Political debates about the United States federal budget discusses some of the more significant U.S. budgetary debates of the 21st century. These include the causes of debt increases, the impact of tax cuts, specific events such as the United States fiscal cliff, the effectiveness of stimulus, and the impact of the Great Recession, among others. The article explains how to analyze the U.S. budget as well as the competing economic schools of thought that support the budgetary positions of the major parties.
Overview
Many of the debates about the United States federal budget center on competing macroeconomic schools of thought. In general, Democrats favor the principles of Keynesian economics to encourage economic growth via a mixed economy of both private and public enterprise, and strong regulatory oversight. Conversely, Republicans generally support applying the principles of either laissez-faire or supply-side economics to grow the economy via small government, low taxes, limited regulation, and free enterprise. Debates have surrounded the appropriate size and role of the federal government since the founding of the country. These debates also deal with questions of morality, income equality and intergenerational equity. For example, Congress adding to the debt today may or may not enhance the quality of life for future generations, who may also have to bear additional interest and taxation burdens.
Political realities make major budgetary deals difficult to achieve. While Republicans argue conceptually for tax cuts for the wealthy and reductions in Medicare and Social Security, they are hesitant to actually vote to reduce the benefits from these popular programs. Democrats on the other hand argue conceptually for tax increases on the wealthy and a stronger social safety net. The so-called budgetary "grand bargain" of tax hikes on the rich and removal of some popular tax deductions in exchange for reductions to Medicare and Social Security spending is therefore elusive.
Debates following the 2008–2009 recession and resulting slow economic growth and high unemployment centered on the prioritization of job creation and economic stimulus versus the need to address significant budget deficits.Paul Krugman. The Hijacked Crisis. NYT. August 11, 2011President Obama – Weekly Address. November 10, 2012 Concerns regarding the economic impact of significant deficit reductions forecast for 2013 (dubbed the "fiscal cliff") were addressed by the American Taxpayer Relief Act of 2012, which included: a) the expiration of the Bush tax cuts for only the top 1% of income earners; b) the end of the Obama payroll tax cuts; and c) a sequester (cap) on spending for the military and other discretionary categories of spending. The deficit faded as a major issue for the remainder of President Obama's tenure, as the deficit returned to its historical average relative to GDP by 2014 as the economy recovered.
President Donald Trump has proposed policies including significant tax cuts and increased spending on defense and infrastructure. The Committee for a Responsible Federal Budget and Moody's Analytics reported in 2016 that enacting these policies would dramatically increase the annual budget deficits and national debt over the 2017–2026 periods, relative to the current policy baseline, which already includes a sizable debt increase.Fiscal Fact Check: How Do Donald Trump's Campaign Proposals So Far Add Up?, Committee for a Responsible Federal Budget (February 13, 2016).
Analyzing the budget
Before analyzing the budget debates, some background on the key terms used and sources of information may be helpful. The definitive analysis of the federal budget is performed by the Congressional Budget Office (CBO), which is the non-partisan organization charged with evaluating the budgetary and economic impact of legislation for the U.S. Congress. The CBO provides reports on specific legislation, as well as overall analyses of the budget and economy. For example, the annual "CBO Budget and Economic Outlook" covers recent historical information as well as revenue, expense, deficit, and debt projections for a ten-year forecast period. It also includes economic projections, as budgetary results are related to economic results. The CBO provides a "current law baseline" which assumes current laws are executed as written (e.g., tax cuts expire at the date legislated), as well as "current policy baselines" which assume current policies continue indefinitely. It also provides historical information in supplemental tables. Since the federal budget and economic variables are so large (trillions of dollars), CBO also measures many key variables relative to the GDP, a measure of the size of the economy. CBO uses an array of graphics to help explain their analyses, several examples of which are included in this article. CBO evaluates each fiscal year (FY), which runs October 1 to September 30.
For example, the CBO and Treasury Departments reported that: Federal spending increased significantly from $3.0 trillion in FY2008 to $3.5 trillion in FY2009, the last fiscal year budgeted by President Bush, which overlapped with President Obama's first year in office. This increase was primarily due to the Great Recession, which significantly increased automatic stabilizer spending (e.g., unemployment compensation, food stamps, and disability payments) which are made to eligible parties, without any legislative action.CBO – The Effects of Automatic Stabilizers on the Federal Budget as of 2013. Retrieved October 12, 2016 Spending then roughly stabilized at that dollar level for the remainder of his two terms. During 2015, the U.S. federal government spent $3.7 trillion, around the historical average relative to the size of the economy at 20.7% GDP. Projecting 2008 federal spending forward at the historical 5% rate, by 2015 it was $500 billion below trend. Revenue fell from $2.5 trillion in FY 2008 to $2.1 trillion in 2009, roughly $400 billion or 20%, as economic activity slowed due to the Great Recession. Measured as a % GDP, revenue in 2009 was the lowest in 50 years at 14.6% GDP. Revenue then began to recover as the economy did, returning to the historical average of 17.4% GDP by 2014. The budget deficit reached 10.8% GDP in 2009 in the depths of the recession, before steadily recovering to 2.5% GDP by 2015, below the historical average (1970–2015) of 2.8% GDP. The national debt increased from $10.0 trillion in September 2008 to $19.6 trillion in September 2016. Roughly $3 trillion of this increase was anticipated in the January 2009 CBO baseline forecast, or $6–8 trillion adjusting for the extension of the Bush tax cuts and other baseline overrides typically legislated. Obama ultimately extended the Bush tax cuts for approximately 98% of taxpayers as part of the American Taxpayer Relief Act of 2012, allowing taxes to rise on the top 1–2% of income earners. The debt held by the public (which excludes intra-governmental liabilities like the Social Security Trust Fund) rose from around 36% GDP in 2009 to 76% GDP by 2016, the highest level except for the post World War 2 era, mainly due to the economic impact of the Great Recession and the extension of the Bush tax cuts.
The CBO also provides a long term forecast (30 years) as part of their "CBO Long-Term Budget Outlook" annual report. Over the longer-term, the U.S. faces budgetary challenges primarily related to an aging population, along with healthcare costs growing faster than inflation, which are increasing the spending relative to GDP for mandatory programs such as Social Security and Medicare. Under current law, future deficits driven primarily by these programs are expected to drive larger amounts of debt and interest payments, particularly as interest rates return to more normal levels from the unusually low levels during the aftermath of the Great Recession. For example, Social Security spending relative to GDP is expected to rise from 4.9% GDP in 2016 to 6.2% GDP by over the 2027–2036 period; for Medicare, these figures are 3.8% GDP and 5.5% GDP, respectively. Without changes that increase revenues or reduce the rate of spending increases relative to GDP or both, U.S. debt held by the public will rise beyond the 100% GDP level by 2030, a level last seen in the aftermath of World War 2.
Cause of increases in deficits and debt 2001–2011
CBO cause of change analysis Both economic conditions and policy decisions significantly worsened the debt outlook since 2001, when large budget surpluses were forecast for the following decade by the Congressional Budget Office (CBO). In June 2012, CBO summarized the cause of change between its January 2001 estimate of a $5.6 trillion cumulative surplus between 2002 and 2011 and the actual $6.1 trillion cumulative deficit that occurred, an unfavorable "turnaround" or debt increase of $11.7 trillion. Tax cuts and slower-than-expected growth reduced revenues by $6.1 trillion and spending was $5.6 trillion higher. Of this total, the CBO attributes 72% to legislated tax cuts and spending increases and 27% to economic and technical factors. Of the latter, 56% occurred from 2009 to 2011.Bruce Barlett. The Fiscal Legacy of George W. Bush. June 12, 2012. NYT
According to CBO, the difference between the projected and actual debt in 2011 can be largely attributed to: $3.5 trillion – Economic changes (including lower than expected tax revenues and higher safety net spending due to recession) $1.6 trillion – Bush Tax Cuts (EGTRRA and JGTRRA), primarily tax cuts but also some smaller spending increases $1.5 trillion – Increased defense and non-defense discretionary spending $1.4 trillion – Wars in Afghanistan and Iraq $1.4 trillion – Incremental interest due to higher debt balances $0.9 trillion – Obama stimulus and tax cuts (ARRA and Tax Act of 2010)
Similar analyses were reported by the Pew Center in November 2011,Pew Center – 10 Essential Fiscal Charts . Retrieved November 2011 The New York Times in June 2009,NYT. America's Sea of Red Ink was Years in the Making. June 10, 2009 The Washington Post in April 2011Washington Post. Running in the Red. April 28, 2011 and the Center on Budget and Policy Priorities in May 2011.CBPP – Economic Downturn and Bush Policies Continue to Drive Large Projected Deficits. May 2011
Economist Paul Krugman wrote in May 2011: "What happened to the budget surplus the federal government had in 2000? The answer is, three main things. First, there were the Bush tax cuts, which added roughly $2 trillion to the national debt over the last decade. Second, there were the wars in Iraq and Afghanistan, which added an additional $1.1 trillion or so. And third was the Great Recession, which led both to a collapse in revenue and to a sharp rise in spending on unemployment insurance and other safety-net programs."Krugman, Paul. The Unwisdom of Elites. The New York Times. May 9, 2011. A Bloomberg analysis in May 2011 attributed $2.0 trillion of the $9.3 trillion of public debt (20%) to additional military and intelligence spending since September 2001, plus another $45 billion annually in interest.Bloomberg. Bin Laden Exacts Multitrillion-Dollar Toll on U.S. Taxpayer. May 12, 2011
What deficit trajectory did President Obama "inherit"?