America's Achilles Heel: A Looming Financial Disaster Awaits

Get ready: America is on a tenuous fiscal path and a return to trillion-dollar deficits is less than a decade away. However, lessons learned from one reeling U.S. city might offer some important lessons. 

With the new year in full swing, those in Washington would serve the country well with serious reflection about the future of U.S. fiscal policy. Though total federal spending actually declined and the deficit ebbed from its $1.4 trillion high mark, federal debt has remained on its upward trajectory. This is an immensely worrying financial position for the nation.

Congress, not for the first time, neglected to pass spending bills required by the start of the fiscal year so agencies could both plan and operate. Hence the need to work well into December to pass an appropriations bill. This 1,600 plus page “CRomnibus” bill consists of just over $1 trillion in funding through the end of the fiscal year in September 2015. The bill stayed within the spending caps set in the 2013 Ryan-Murray budget deal. The Ryan-Murray budget agreement itself was rightly criticized for pushing off some of the spending cuts required by the Budget Control Act of 2011, most notably on defense, and in essence establishing a new—and regrettably higher—budget. Not meeting this higher spending limit would have been appalling. But the CRomnibus also included $86 billion in spending outside the caps for the Overseas Contingency Operations (OCO) and other so-called emergencies for such things as ISIS, Ukraine and the Ebola outbreak.

Budget limits are intended to restrain spending. The way to do that is to limit all spending, not just some spending. Emergencies happen every year and lawmakers could include contingency spending within these limits during the normal budget process. However, since OCO and other "emergency" spending are expressly outside the budget caps, they are unsurprisingly used to pass new spending without making any budgetary trade-offs. This is the kind of gimmick that irks budget watchers and limited government proponents because it is portrayed as utterly reasonable, but really provides an easy escape from the requirements of spending limits.

Most of the debate revolved around avoiding a government shutdown, or the president’s immigration plan, or relaxing a Dodd-Frank restriction. There was something for every perspective to dislike. And, as with many massive bills like this one, there was plenty of cronyism and corporate welfare. Like reauthorizing the Export-Import bank, which hands out unnecessary subsidies to U.S. businesses that sell internationally, giving them an edge over their competitors; or one of the very last provisions in the bill which relieves a requirement of the Affordable Care Act—for one specific health-insurance company.

But missing from the conversation was a tough examination of the country’s bigger financial picture. It was as if merely keeping within the spending caps was enough. However, the United States is on a tenuous fiscal path and a return to trillion-dollar deficits is less than a decade away.

Though much emphasis is rightly placed on the appropriations process, only about one third of federal spending is actually appropriated. This part of the budget is known as discretionary spending. The balance, often called “mandatory” spending, is not annually appropriated. Spending on such things as Social Security, Medicare and Medicaid is on a sort of budgetary autopilot and grows each year in accordance with the laws and formulas governing the programs. Same for interest on the debt. No true oversight or accountability is actually required for the majority of federal spending. And, nearly all of this spending is exempt from the spending caps. It is this mandatory spending which is putting growing, upward pressure on the budget.

Some say that the picture has improved significantly, so why worry? After all, the deficit in fiscal year 2014 was "only" $483 billion. This is a big improvement over 2009, when total federal spending topped $3.5 trillion, nearly 25 percent of GDP, driven by recession-related spending such as the stimulus package. Accompanied by a stiff decline in tax revenues, the deficit reached $1.4 trillion that year, nearly 10 percent of GDP. But this improvement is temporary. Though spending declined recently, in part due to the spending caps, it returned to $3.5 trillion in 2014. This spending is enormous not just in nominal dollar terms, but also in relative terms. By comparison, at nearly 21 percent of GDP, spending today is well over the 17.6 percent when Clinton left office. Additionally, 2014’s $483 billion deficit, is projected to return to $1 trillion levels in as little as seven years. The biggest budget problem is mandatory spending—fueled by entitlements and interest—which will drive annual spending up by $2 trillion to nearly $6 trillion in a decade.

Debt is another matter. Though the rapid increase in spending and deficits has experienced a short respite, debt has steadily marched up. While shoppers were running up their credit cards this black Friday, the federal government was busy borrowing; total federal debt breached $18 trillion mark—or 102 percent of GDP. Debt held by the public, the debt which is sold and traded in credit markets, reached 73 percent of GDP.