Mastering the Federal Budget

Did you know you could master the federal budget in under ten minutes? One function of a data analyst is to take a large amount of data and distill it to a few important points so decisions can be made quickly and accurately. All we have to do to get you ready for your ten minutes is to make one assumption — we will have a balanced budget. Later we can relax that assumption, but for now, let’s assume spending must equal revenue. All figures that follow are from the 2014 budget and are shown in billions of dollars..

Table 1. Income Sources
Source Dollars
Individuals $1,380
Payroll 1,020
Corporate 330
Miscellaneous 150
Excise 90
Customs 30
All Sources $3,000

Let’s start with tax revenues. There are only six sources of revenue and there are a couple of terms you should learn. First the combination of individual taxes and corporate taxes is called federal funds. These are designed to be specifically for discretionary spending. Just keep that in mind for now; we’ll define that soon.

Take a look at payroll taxes. These are also called trust funds and have been designed specifically to fund the trust accounts like Social Security and Medicare. The rest of the income sources are small and would complicate the analysis. For now, you should keep track of two items — federal funds and trust funds.

Tabe 2. Expenditures
Type Dollars
Mandatory $2,432
Interest 228
Subtotal $2,660
Discretionary 1,140
All Spending $3,800

When we move into the spending categories, this is where things get simpler and the time saved from the analysis comes significantly into play. There are only three basic types of spending. Mandatory spending is by far the largest. All of the programs that get funded within the mandatory spending category are earned-benefit programs. That is, recipients have earned a benefit by participation in the program or through eligibility requirements determined by Congressional oversight. These programs include Social Security, Medicare, and SNAP. The combination of Social Security and Medicare expenditures are 87% of Mandatory spending. The remaining 13% are for programs with eligibility requirements.

Notice that mandatory spending should be funded from trust funds. Yet the revenue from trust funds doesn’t cover the mandatory spending. That means federal funds must be allocated to cover the remaining mandatory spending.

The second category is simply labeled Interest in Table 2, but the full title would be Interest on the Federal Debt. I would maintain this should also be considered Mandatory spending since the continued payment of interest fulfills the “full faith and credit” obligation of the government when it issues debt.

With that, I included a Subtotal line in Table 2. The purpose is so we can compare those required expenses to the income table. You can see that 89% of the income planned is already spent (2,660 / 3,000). The remaining 11% gets allocated to discretionary programs. When you hear talk in the press regarding the Appropriations process, this is the part they are talking about — how to allocate money towards the programs within the discretionary spending category. Unfortunately, that 11% is only 30% of the funds requested by those discretionary programs. While there are currently 21 of these programs, let me list off the top five in order of dollars requested:

  1. Department of Defense
  2. Department of Education
  3. Department of Veteran Affairs
  4. Department of Housing
  5. Department of State

Lower down on this list are programs like the Department of Homeland Security and the Department of the Treasury (which includes the Secret Service). If we want a balanced budget and if we want to make it fair, then all of these programs get 30% of their requested funds. Done! All income is allocated and we have met our assumption.

Alternatively, let’s say we cannot compromise our military and the Department of Defense gets all of its request with the remaining programs getting zero. The DoD’s request of $673 million would put us with a 7% budget deficit. The consequence of fully funding just this one program forces us to cancel our assumption of a balanced budget. Withdrawing our assumption then opens up all kinds of discussion on which programs to fully fund and which ones don’t get fully funded. Our point here is to understand the federal budget and at under 700 words, we are done.

The relaxing of our assumption is why the budget is so contentious. It is also why I think we are hearing less and less about requiring a balanced budget. Projections regarding the budget indicate that by 2025, the Mandatory spending category will consume more than 100% of tax revenues. For now, we cannot afford to fully fund the programs of the Federal government. In about a decade, we won’t even be able to fully fund the earned benefits promised to people earning them today. Our opportunity to solve this problem without significant pain ended twenty years ago. Now we are left without good choices and only have bad choices and disastrous choices. Unfortunately, I’m not sensing any meaningful leadership discussion coming from the Office of the President, the Senate Budget Committee, or the House Budget Committee. What is left is for me to do my little part here by trying to get some understanding through the simplification of the budget so we can tell our leaders they have run out of time to talk about the situation and it is time to make changes that impact our future.

There are a lot of resources available on the internet to learn about the budget and follow developments. I follow Stan Collender, a blogger at Forbes. This analysis was made possible from many pages at nationalpriorities.org.

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Author: dmcnic

Educated as an economist, I now work as an Analytical Professional for a manufacturing firm. I have have a second job as a part-time lecturer at the University of Washington in Bothell. While all baseball interests me, the Mariners are my home town team. Married with one dog.

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