total Entitlements and Other Mandatory Spending does not
include interest on the national debt.
==============================================
As one can see, just these three categories have more than doubled their share of GDP -- from 3.0% of GDP in 1962 to 8.0% of GDP in 1998. All Entitlements and Other Mandatory Spending (which includes Social Security, Medicare, ORAD, Medicaid, Unemployment Compensation, Farm Price Supports, Deposit Insurance, and a few other programs, see section non144), has nearly doubled its share of GDP -- from 6.1% of GDP in 1962 to 11.2% of GDP in 1998.
The first thing to be clear about is that Social Security and Medicare are part of the federal budget that everyone talks about. There has been some confusion about this, because occasionally one hears that Social Security has been put "off budget". Technically that is true. But as a practical matter, the budget figures (particularly total revenues and expenditures) that are reported in the media are almost always "unified budget" figures -- i.e. the combination of "on budget" and "off budget". Thus they practically always include both Social Security revenues and expenditures. (Medicare has always been "on budget").
Thus, when the media reports something like
"total federal spending in FY 1998 was $1.65 Trillion, and, according to the 1999 Budget, it is expected to be $1.71 Trillion in FY 1999"
then one can be sure that these are unified budget spending totals -- i.e. they include the "off budget" items. Similarly when the media discusses total revenues, they are practically always discussing unified budget revenues (in particular, they include revenues from Social Security taxes).
There are only two "off budget" items -- Social Security and the Postal Service. The Postal Service is very minor, only _____ B$ ((fill-in)) in FY 1998. So when you see the term "off budget", think Social Security. Actually, I don't think the Postal Service revenues and expenditures are in the federal budget, but only its surplus or deficit. If the Postal Service runs a deficit, then the federal government makes up the deficit. Similarly, if the Postal Service runs a surplus, presumably they give that to the federal government as payback for previous deficits. The Postal Service ran a $ 0.2 Billion surplus in FY 1998, per Table F-4, p. 129 {152} of E&B0199.pdf
As for budget surpluses (or deficits), when the media and politicians give one number, it is almost always the unified budget surplus. For example, in a statement like:
"in fiscal year 1998 we enjoyed a $70 Billion surplus, and the budget forecast for 1999 is for a $107 Billion surplus",
they are referring to the unified budget surplus.
However, they frequently qualify their statements by stating what the surplus would be if the Social Security surpluses were excluded. For example,
"in fiscal year 1998 we enjoyed a $70 Billion surplus, however, that number includes the $99 Billion Social Security surplus. If it weren't for the Social Security surplus, we would have had a deficit of $29 Billion."
For a deeper discussion of what the "off budget" status of Social Security means in a technical and a practical sense, see Congressional Research Service Report For Congress (98-422 EPW), "Social Security: and the Federal Budget: What Does Social Security's Being "Off Budget" Mean?", May 5, 1998.
Most of these terms are defined in the abbreviations section (non3). I've repeated them here for now, with the goal that I be sure to illustrate them.
Discretionary spending -- which pays for such things as defense, education, transportation, national parks, the space program, and foreign aid -- accounts for about one-third of the budget.
For Fiscal Year 1999, it is expected to total $575 Billion as follows:
==============================================
Discretionary Spending For FY 1999
Billions of Dollars
275 Defense
300 Non-Defense Discretionary
-----------------------------------
575 Total Discretionary Spending
Nondefense discretionary spending is expected to make up 18 percent of total outlays, or $300 billion, in 1999. It encompasses a broad array of federal activities (see Figure 4-2). By program category, nondefense outlays for 1999 include
==============================================
% of Non- Spending, Discret- Billions ionary Of Spending Dollars Item --------- -------- ------------ 15.6% 47 Education, Training, Social Services 13.9 42 Transportation 13.4 40 Income Security 12.6 38 Justice and General Government 9.4 37 Other 8.9 27 Health Research and Public Health 7.6 23 Natural Resources and Environment 6.4 19 Veterans' Benefits 6.2 19 International Programs including Foreign Aid 6.1 18 Space and Science ----- ------ 100.0 300 Total Non-Defense Discretionary Spending
Income Security- chiefly housing subsidies, and the administrative costs of running benefit programs;
Veterans Benefits - medical care and other noncash benefits for veterans;
Justice and General Government - administration of justice, violent crime reduction, and general government activities, such as running the Internal Revenue Service;
Figure 4-2. Nondefense Discretionary Spending, by Category, Fiscal Year 1999 (In percent)
Source: E&B0199.pdf, p. 68 {92}
For more on interest on the national debt, see also section non161.
Sometimes there is a lot of confusion about what interest figures are being talked about. Some people say that interest on the national debt in FY 1998 was 364 B$. Some say that interest on the national debt in FY 1998 was only 243 B$. This is understandable, as official sources seem to disagree.
For example, the Bureau Of The Public Debt ( http://www.publicdebt.treas.gov/opd/opdint.htm ) shows the FY 1998 interest on the debt as 364 B$, whereas the General Printing Office, in the Citizen's Guide to the FY 2000 Budget ( http://www.gpo.gov/usbudget/fy2000/guidetoc.html ), shows 1998 Actual "Net Interest" as 243 B$.
This seeming contradiction is explained in depth by E&B0199.pdf, p. 78-79 {102 - 103}, and particularly Table T155.1 (E&B0199.pdf, Table 4-8):
==============================================
Table T155.1- From Table 4-8 of E&B0199.pdf, p. 79 {103}.
CBO Projections of Federal Interest Outlays
(By fiscal year, in billions of dollars)
Actual
Fiscal Year 1998 2009
Interest on Public Debt
(Gross Interest) (a) 364 318
Interest Received By Trust Funds
Social Security -47 -137
Other Trust Funds (b) -67 -86
---- ----
Subtotal -114 -223
Other Interest (c) -7 -10
==== ====
Total (Net Interest) 243 85
NOTE: Projections of interest assume that discretionary spending
will equal the statutory caps that are in effect through 2002 and
will grow at the rate of inflation thereafter.
a. Excludes interest costs of debt issued by agencies other than
the Treasury (primarily the Tennessee Valley Authority).
b. Principally Civil Service Retirement, Military Retirement,
Medicare, unemployment insurance, and the Highway and the
Airport and Airway Trust Funds.
c. Primarily interest on loans to the public.
The below diagram of FY 1998 interest payments helps explain
the above table and the concepts of net and gross interest
a little better:
Interest payments in Fiscal Year 1998, in $ Billions
to trust funds
+--------------
114 | \
V |
|------ | --114-->/
| |
| Fed | -->- 250 ---------> |--------|
| Govt | int. on p-h debt | Public |
| | | |
| ----- | <--- 7 ---------<-- |--------|
"Other interest"
e.g. on student loans
==============================================
The federal government pays 114 B$ to the trust funds for interest on the securities (Treasury bonds, bills, notes, etc.) held by the trust funds, and 250 B$ to the public for interest on Treasury securities held by the public.
Thus, the federal government pays out a total of 114 B$ + 250 B$ = 364 B$ in interest. This total payout of interest by the federal government is the gross federal interest.
However, the 114 B$ trust fund interest is really a transfer from one federal government account to the trust fund accounts, which are also federal government accounts. So this amount "comes back" to the federal government.
In the "other interest" category, the federal government pays out some interest to the public (primarily for interest on tax refunds that are held up for more than 45 days after the filing date). And the public owes money to the federal government, for example, student loans. Overall, in the "other interest" category, the public pays more interest to the federal government than the federal government pays to the public. The net amount of interest that the public pays to the federal government in the "other interest" category is 7 B$. See also a few paragraphs down for more on "other interest", non156.
Thus, on net, the federal government pays out 364 - 114 - 7 = 243 B$.
Another thing to make clear is that there is a difference, though relatively minor, between "net interest" ($243 B) and "interest of the publicly - held debt" ($250 B). They differ by "other interest" ($7 B). (In some other sections of this report, I've been using net interest figures and saying they are roughly the same as the interest on the publicly - held debt. Now we know that they are quite close, but they do differ by the amount of "Other Interest").
Here is some more information about net interest and gross interest from E&B0199.pdf, p. 78-80 {102-104}
[Net] Interest costs are a sizable portion of the federal budget, representing almost 15 percent of government outlays. Under CBO's assumptions of stable interest rates and rising surpluses through 2009, outstanding government debt is projected to decline significantly (see Chapter 2). In turn, annual [net] interest payments will drop from $243 billion in 1998 to $85 billion -- just 4 percent of the budget -- in 2009 (see Table T155.1). As a percentage of GDP, those [net] interest costs are projected to decline slowly from 2.9 percent last year to 0.6 percent in 2009.
[snip]
Net or Gross?
Net interest is the most useful measure of what it costs the government to service its debt. However, some budget-watchers stress gross interest (and its counter-part, the gross federal debt) instead of net interest (and its counterpart, debt held by the public). But that choice exaggerates the government's debt-service burden because it overlooks billions of dollars in interest income that the government receives.
The government has sold around $3.7 trillion worth of securities to finance deficits over the years. But it has also issued approximately $1.75 trillion worth of securities to its own trust funds (mainly the Social Security and other retirement trust funds). Those securities represent the past surpluses of the trust funds, and their total amount grows approximately in step with the projected trust fund surpluses (see Chapter 2). The funds redeem the securities as needed to pay benefits; in the meantime, the government both pays and collects the interest on those securities. It also receives interest income from loans and cash balances. Broadly speaking, gross interest encompasses all interest paid by the government (even to its own funds) and ignores all interest received. Net interest, by contrast, is the net flow to people and organizations outside the federal government.
Net interest is only about two-thirds as large as gross interest. CBO estimates that the government will pay $357 billion in gross interest costs this year (see Table T155.1). Of that amount, however, $119 billion is credited to trust funds and does not leave the government or add to the total deficit. The government is also projected to collect more than $7 billion in other interest income this year. Therefore, net interest costs will total $231 billion.
[snip]
[more on that $7 billion in "other interest, from p. 80 {104}: ]
Other Interest (156)
The $7 billion in other interest expected in 1999 comprises some interest payments and some interest collections. On balance, however, the government receives more in interest in that category than it pays out. Among the expenditures are Treasury payments for interest on individual, corporate, and excise tax refunds that are held up for more than 45 days after the filing date (those payments total approximately $3 billion a year). An example of other collections is the interest received from the financing accounts of direct loan programs. As those programs (student loans, for instance) make more loans, they borrow money from and pay interest to the Treasury. The size of all interest payments for direct loan programs is expected to rise from $5 billion in 1999 to $14 billion in 2009, mostly because of the growth of the direct student loan program.
A Note on foreign ownership of the publicly - held debt
At the end of fiscal year 1998, foreign residents owned 1.2 T$, or 33% of the 3.7 T$ publicly - held debt. Interest payments to foreign residents on this debt during FY 1998 was 91 B$, or 36% of the total 250 B$ interest paid on the publicly - held debt. See section non163 for further information.
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