The now ended federal government shut-down points to the major problem facing the USA.  There is a great debate over the deficit incurred by the federal government in its budget.  The Democrats believe we can continue to incur higher deficits than our historic average for several more years but even President Obama promises to reduce this in four or five years.  The Republicans argue that we must reduce this deficit sharply now.  

The problem is compounded by the fact that we have not had an authorized federal budget in over five years.  The House has submitted them but the Senate has refused to act on them.  The result is that federal spending has been funded by “continuing resolutions” or “CRs” during this period.  Since CRs fund at present rates of spending and present rates of increase they guarantee that the deficit will continue to be higher than historic levels.  The only brake on increase was the “sequester” adopted in 2011 to gain acceptance for the last CR that expired on Oct 1 of this year.  The sequester simply mandated an across the board cut in increases in federal spending.  It did not reduce spending but rather reduced increase in spending.  So the deficit will continue at higher than historic rates but not as high as unchecked CRs would have allowed.

One would ask why not adopt an authorized annual budget and eliminate all this struggle over CRs?  And this latest agreement for a new CR mandates a Congressional committee to come up with such a proposal.   However, the reality is that there will be no agreement in Congress on an annual budget until the next election alters the current composition of the Congress.  So be prepared for more battles over CRs.

What are the numbers behind the deficits?  Tax revenues for the Feds for the 40 years until 2007 averaged 18.3% of GDP.  However, the Great Recession dramatically reduced this income to 15.4% in 2011 and 15.8% in 2012.  Total revenues in 2012 were $2.45 trillion.  However, total expenditures in 2012 were $3.54 trillion leaving a deficit of $1.09 trillion or 7% of GDP.  This was less than 8.7% in 2011 and 9% in 2010 but still almost three times the historic level of about 3%. 

Going behind these numbers one finds that federal revenues for 2012 were 47% from income taxes, 35% from payroll (social security and medicare) taxes, 10% from taxes on corporations and the balance from a wide variety of income streams.  Meanwhile 2012 federal expenditures were 23% or $802 billion, for Medicare and Medicaid, 22% or $768 billion for Social Security, and 19% or $607 billion for defense and the rest for other expenses with 6% or $223 billion for interest on the federal debt. 

These numbers do reveal another interesting fact.  Health care expenditures now account for the largest expense of the federal government which is the same case for the main EU countries.  Similarly social security or retirement benefits account for the second largest federal expense which is the same for the main EU countries.  In other words we are no less a “nanny state” than is England, France or Germany.

The problem is that while revenues from Medicare and Social Security taxes provided 35% of revenues, these two items accounted for 45% of expenditures.  In short, the two programs are not paying their way from current income.  They do cover the difference from their reserve funds but these are dwindling. 

The Congressional committee called for by this latest CR is expected to look at these realities of the federal budget but no one expects it to come up with a remedy.  All it will do is add some more information to a sobering reality.  No, we will not have an annual budget until after a new Congress is elected and perhaps even after that.  Nor will we see a comprehensive solution to the long term realities until then.