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The budget and economic outlook

The budget and economic outlook

Revenue and Expenditure

            Expenditures or outlays are payments by the government in fulfillment of an obligation. The two major categories under government expenditures are: Mandatory spending and Discretionary spending. It is estimated by the Congressional Budget Office (CBO) that total outlays will increase by $80 billion, or 3.0 percent, this year, reaching over $2.7 trillion. Outlays are expected to reach 19.9 percent of GDP in 2007—down from 20.3 percent last year.

            Outlays for mandatory programs are projected to reach almost $1.6 trillion in 2008, with nearly 80 percent alocated for Medicare, Medicaid, and Social Security. Based on CBO’s latest baseline projections, total discretionary outlays will increase at an average rate of 2.5 percent annually, from over $1.1 trillion next year to almost $1.4 trillion in 2017.

            Government or federal revenues are collections that are accrued from the Government’s exercise of its sovereign power to tax or otherwise compel payment and from gifts of money to the Government. The two major categories under government revenues are: Individual Income Tax and Corporate Income Tax.

            It is projected that individual income tax receipts as a share of GDP will increase from 8.5 percent this year to 10.7 percent in 2017. With reference to the size of the economy, they are expected to rise in 2008, stabilize through 2010, and increase every year thereafter.

            After increasing sharply for the past four years, revenues from corporate income taxes are projected to decrease gradually compared to the size of the economy over the next 10 years: from 2.7 percent in 2007 to 1.9 percent by 2017.

            CBO estimates that, as a percentage of GDP, growth in individual income tax receipts will be offset by decreases in corporate income tax receipts and by lower receipts from estate and gift taxes and excise taxes.

National Debt and Interest Payment Outlays

            The national debt is composed of debt issued by the Treasury and debt securities issued by other federal agencies. National debt is held either by the public (that is, private investors) or in government accounts. About 42% of national debt is currently being held in various government accounts. The rest of the national debt is held by the public (foreign and domestic), including individuals, pension funds, banks, and other investors.

            Net interest payments are part of gross interest payments that forms part of a transfer of funds or real resources from the government to the public. CBO has estimated that national debt will reach the current limit of $8.965 trillion during the last calendar quarter of 2007. Furthermore, net interest costs are projected to rise from $253 billion in 2008 to a peak of $292 billion in 2012, an average annual increase of 3.7 percent. After 2012, net interest is estimated to fall—by an average rate of 1.0 percent a year—to $278 billion in 2017.

It also projected that outlays for net interest payments will increase by 3.9 percent in 2007 to a total of $235 billion, which is a figure that equals nearly 9 percent of total spending. Almost all of this year’s increase in net interest payments is attributable to rising short-term interest rates and the growth in the amount of federal debt held by the public.

            The sharp increases in the national debt and net interest payments being projected by the CBO, reaching limits set by budgeting standards, is indeed a cause for concern. More so, of the three broad categories of federal spending (i.e., mandatory spending, discretionary spending, and net interest payments), the only category that cannot be reduced by legislative action is net interest payments. Thus, Congress, being the representative of the people has very limited power to reduce net interest payments. Therefore, such sharp increase in the national debt and the net interest payments would naturally cause a genuine concern for citizens, more particularly the taxpayers.

Major Budget Concerns in the Long Run

            In the long run, the US is expected to face a challenging fiscal scenario, despite some short run budget gains. Health care spending is expected to place a significant burden on the fiscal position of the country as its rates of growth increases. CBO reports that the “future rates of growth for the government’s major health care programs—Medicare and Medicaid—will be the primary determinant of the nation’s long-term fiscal balance”(CBO, 2007).

            Healthcare spending is expected to be the source of uncertainty in the fiscal position of the nation. On a per capita basis, beneficiary costs covered by Medicare and Medicaid have rapidly increased faster by 2.5 percentage points per year over the past 40 years when compared to the annual GDP. It is projected that healthcare spending concentrated on Medicare and Medicaid alone would drastically increase from 4.6 percent of GDP in 2007 to about 20 percent by 2050 if such rapid trend of increase in beneficiary cost continue.

            Furthermore, CBO foresees that:

“Even if health care costs grow 2.0 percentage points above per capita GDP—a rate consistent with that experienced in Medicare and Medicaid over the past 15 years—the share of GDP absorbed by the two major health care programs would reach 17 percent of the economy by the middle of the century. (At a rate of growth of 1.0 percent above per capita GDP, the share of those programs would be about 11 percent of GDP by 2050.) However, if the costs to the federal government of the two health care programs grew at the same rate as income—an assumption that isolates just the effects of demographic changes on the programs—the growth in  spending by 2050 would be much smaller, rising to only about 7 percent of GDP”.

            This highlights the importance of managing the growth rate of health care costs, using per capita income as a point of reference rather the aging of the population. In other words, the management of healthcare spending will determine the future budget outlook of the nation.

            However, the impact of aging of population on the budget can not be totally dismissed as it has considerable bearing on Social Security. CBO estimates that:

“Social Security spending will rise from its current level of 4.2 percent of GDP in 2007 to 6.4 percent of GDP in 2050, an increase of 50 percent. If tax revenues as a share of GDP remain at historical levels (about 18.2 percent of GDP), additional  pending for Medicare, Medicaid, and Social Security will eventually cause future budget deficits to become unsustainable. Even if revenues follow the path projected under current law and rise to about 24 percent of GDP by 2050, budgetary pressures would increase significantly. “

Recommendations

            In order to sustain the fiscal gains in the long-run, the government must be able ensure fiscal stability in the economy of the US through the national budget. To achieve such objective in the coming decades, the government must adopt a combination of fiscal strategies that will further minimize the growth of spending and increase the level of taxes as a share of the economy.

            One crucial spending area where the government must effectively and efficiently manage is healthcare spending, as it puts tremendous pressure on the viability of country’s budget in the future. Policy changes must be adopted to reduce the cost of healthcare, complemented by policies that will manage the expansion of elderly population.

            Ultimately, significant reductions in the projected growth of spending, a reliable  increase in taxes as a percentage of the economy, or some combination of changes in policies for spending and revenues is indeed a  necessary ingredient in  achieving fiscal stability in the long run. These policy changes would certainly have some effect on the economy, although it will probably be less than the costs of allowing deficits to grow to unsustainable levels.

Works Cited

“The Budget and Economic Outlook: An Update”.  Congressional Budget Office.  The Congress of the                 United States. August 2007.  < http://www.cbo.gov/ftpdocs/85xx/doc8565/08-23-      Update07.pdf>

 

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