Earlier today, Calculated Risk blogger Bill McBride posted a great, straightforward analysis showing how, as a percentage of GDP, federal revenues fell during the recession and federal expenditures increased.

See: Thoughts on the Budget Deficit

As McBride notes in the post: “The bottom line is this is all very solvable.”

I’ll be making periodic posts here in the coming weeks about the current federal deficit and debt, but there’s no rocket science. We need to encourage continued economic growth, which will help correct the current imbalance between revenues and outlays. At the same time, we need some cuts and revenue increases that pull the lines in the following graph closer together, near a sustainable level of about 21 percent of GDP:

RevenueOutlays

So for the rest of this post, I’ll just take a quick look at the outlays in that graph.

WhereOurTaxDollarsGo-f1_rev9-6-12The graphic here is from the Center on Budget and Policy Priorities’ Policy Basics: Where Do Our Federal Tax Dollars Go?

So here’s my question for those who complain about out-of-control federal spending: Where do you want to cut?

I think we could actually cut quite a lot, but the American people broadly support the vast majority of existing spending.

There’s some evidence that the pace of health care spending — including Medicare — has slowed since the recession, but it’s still increasing faster than the pace of inflation. That’s where our biggest problem lies for the future, especially given the aging of the population.

Even if we find ways to restrain Social Security spending, it will still take a huge bite out of the budget because of the aging population. Still, moderate changes to Social Security taxation or benefits could keep Social Security more or less intact for decades.

Of the major expenditures in the budget, defense seems the most logical to cut. After all, in 2011, we spent more on the military than the next 13 nations combined.

And what about those safety net programs that eat up 13 percent?

From the CBPP:

About 13 percent of the federal budget in 2011, or $466 billion, went to support programs that provide aid (other than health insurance or Social Security benefits) to individuals and families facing hardship. Spending on safety net programs declined in both nominal and real terms between 2010 and 2011 as the economy continued to improve and initiatives funded by the 2009 Recovery Act began to expire.

These programs include: the refundable portion of the earned-income and child tax credits, which assist low- and moderate-income working families through the tax code; programs that provide cash payments to eligible individuals or households, including Supplemental Security Income for the elderly or disabled poor and unemployment insurance; various forms of in-kind assistance for low-income families and individuals, including food stamps, school meals, low-income housing assistance, child-care assistance, and assistance in meeting home energy bills; and various other programs such as those that aid abused and neglected children.

Even if we somehow found a way to cut those programs and tax credits by 20 percent (a big cut), we’d still see about 10 percent of the federal budget devoted to that general sector. I don’t think Americans would stand for cuts deeper than that — and probably not even that much.

We can restrain salary increases, we can do our best to root out fraud, we can trim a bit here or there.

But any serious cuts to federal spending require going after defense, Social Security, or Medicare and Medicaid.

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One Response to What do our federal taxes get spent on?

  1. […] To put it simply, we don’t have enough money coming in right now to pay for all the spending that Congress has authorized. The bulk of that spending falls in a few key areas: Social Security, Medicare and Medicaid, and defense. I used the following image in another recent post, What do our federal taxes get spent on?: […]