A small share of federal spending is for direct provision of
domestic government services, which many people may think of when
considering federal spending. Since this spending is normally about
10% of total federal spending and about 2% of GDP and deficits
excluding interest are projected to be as much as 7.7% of GDP by
2037, cutting this type of spending can make only a limited
contribution. Transfers and payments to persons and state and local
governments constitute most of federal spending, about 70%. Defense
spending, currently accounting for about 20% of spending, has
declined over the past 35 years, but also tends to vary depending,
in part, on the presence and magnitude of international conflicts.
Until the recent recession, most types of nondefense spending have
been constant or declining as a percentage of output, but spending
for the elderly and health care has been rising. Although some
increase in the debt can be attributed to the Bush tax cuts and the
conflicts in Iraq and Afghanistan, along with growth in spending on
the elderly and health care, the current debt level is not the
result of prolonged and significant past deficits. Debt grew during
the recession and its aftermath. Federal debt held by the public
had actually declined from almost 50% of GDP in 1993 to 33% in
2001; it rose slightly to 36% by 2007. During the three
recession/recovery years (2008 through 2010), it rose to 62%, and
is projected to continue to grow somewhat, before stabilizing for a
while. The problem with the debt is due to growth in spending for
health care and Social Security if current policies continue. In
addition, much of the pressure on future spending arises from
imbalances in Social Security and Medicare A (Hospital Insurance)
trust funds; thus, keeping these funds and their financing sources
intact is an objective that could constrain choices. Because
contributions from discretionary spending appear inadequate to
reduce the deficit to a sustainable level, limiting taxes as a
percentage of output or constraining the overall size of the
government to current levels would likely require significant cuts
in mandatory spending, which includes entitlement programs such as
Social Security, Medicare, and Medicaid. Preserving entitlements
would eventually require increases in taxes; by one projection the
difference between spending on Social Security plus health and
taxes leaves less than 2% of GDP for all discretionary and other
mandatory spending. Options include allowing the Bush tax cuts to
expire, reducing tax expenditures, increasing other taxes, or
introducing new revenue sources. Tax expenditures may be difficult
to eliminate, but if not used to lower rates they may be a source
of additional revenue. Addressing the eventual Social Security
trust fund shortfall largely with tax increases would smooth
burdens of accommodating longer lives across both working and
retirement years. This argument might also apply, in part, to
Medicare and Medicaid. Because the federal government provides
about a fifth of the revenue for state and local governments,
cutbacks in transfers to these governments may, in part, shift the
burden of providing services from the national to subnational
governments, rather than altering the overall size of government
services.
General
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