Q & A on the Federal Budget Deficit
Mar 24, 2009
Trillions and Trillions – Isn’t That a Lot of Money?
The United States currently faces the largest deficit in its history — more than $1.7 trillion according to the Congressional Budget Office. This deficit is primarily due to the large tax cuts adopted since 2001, the huge amount of government spending on two wars, and the stimulus and recovery packages. Because the economy is so slow right now, the deficit is also at a historic level (12%) compared to the gross domestic product (GDP).
What is a budget deficit?
It’s the difference between what the government brings in (through taxes and other revenue) and what it spends during a fiscal year. The government borrows money to make up the difference; the borrowed money adds to the national debt.
Should I be worried about the size of the U.S. budget deficit?
Deficit spending is resolved primarily by economic growth. When more people have jobs and more businesses are healthy, they generate tax revenues that support federal and state budgets. They also reduce the level of federal government assistance needed by individuals and states.
Investing in economic growth during an economic downturn is a smart fiscal move. In its analysis of the administration’s plan, the Congressional Budget Office shows deficit spending leveling off at about 4 percent of GDP by 2012.
Does President Obama intend to cut federal spending to reduce the deficit?
In addition to investing in growth, President Barack Obama and his financial team have already identified more than $2 trillion that can be cut from the budget over the next decade by making tax laws more equitable, introducing efficiencies, and ending programs that don’t perform. Here are some examples of estimated savings over the next 10 years.
- Save $354 billion by eliminating certain tax loopholes for large businesses.
- Allow tax cuts that benefit the wealthiest one and two percent of taxpayers to expire, recovering $318 billion.
- Promote a market-based cap on carbon emissions, which would raise at least $646 billion. The “cap and trade” proposal is the leading contender for this program; FCNL prefers a carbon tax, a quicker and simpler way to reduce carbon emissions. (See FCNL’s February 2009 Washington Newsletter.)
- Obama’s plan to withdraw troops from Iraq, even as the United States escalates operations in Afghanistan, will save $1.5 trillion over the next 10 years.
Is reducing the military budget part of Obama’s plan for reducing the deficit?
Obama plans to save money by withdrawing troops from Iraq, and he has committed to reform military contracting and eliminate unnecessary weapons programs. Yet his recent budget proposal includes a small increase in the Pentagon’s budget, and he is not expected to decrease overall military spending in the near term. Rep. Barney Frank (MA) is seeking to build support in Congress and the White House for his proposal to reduce the military budget by 25 percent.
What about health care costs? I've heard that they are one of the reasons the deficit is increasing.
The rising cost of health care, which the federal government pays in Medicare, Medicaid, federal employee, veterans’ and other military programs, exerts the strongest upward pressure on government spending. Obama has proposed some adjustments to Medicare and Medicaid in the short term to lower costs and increase efficiency as well as comprehensive health care reform in the long term so that special health care programs are no longer necessary. His budget identifies an income stream that would collect $630 billion to create a structure for a universal health care plan.
Pie chart from the Center on Budget and Policy Priorities