Federal Budget 101, Part 3 of 5: Expenditures
Federal Budget 101, Part 3 of 5: Expenditures
Understanding the Federal Budget: The Process, Revenue, Expenditures, Deficits
Part 3 in a 5-part Series: Expenditures
Not all government spending is created equal.
From a political standpoint, some types of spending are popular, and some types of spending have a bad reputation. Often, the difference between popular and unpopular types of spending is a partisan issue. Politicians have their pet projects, but politicians also often get elected and maintain power through rants against “wasteful” spending, or spending for programs that are unpopular with the groups of people the politicians are courting. Often, political rhetoric influences which types of programs become unpopular and considered “wasteful”.
From an economic standpoint, some types of federal spending produces a higher return on investment to Americans than others. Generally, this has little relation to the distinction between politically popular and unpopular projects.
In terms of the budget process, there is a legal distinction between types of government spending. Some spending is discretionary, while other spending is mandatory. As you can see in the pie chart below, discretionary spending accounts for 29% of President Obama’s proposed fiscal year 2015 budget. Mandatory spending accounts for 65% of the budget; the other 6% is interest on the federal debt.
Discretionary spending must go through an appropriations process each year. You can think of it in terms of money that won’t get spent unless it is included in the final budget. In other words, it doesn’t renew from one year to the next.
Mandatory spending is spending that is mandated by current law. It doesn’t require an appropriations process in order to get into the budget. You can think of it in terms of being money that must be spent, according to law, independently of the budget process. It does renew from one year to the next. As you can see from the pie chart above, mandatory spending comprises the largest share of the federal budget.
The distinction between discretionary spending and mandatory spending is important to understand when looking at the overall budget. A pie chart for the overall budget is simply a combination of discretionary spending and mandatory spending. But if you look at discretionary spending and mandatory spending through separate pie charts, you would probably be able to have a better understanding of the budgetary impact of each category of government expenditures.
People tend to view the budget in terms of looking for areas where cuts can (or should) be made. With that in mind, before looking at separate discretionary, mandatory, and total spending pie charts, take note of these relevant numbers:
- Total projected revenue per president’s proposed budget for fiscal year 2015: $3.3 trillion
- Total projected expenditures per president’s proposed budget: $3.9 trillion
- Total projected discretionary spending per president’s proposed budget: $1.16 trillion
- Total projected mandatory spending per president’s proposed budget: $2.56 trillion
- Interest on debt: $252 billion (that’s $0.252 trillion)
- Projected budget deficit per president’s proposed 2015 budget: $561 billion ($0.561 trillion)
[Note: revenue and spending numbers do not balance due to rounding]
The pie chart above shows how the president’s proposed $1.16 trillion discretionary spending looks when broken down into various categories. Note that while military spending accounts for 55% of the $1.16 trillion, no other category is larger than 6% (which would be about $70 billion).
The above pie chart shows how the president’s proposed $2.56 trillion mandatory spending looks when broken down into various categories.
I mentioned that mandatory spending is spending that is mandated by law. You might be asking: if it is mandated by law, how does it fit into budget negotiations?
In general, these are items that are known as “entitlements”. Current law specifies a process for these payments, but does not specify a total dollar amount. The actual amount of expenditures will be determined by the process established by law, economic conditions, and changes in demographics. For example, the amount paid for unemployment benefits tends to increase when the economy is in a recession. The amount paid for Social Security benefits has been increasing as more baby-boomers reach retirement age.
Politicians who are determined to show voters that they are budget-conscious are always looking for ways to cut the budget. We’ve already seen the breakdown for discretionary spending. Most of those numbers have been scrutinized, year after year, by politicians looking for areas to cut spending. But with mandatory spending being a much larger share of the overall budget, politicians are increasingly looking towards mandatory spending as a place to make cuts.
How can lawmakers cut something that is mandatory? They do so by changing the details in the laws. After all, they are the ones who make law. They can change the conditions that determine the eligibility for benefits, and they can change the amount of benefits.
In other words, they cut benefits.
The process for cutting benefits can be rather complicated. These are entitlements. Entitlements are simply payments that people are entitled to. For the most part, entitlements are payments made from funds that future beneficiaries pay into so that they can receive the money when the law says they are entitled to it. The payments into these trust funds are made for the express purpose of making benefit payments at the time that people are entitled to them. This is money that people pay into for this express purpose. It is not money that comes from the general fund, paid for with income tax receipts. For beneficiaries, this is their money; they paid it so that they could get it back when they need it. Cutting benefits for these people in order to balance a budget that is mostly unrelated can be very unpopular, and rightly so.
In order to cut benefits for popular programs, politicians often use rhetoric designed to make these programs less popular. They use rhetorical statements in order to turn the word “entitlements” into something that people can be against. Instead of saying that entitlements are trust funds that beneficiaries have paid into, they imply that entitlements are something that people feel “entitled to” because they are lazy moochers who want to live off the hard work of taxpayers. They say that the taxpayers cannot afford to pay full benefits, even though the money comes from dedicated funds instead of income taxes. They raise the retirement age in order to decrease Social Security benefits. They change the formula for determining the amount of benefits, for the purpose of decreasing benefit payments as part of the government’s overall budget process.
Many politicians are repeatedly making statements along the lines of “entitlements are getting out of hand – we simply have to cut entitlements or the country will go broke”.
You should be able to see some problems with this process for cutting mandatory spending, or entitlements. This is money held in separate trust funds, largely financed by direct payments into these funds by the people who will expect the funds to pay them certain benefits. Yet these funds are part of the general budget negotiations. They are large funds, as indicated by the fact that they account for 65% of the entire federal budget. They are easy prey for politicians who are looking for ways to cut government spending. It is easy to see why so many people blame the government for “raiding Social Security”.
The pie chart above shows the break down for total spending in President Obama’s fiscal year 2015 proposed budget. This is merely a combination of the discretionary spending and mandatory spending pie charts.
Next up: Part 4: Putting Revenue and Expenses Together to Form a Budget
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