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Noteworthy Contours of Federal Spending

Tue, Feb 9 2010, 23:06 GMT
by Northern Trust Economic Research Department

Northern Trust

Noteworthy Contours of Federal Spending

The Congressional Budget Office's (CBO) projects a federal budget deficit of $1.3 trillion in 2010, if current laws are left unchanged.  The deficit is predicted to decline to $475 billion in 2014 and climb to $687 billion by 2020.  The budget deficit as a percentage of GDP is forecast to hover between 2.6% and 2.7% of GDP during 2014-2018 and advance to 3.0% by 2020.  During the forecast period (2010-2020), revenues are expected to climb to 20.2% of GDP from 14.9% in 2010, while outlays are predicted to be 23.3% of GDP by 2020 from 24.1% in 2010.  This differential trend of outlays compared with revenues warrants a closer understanding because outlays could be cutback to slow the growth rate of deficits in place of raising revenues.  A combination of spending cuts and higher taxes is another alternative, but one that is not a suitable choice given the current economic environment. 

Source: http://www.cbo.gov/ftpdocs/108xx/doc10871/01-26-Outlook.pdf

A starting point to understand the culprits behind the projections of onerous spending is to look at the trend of the major components of outlays.  Federal budget outlays have three major components - mandatory outlays, discretionary outlays, and net interest payments.  Of these three items, net interest payments are the smallest component of outlays, while mandatory and discretionary components make up the two large components.  Mandatory spending, which was nearly 60% of outlays in 2009, is projected to advance by nearly 108% in 2020 in absolute terms and make up about 57% of outlays by 2020.  Among the components of mandatory outlays of the federal budget, Social Security, Medicare, and Medicaid show differing rates of growth.  Social Security expenditures are projected to grow 73% by 2020 and an 83% increase in Medicaid outlays is projected for 2020.  These large increases of the three components suggest that there is room for paring back.  Discretionary spending, which was roughly 35% of total outlays in 2009, is predicted to advance 22.7% by 2020, and account for 29% of outlays.  Net interest expenses are predicted to climb to $723 billion in 2020 from $187 billion in 2009, which amounts to nearly 14% of outlays from 5.3% in 2009.  Here are the broad details of the spending trends that should put in perspective policy discussions in the months ahead. 

Published on  Tue, Feb 9 2010, 23:09 GMT