Dollars & Sense October 2013
Q. The recent government shutdown confuses me. They were arguing about raising the debt ceiling and reducing deficits. At least I think they were. Can you explain to me the difference and what the big deal is?
A. I can definitely explain debt and deficits, but I cannot explain our government. Actually, it’s a shame that there isn’t a national dialogue about our government’s annual budget; how much money to raise and from whom, and how much money we want to spend and on what. Maybe it will take a crisis to cut through all the grandstanding and blaming, but there really is a problem that we should all become aware of. My answer herein is just factual, not political. You can do what you want with the data.
Firstly, let’s be clear on deficits and debt. Put simply, the deficit is the current year difference between the total revenue and total expense of the government. In 2013, the U.S. will bring in revenue of about $2.7 trillion and will spend about $3.7 trillion. That results in a $1.0 trillion deficit. The debt is the cumulative amount of deficits over the years and the U.S. now has about $17 trillion in debt, or accumulated deficits. That’s a lot of debt, obviously, even for the U.S. of A.
Let’s look into the annual budget and see where the money comes from (revenue) and where it’s being spent (expenses). It may be surprising to you when you see the actual numbers. Let’s start with that $2.7 trillion revenue number for 2013. 45% comes from individual income taxes, 11% comes from corporate income taxes, 35% comes from social insurance taxes (think social security taxes on your paycheck). To round it off, there is another 9% from “other’. We could delve into any one of these categories for days. For instance, of the 45% that comes from individual taxes, just exactly who is really paying them? Is it the poor, the middle class, or the rich? At the end of the day, or end of year to be more exact, the U.S. brings in $2.7 trillion in revenue. That’s about 17% of our annual GDP of $17 trillion. We should have a conversation about how big “we the people” want our government to be. For the past 15 years, at least, we’ve actually been pretty consistent on revenue, raising between 16% and 20% of GDP each year. So that’s the revenue side of the budget. Let’s move on the expense side of the ledger.
As I said before, spending for 2013 will be about $3.7 trillion, fully $1.0 trillion more than revenue. Whoops. “Where does that go?” you’re hopefully asking. Before I tell you, take some wild guesses, because you’re probably wrong. As a percentage of revenue, here is the breakdown: 32% to pensions (Social Security), 33% to healthcare (Medicare and Medicaid), 32% to Defense. That already adds up to 100% but wait, we’re not done. There’s also: 16% welfare, 4% education (States mostly pay), 3% transportation, 8% interest on our debt, and 7% other. So yes, the U.S. is spending 136% of its revenue and that’s why we have current year budget deficits and accumulated debt. Our accumulated debt is now 106% of our annual GDP. Now that we’ve crossed over the 100% level of debt to GDP, we’ve joined the ranks of Greece (160%), Italy (128%), Portugal (124%) and Ireland (123%).
So like any household would have to do, the U.S. has to raise revenue and/or cut expenses. Where would you cut? No politician is willing to tackle the big 3 expenses (pensions, healthcare, and defense), yet these 3, alone, comprise 100% of revenue. Cutting just the smaller expense items won’t make enough impact. On the other hand, tax increases of any kind are fiercely fought. But with no changes, (and that’s the path we’re on), we’ll just keep running deficits and accumulating debt. That is, until we can’t.
If you would like a nifty little spreadsheet I put together with 15 years of this kind of data, just email me and I’ll gladly send it you for free. I can be reached at chris@ryaninvest.com.