The Federal Budget Challenge:  The Elephant No One is Talking About

Yes, remember the federal debt?  It’s currently $14 trillion dollars and growing by roughly $500B per year.  And if the raw numbers don’t scare you enough, a scarier fact is that the federal debt as a percentage of GDP is at its highest level since World War II – approaching 75%.

This was the focus of the CFO Leadership Council’s New Jersey and New York City Chapter meetings in June.  The guest speaker was Robert L. Bixby, Executive Director of The Concord Coalition, a nationwide, non-partisan, grassroots organization advocating generationally responsible fiscal policy. The Concord Coalition was founded in 1992 by the late former Senator Paul Tsongas (D-Mass.), late former Senator Warren Rudman (R-N.H.), and former U.S. Secretary of Commerce Peter Peterson. Former Senator Sam Nunn (D-GA) serves as co-chair of the Concord Coalition.

The Concord Coalition is dedicated to educating the public about the causes and consequences of federal budget deficits, the long-term challenges facing America’s unsustainable entitlement programs, and how to build a sound economy for future generations. The Concord Coalition’s national field staff and loyal group of volunteers cover the country holding lectures, leading interactive exercises, conducting classes, giving media interviews, and briefing elected officials and their staffs.

The presentation given by Mr. Bixby was a real wake-up call that the national debt will be a major issue for the next president.  It’s an issue that we should all demand more discussion about, especially during the campaigns and debates running up to the November 2016 presidential election.  Here are some of the facts presented during the session:

The Federal Debt:  The Elephant

• Federal debt as a % of GDP is at the highest level since WWII – 75%. And it’s projected to double by 2050.
• The FY2015 federal budget deficit was $438B, down from prior years. Interest was $223B, based on borrowing at historically low interest rates.  That will surely change going forward as interest rates are expected to rise.
• The FY2018 budget deficit is expected to be over $500B. Current law is expected to drive the annual deficit to over $1 trillion by 2022.
• Federal spending averages 20% of GDP, while revenue averages 17% of GDP. Going forward, the revenue is expected to stay flat while expenditures are expected to increase.

Spending Breakdown:  What’s Fueling the Elephant

• Mandatory spending and interest has risen to 69% of the budget, whereas discretionary spending is only 31%. Mandatory spending will continue to grow based on demographics (i.e., Social Security, Medicare, Medicaid, federal & military retirement, veterans support, etc.).
• Social Security, Medicare, and Medicaid are 48% of the budget.
• Discretionary defense spending has declined to record low levels – less than 3% of GDP. Non-defense discretionary spending (i.e., education, transportation, R&D, etc.) is tracking to its lowest historic level.
• Interest costs will rise sharply under current law and interest rate expectations, from $250B in 2016 to $500B by 2020, and closer to $800B by 2026.
• The main sources of growth in federal spending include Social Security, Medicaid, Medicare, and interest. All other spending is expected to decrease as a % of GDP.

 The Aging Population:  Hello Baby Boomers

• Population aging is the largest factor in growth of healthcare programs and social security because there are more beneficiaries and more costs per person.
• From 2010 – 2030, the number of people aged 20 – 64 is expected to increase by 8%, while the number of people aged 65 and over will increase 82%.
• The number of workers per retiree has dropped from 50:1 in 1950 to 3:1 in 2015

Entitlements: The Dreaded “Third Rail”

• Social Security benefits are expected to exceed tax revenue by 1.6% of GDP over the long term. The Social Security Trust Fund (which is a credit owed by the Treasury) is projected to be solvent through 2034.
• Federal spending on healthcare (Medicare and Medicaid) is projected to grow from 5% to 9% of GDP. This is mostly driven by the increase in beneficiaries.
• Medicare and Social Security require subsidies from the general fund to remain solvent

Tax Expenditures:  The Hidden Entitlement

• Tax expenditures are more than half of tax revenue for individuals and roughly 50% on the corporate side. Scaling back some exemptions would help increase tax revenue and simplify the tax code.
• The largest tax expenditures include defined benefit plans, employer healthcare, cap gains and interest, home mortgage deduction, earned income credit, state & local taxes, charitable contributions, and others.

Call to Action

The Concord Coalition’s view is that the current fiscal policy is unsustainable.  There are no easy solutions, such as cutting waste, fraud, and abuse, or growing our way out of the problem.  Finding solutions will require bipartisan cooperation and a willingness to discuss all options.  Public engagement and understanding is vital in finding solutions.  This is not about numbers. It’s a moral issue.

Presidential candidates and their campaigns need to acknowledge the problem, prioritize the issues, formulate a plan, and explain how they plan to pay for policy initiatives.  The recommendations of The Concord Coalition are as follows:

• Slow the growth of federal healthcare spending and improve delivery
• Make Social Security sustainable and secure
• Reform and simplify the tax code, reduce exemptions, grow the economy
• Protect critical investments such as infrastructure

To learn more about The Concord Coalition, visit its website and join “The Lookout Campaign,” which is focused on urging voters and candidates to look out for the future and stop kicking the can down the road for our children and grandchildren to deal with.