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Federal Budget Outlook: Worse Than You Think

by Dan Barrett / /

What are the long-term implications of government spending, and how should policymakers reign in the current trend of unsustainable federal expenditures? Those questions were the focus of a recent event hosted by the Cato Institute, entitled Federal Budget Outlook: It’s Worse Than You Think, featuring Senator Ron Johnson (R-WI) and Cato’s Director of Tax Policy Studies Chris Edwards.

In FY 2013, the federal budget deficit was a staggering $680 billion, and expenditures topped $3.9 trillion. That pattern is projected to continue going forward, with some estimates showing current spending at 20.4 percent of GDP (projected to rise to 31.8 percent by 2040).

Edwards considered five categories of federal spending:

  • compensating federal workers – $407 billion
  • paying interest on the federal debt – $414 billion
  • purchasing goods and services – $571 billion
  • state and local aid – $510 billion
  • subsidy and benefit programs (transfers) – $1.98 trillion

Despite recent deficit decreases, spending on subsidy and benefit programs are growing at an annual rate of 6.7 percent. This spending increase results from the proliferation of entitlement programs including: Social Security, Medicare, SNAP (food stamps), unemployment benefits, agricultural subsidies, refundable tax credits, and so forth. Below is a visual graphic demonstrating the aforementioned categories.

Edwards noted, “the U.S. Constitution does not create an open-ended role for the federal government to transfer wealth or aid to the states. Yet today those two activities account for about two-thirds of federal spending.”

Senator Johnson’s main argument was that reporting by the Congressional Budget Office (CBO) is fundamentally flawed, allowing an administration to mask the severity of fiscal crises. CBO typically sticks to a ten-year budget window, but Johnson contended that some fiscal scenarios warrant a thirty year window, especially as demographic changes like the aging of the baby boomer generation impact the long-term stability of Social Security, Medicare, and other federal entitlement programs. The Senator said that ultimately, these programs amount to “inter-generational theft.” A sense of urgency has not yet set in among lawmakers because CBO does not adequately report the long-term effects of current fiscal policy.

The speakers suggested that America can move towards budgetary solvency if it eliminates wasteful spending (those that cost more than the benefits they yield) and respects the 10th Amendment. They also suggested that policymakers should work towards reducing regulatory and bureaucratic inefficiencies that cost taxpayers time and money, and open the door to cronyism and abuse.

At the current spending rate, the deficit will soon be many, many trillions. Senator Johnson finished the talk by imploring, “Please, God, don’t tell Washington what comes after trillions.”

Thanks to Paul Bartow for drafting this post.