The federal budget—the $4 trillion a year that the U.S. government spends, collects in taxes and borrows—serves several purposes. The budget is a tangible manifestation of national priorities: From whom will the government raise money and on what will it spend? How much for defense, for health care, for highways and so on? The budget is one way the federal government reduces the gap between economic winners and losers that an unfettered market would otherwise produce. And it is a powerful stabilizing force that—sometimes automatically, sometimes with explicit decisions to cut taxes or increase spending—offsets some of the swings in private spending over the business cycle.
The budget also embodies policies that influence how well our children and grandchildren will live. Decisions made today will affect the incomes and well-being of today’s younger Americans and their progeny. How much do we tax today and how much do we borrow? How much do we spend on the young and how much on the elderly? How much do we invest for the future in, say, scientific research and how much do we devote to today’s voters on, say, tax breaks for mortgage interest? This aspect of the federal budget is the focus of this volume.
The thesis of this report is that the American people and their elected representatives focus too little on the long-term implications of budget decisions we make, or avoid making, today. From the way tables are presented in the president’s annual budget, to the dysfunction on Capitol Hill, to the less-than-edifying public debate over spending and taxes, we are fiscally short-sighted. The authors don’t agree on everything. They do agree on that much.
Some experts try to capture the budget future in a single number, often the size of federal debt relative to the size of the gross domestic product (GDP). By this metric, federal debt is higher than at any time in U.S. history, other than in the immediate aftermath of World War II. Withouta course correction, it will keep rising to unprecedented levels. A stable or declining debt/GDP ratio—in other words, federal debt that grows no faster than the overall economy—is a widely shared definition of fiscal sustainability. While there is broad agreement that the U.S. budget is on an unsustainable course, there is little consensus on what level of debt would be truly dangerous.
The federal debt is essentially all the money that has been borrowed over time so that the government was able to spend more than it took in. The budget deficit—the annual gap between spending and revenues—swelled substantially during the Great Recession as revenues fell and spending rose. For four years in a row, deficits exceeded $1 trillion. In 2009, the deficit amounted to 9.8 percent of GDP, more than triple the level of the previous year. Since then the deficit has been shrinking, largely because the economy has recovered, but also because Congress raised taxes and restrained annually appropriated spending.
The fiscal 2016 deficit amounted 3.2 percent of GDP, roughly the 40-year average. But the run of shrinking deficits has ended. When President-elect Trump contemplates the fiscal outlook after the inauguration, the projections will show bigger and bigger deficits over the next decade and beyond, unless Congress and the president act. Without a change in policy, the deficit will again top $1 trillion (around 4 percent of GDP) before the 2024 presidential election. What better time than the opening months of a new administration to take a longer-term look at budget trends?
This report was prepared by a team of budget and fiscal policy experts with extensive experience in the legislative branch, the executive branch, legislative support agencies, the Federal Reserve, international organizations, think tanks, and more. Read the acknowledgements.