Congress recently averted a government shutdown by passing a stopgap spending bill. But the hard work of adopting a yearlong budget resolution remains.
The President’s budget shows federal revenue, spending, and debt increasing to different degrees, with the annual deficit falling to zero by 2027. The CBO projects similar trends, but with revenue increasing at a slower rate and, therefore, annual deficits continuing.
Who will pay for the revenue increases? Will my taxes increase?
The President’s budget shows annual revenue increasing $1.1 trillion, or 34%, in six years. Revenue growth is forecasted to come primarily from individuals through higher income and payroll taxes. The increase in taxes paid by individuals is driven by assumed growth in their income; the budget projects that annual employee compensation will be 35% higher in 2022 than it was in 2016. Within the budget, any proposed tax reform (e.g. reductions to certain individual income tax rates) is assumed to be deficit neutral, which means that any tax reductions would be paid for by increasing tax revenue or reducing spending elsewhere. In the future, we will publish an analysis of the tax reform proposal.
Budgeted revenue increases exceed revenue decreases. The largest decrease is a $105 billion annual revenue loss associated with repeal of the Affordable Care Act (ACA), which is funded in part by tax revenue.
Though most revenue categories increase in absolute dollars, the share of total federal revenue they represent may not. The share of federal revenue coming from individual income taxes is projected to increase from a historical average of 45% of annual revenue to 51% in 2022, while the share coming from payroll taxes decreases from 36% to 33%, and the share from corporate income taxes decreases from 10% to 9%.
Are revenue and GDP likely to grow as budgeted?
The budgeted revenue growth is tied to assumptions about the health of the US economy, as reflected by gross domestic product (GDP). GDP is a measure of the value of all finished goods produced and services provided in the country during the period. The President’s budget assumes an average annual GDP growth rate of 2.8%, which approximates the historical average, but is higher than the average for recent years.
CBO projects that GDP will grow at an average rate of 1.9% annually, nearly a full percentage point below the rate in the President’s budget. This causes CBO’s projected revenues to be lower, and therefore projected annual deficits to be larger. The difference between 2.8% and 1.9% may seem small, but the difference in dollars of GDP that results in 2022, just six years from now, is $1.1 trillion, about the size of Mexico’s entire economy.
Should the government reduce its spending? If so, for what programs?
The President’s budget shows annual spending increasing $969 billion, or 25%, in six years. The largest increases in spending are for Social Security, interest on the national debt, and Medicare. Proposed spending increases exceed spending reductions; the only proposed reduction that is material to the overall budget is $140 billion in annual savings related to repeal of the Affordable Care Act.
Though most expenditure categories increase in absolute dollars, the share of total federal government expenditures they represent may not. Social Security expenditures increase from a historical average of 21% of annual spending to 25% in 2022; Medicare increases from 10% to 17%; national defense decreases from 20% to 13%; and Medicaid/CHIP (children’s health insurance) increases from 6% to 9%.
Should the budget be balanced? What does the President’s budget mean for our future?
On September 30, 2016, the amount of federal government debt held by the public (excluding accrued interest) totaled $14 trillion, or $43,800 per American. The President’s budget shows overall increases in federal revenue that outpace increases in expenditures, causing the annual deficit to fall to zero by 2027 and the national debt to increase to $19 trillion. CBO projects the annual deficit increases slightly over this same period, causing the national debt to reach $23 trillion in 2027.
For historical comparison, the federal government has spent more than it has taken in every year since 1980, except the four years between 1998 and 2001. These annual deficits have fluctuated, but peaked in 2009 during the Great Recession, and have declined by nearly 60% since, to $585 billion in 2016.
In addition to borrowing from the public to fund its deficits, the federal government also borrows from itself, with certain programs and agencies borrowing funds from other programs and agencies. These funds must be paid back and therefore the total debt that the federal government owes is larger than the debt held by the public, with a total of $20 trillion as of September 30, 2016. This is the debt subject to the debt ceiling, which was also $20 trillion as of September 30, 2016.