Policymakers can further address the nation’s long-term fiscal challenges only if they acknowledge the need for more revenues. Trying to address those challenges solely by holding total federal spending to historical levels, as some policymakers and pundits advocate, would require unacceptable cuts in Social Security, Medicare and a host of other vital government functions that enjoy broad public support.
As my Center on Budget and Policy Priorities colleague Paul Van de Water has explained, fundamental changes in society and government make the spending levels of the past inapplicable for the future. They include the aging of the population, substantial increases in health care costs and new federal responsibilities in areas such as homeland security, veterans’ health care, prescription drug coverage for seniors and, most recently, health coverage for tens of millions more Americans.
The share of Americans aged 65 and older will grow by more than half over the next 25 years, and increases in per-person health costs in both the public and private sectors will raise the cost of longstanding federal commitments to seniors and people with disabilities. Together, these factors will drive up spending for the three largest domestic programs: Medicare, Medicaid, and Social Security.
Federal responsibilities have grown as well since the budget was last in balance at the beginning of the George W. Bush administration. They include defense and homeland security after September 11, 2001; aid to Iraq and Afghanistan veterans, many of whom — especially those disabled in the wars — will need health care and income support for decades; the Medicare prescription drug benefit, which President Bush and Congress added to Medicare in 2003 without offsetting the costs; and the Affordable Care Act, which boosts spending (although it does not add to the deficit).
As the chart shows, nearly two-thirds of federal spending last year went to defense (19 percent), Social Security (24 percent), and the major health programs (22 percent, almost two-thirds of it on Medicare). Affordable Care Act subsidies will add to the health share starting this year. The rest went to interest on the debt; safety net programs like SNAP (formerly food stamps) and unemployment insurance that aid individuals and families facing hardship; benefits for federal retirees and veterans; and finally, a broad set of public services that includes environmental protection, education, job training, border security, science and medical research, transportation, economic development, law enforcement and international assistance.
In the decades to come, spending on the big four health programs will rise both as a share of the budget and as a share of gross domestic product, Social Security will rise only gradually for two decades but then level off, and, in total, all other program spending will fall sharply, according to CBPP’s latest long-term projections of spending and revenues under current budget policies (see chart at right).
Projected non-interest (primary) spending will nearly equal projected revenue in 2040. The gap between total spending and revenues, however, is larger, due to interest payments on the debt from unfinanced tax cuts and wars and then, after 2007, the Great Recession and the temporary measures enacted to combat it.
To be sure, policymakers can find some savings on the spending side. But we can’t close the budget gap simply by eliminating “waste, fraud, and abuse.” Besides, policymakers have already cut quite of bit of spending in recent years. The reduction in projected “other primary spending” in the chart comes from significant cuts in government services across a broad range of government programs due to sequestration and other aspects of current budget policies. Further cuts would reduce the quantity and quality of government services even more. Similarly, cuts to Social Security and the health programs will mean real cuts in promised benefits.
In future budget action, policymakers should balance the benefits of preserving spending that we value against the costs of raising taxes. They shouldn’t try to squeeze spending into some arbitrary limit that’s based on spending and revenue patterns from the past that don’t fit the needs of the future.