Taxes, Entitlements and the Federal Debt Crisis

by: Doug Short

On Thursday I shared my historical perspective on Debt, Taxes and Politics. Let's now take a closer look at Uncle Sam's balance sheet for last year and the official government projections for 2011 and the decade beyond. With the looming congressional showdown on the debt ceiling, it seems particularly appropriate to understand the broader context.

For a quick review of 2010, here is a slide I created for a presentation I made earlier this year at the Retirement Income Industry Association (RIIA) spring conference in Chicago.

(Click charts to expand)

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As we can see, 2010 entitlement costs exceeded the entire tax revenue for the year — personal, corporate, and social. However, according to the Congressional Budget Office (CBO), entitlements only accounted for about 55% of 2010 spending. Defense spending took another 20%, nondefense discretionary 19%, and interest payments 6%. Thus we ended 2010 with a deficit of $1.294 trillion.

For 2011 the CBO projects a staggering $1.48 trillion deficit (see the CBO XLS file of budget projections). And we can be fairly certain that the actual 2011 deficit, which we'll learn next year, will be higher than the projection.

Now let's put the current deficit into the larger pattern of federal spending behavior. I created the next two charts from a combination of the CBO historical data since 1971 and their budget projects for 2011-2021. The first chart shows the astonishing growth of entitlements.

Click to ViewClick to enlarge

The next chart shows the projected gap between revenues and outlays over the next decade together with an overlay of the accelerating growth of public debt.

Click to ViewClick to enlarge

Meanwhile Congress continues to squabble over the inevitable increase in the debt ceiling. Soon, of course, that showdown will be resolved — at least for the time being — and the prospect of budget paralysis will become the new inevitability. Why? Because an election year is in the wings. Posturing will prevail, with little hope for a rational resolution to the budget mess we face.