March 10, 2011
The choices facing the 112th Congress come at a time when the federal government’s debt has increased dramatically in the past few years and when large annual budget deficits are projected to continue indefinitely under current laws or policies. Federal budget deficits will total $7 trillion over the next decade if current laws remain unchanged, CBO projects. If certain policies that are scheduled to expire under current law are extended instead, deficits may be much larger.
Today CBO released Reducing the Deficit: Spending and Revenue Options, which presents more than 100 options for altering federal spending and revenues. As in past reports of this type, the options cover an array of policy areas—from defense to energy to entitlement programs to provisions of the tax code. They come from legislative proposals, various Administrations’ budget proposals, Congressional staff, other government entities, and private groups, among others. The options are intended to reflect a range of possibilities, not a ranking of priorities, and the inclusion or exclusion of a particular policy does not represent an endorsement or a rejection of that policy by CBO.
In recent months, a number of groups and individuals have released plans focused on reducing the deficit. The plans reflect widely varying priorities, with some emphasizing spending cuts and others emphasizing tax increases. The budget options presented in this volume do not constitute a comprehensive plan (although many of the options could be combined into broader plans) but rather a set of discrete policy actions that illustrate ways in which lawmakers could decrease federal spending or increase revenues. The options are grouped into three major budget categories: discretionary spending, mandatory spending, and revenues.
As show in the figure below, nearly 40 percent of federal outlays are labeled “discretionary,” because they stem from authority provided in annual appropriation acts. Spending on defense programs accounted for half of discretionary outlays in 2010, while spending on nondefense activities, such as law enforcement, homeland security, transportation, national parks, disaster relief, scientific research, and foreign aid, accounted for the other half.
Breakdown of Federal Spending in 2010
Because the Congress sets funding for discretionary programs each year, cutting spending through the regular appropriation process can ensure only short-term savings. An approach that has been used in the past to try to ensure longer-term savings is to set overall limits on discretionary spending for future years. Whether lawmakers opt to reduce spending annually or on a multiyear basis, they could choose blunt, across-the-board mechanisms, or they could prioritize spending decisions and make choices about where limited resources should be directed. Such choices would involve difficult trade-offs. About one-third of the 38 discretionary spending options in this report focus on defense spending, while the remaining two-thirds cover a broad array of nondefense programs.
Also known as direct spending, mandatory spending accounts for more than half of federal outlays. The largest mandatory programs are Social Security, Medicare, and Medicaid, which together accounted for nearly three-quarters of mandatory spending in 2010 (see figure below). The Congress generally determines spending for mandatory programs by setting eligibility rules, benefit formulas, and other parameters rather than by appropriating specific amounts each year. Accordingly, to reduce such spending, policymakers might want to modify the automatic indexation of benefits, the populations entitled to benefits, or the federal government’s share of spending for certain programs. Of the 32 options to reduce mandatory spending, about two-thirds deal with spending for health care programs, Social Security, or other retirement programs.
Breakdown of Mandatory Spending in 2010
Federal revenues come from taxes on individual and corporate income, payroll taxes for social insurance programs (such as Social Security and unemployment compensation), excise taxes, estate and gift taxes, remittances from the Federal Reserve System, customs duties, and miscellaneous fees and fines. The two largest sources are individual income taxes and social insurance taxes, which together produce more than 80 percent of the government’s revenues (see figure below). Lawmakers could raise revenues by modifying existing taxes—either by increasing tax rates or by expanding tax bases (the measures on which assessments of tax liabilities are made). Alternatively, they could impose new taxes on income, consumption, or particular activities. All of those approaches—embodied in the 35 options presented in this report—would have consequences not only for the amount of revenue collected but also for economic activity, people’s tax burdens, and the complexity of the tax system.
Breakdown of Revenues in 2010
This volume is the result of work by more than 130 people at CBO. The staff of the Joint Committee on Taxation prepared most of the revenue estimates.