Question

1. Does the US Government have a spending problem, a revenue problem or both? Why or Why not?
2. Let's look at spending...what is the breakdown of the federal budget (where does the money go)? What proportion is discretionary vs. non-discretionary? Where is the majority of the spending growth taken place?

Answer 1

They have a spending problem as their expenditure is always greater then what they earn. Even if they manage to increase their earnings which they do via increase in taxes, their expenditure always turns out be greater and they run a deficit. Their mandatory spending is very high making up 12.9% of GDP in 2019, while only 16.3% of GDP is earned through revenues. Additionally the government has always intervened and spent on immediate consumption, against spending on income generating measures such as capital expenditure and long term investment, which slows down the level of GDP which leads to less revenue generation and thus higher expenditure.

According to the 2019 federal budget, Mandatory expenditure makes up 12.9% of the GDP which consists of spending on social security 4.9% of GDP, Medicare 3% of GDP, Medicaid 1.9% of GDP and other expenditure at 3% of GDP. Other major component is

Discretionary spend: which is 6.3% of GDP; with defense at 3.2% of GDP and non defense at 3.1% of GDP

Thus out of the total $4.4trillion expenditure, Discretionary spend makes up $1.3 trillion which is 30% of total expenditure. While the rest 70% makes up mandatory expenditure and interest payments.

Majority of the spending growth has taken place in mandatory outlays with increase in expenditure on healthcare over the years.

Source: 2019 CBO budget infographic.