In Fiscal Year 2010, the Federal Government spent $3.721 trillion dollars. Federal revenue from all sources was only $2.165 trillion dollars, for a deficit of $1.556 trillion. Put another way, in 2010 the government collected enough tax to cover 58% of its spending.
The federal deficit is currently $15.1 trillion. That means the United States has funded over four times 2010 spending levels by issuing debt. Since GDP for the US was only $14.5 trillion, directing every cent of national productivity for a year toward deficit reduction (a clearly ridiculous proposal) would not pay off the federal debt.
There are ultimately three components of the debt situation. The elephant in the room is the entitlements including Social Security, Medicare, and Medicaid. They represented $2.009 trillion, or 54% of government spending in 2010. As baby boomers continue to retire, this number will balloon, that is unless these previously untouchable promises are trimmed. Trimming seems unlikely, as Obamacare goes on-line in later in the decade and promises to add hundreds of billions of dollars to entitlement spend.
Discretionary spending amounted to $1.378 trillion in 2010. National defense accounted for almost half of that at $0.664 trillion. No other department accounted for more than $79 billion.
Finally, revenues (aka taxes) provide $2.165 trillion to the federal government. In 2011, congress and President Obama enacted a payroll tax holiday that are expected to reduce payroll taxes by $111 billion in 2011; at this moment there is debate on extending this tax cut into future years.
Ultimately, debt must be repaid. While many borrowers take advantage of revolving credit accounts, lenders only extend them to borrowers whose financial statements show high likelihood of paying them back. We don’t need to pay off $15 trillion in debt, but we do need to stabilize our borrowing as a sustainable percent of GDP according to normal lending standards. In the long run, I would expect that a balanced budget each year is not necessary, but over time expenditures must equal tax receipts.
When you look at the numbers, there are a few conclusions that are easy to reach:
1) The tax increases required to solve this problem would need to be massive.
2) Americans would not opt for an increase in Federal Taxes in excess of 40% required to pay for spending; therefore Social Security, Medicare, Medicaid, and Obamacare benefits must be reduced.
3) Normal spending cuts simply cannot close the gap. Our deficit last year exceeded the total outlays for discretionary spending.
While the picture looks pretty bleak, I do have some good news. Tax receipts were down in 2010 because of the rotten Obamaconomy. It’s not ridiculous to expect that receipts could quickly rebound to 2008 levels of $2.7 trillion. However, we would still need to find a way to stem the tide of entitlements, cut discretionary spending, and/or increase tax rates to fill the gap between spending and tax receipts.
I believe all three options must be taken. I would love to see some sort of grand bargain along these lines:
1) Stem entitlement spending by:
a) raising the age for Social Security eligibility to 70
b) revamping Medicare into a program that provides more of a defined contribution for all except the most indigent Americans
c) repealing Obamacare
d) reducing unemployment compensation eligibility down from 99 weeks to 26 weeks
2) Significantly cut discretionary spending, including national defense. There is no reason that the defense department shouldn’t be able to cut spending by 10-20% as the Iraq and Afghanistan wars end. Additionally, multiple federal departments need to be eliminated or dramatically reduced. I would like to see $100 billion reduction in defense and $100 billion from elimination/downsizing of other departments
3) We cannot stabilize the budget unless taxes increase. I would sunset the payroll tax holiday and the Bush/Obama tax cuts. This could add $300-$400 billion in annual revenue. This would raise taxes on all taxpayers, something Republicans have opposed. However, as many Democrats have said, during the 1990’s these tax rates still allowed for a robust economy. I stress that I wouldn’t accept a piecemeal package that only includes tax increases, this must be tied to spending cuts and entitlement reform.
4) I would tie these to a balanced budget amendment requiring that federal budgets limit spending to no more than 103% of previous years revenue by 2020.
It is not too late to solve this problem. Hopefully, by targeting everyone's sacred cows, we could achieve a solution that really represents the ideal of shared sacrifice for the greater good. If we don't, we face a day of reckoning that will prevent our children and grandchildren from maintaining the standard of living that we now share.