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Friday, February 24, 2012

The Federal Budget: Issues for FY2013 and Beyond

Mindy R. Levit
Analyst in Public Finance

The federal budget is central to Congress’s ability to exercise its “power of the purse.” Over the last several fiscal years the imbalance between spending and revenues has grown as a result of the economic downturn and policies enacted in response to financial turmoil. In FY2011, the U.S. government spent $3,598 billion (24.1% of GDP) and collected $2,302 billion in revenue (15.4% of GDP), resulting in a budget deficit of $1,296 billion (8.7% of GDP). The FY2012 deficit is currently estimated at $1,079 billion (7.0% of GDP).

The Obama Administration released its FY2013 budget on February 13, 2012. In FY2013, the President’s budget projects that the deficit will reach $901 billion. Budget deficits are projected throughout the 10-year budget window. The President’s budget proposes a variety of short-term tax and spending measures aimed at job creation, largely drawn from the American Jobs Act submitted to Congress in September 2011. These proposals amount to nearly $350 billion in additional spending and tax cuts, including immediate funding for roads, rails, and runways; aid to states and local governments for teachers and first responders; school modernization; and a full-year extension of the Social Security payroll tax reduction and unemployment benefits.

In August 2011, the Budget Control Act of 2011 (BCA) placed limits on spending via discretionary spending caps and included provisions for additional spending cuts in the amount of $1.2 trillion. In January 2013, the additional cuts are scheduled to take effect via an automatic process. In his FY2013 budget, President Obama proposes replacing the automatic cuts with prescribed spending cuts and tax increases. The largest of these proposals includes allowing the 2001/2003/2010 tax cuts for singles making over $200,000 and households making over $250,000 to expire; savings generated from changes to Medicare, Medicaid, agriculture, and other mandatory programs; and placing caps on spending on Overseas Contingency Operations (OCO).

The FY2013 budget also included other tax proposals including changes in the estate tax parameters, limits to the value of itemized deductions for married taxpayers with incomes over $250,000 and single taxpayers with incomes over $200,000, and eliminating various tax expenditures. A detailed plan on corporate tax reform is expected by the end of February 2012.

CBO, GAO, and the Administration agree that the current mix of federal fiscal policies is unsustainable in the long term. The nation’s aging population, combined with rising health care costs per beneficiary, seems likely to keep federal health costs rising faster than per capita GDP. CBO projected in June 2011 that under current policy, federal spending on federal health programs (including Medicare, Medicaid, CHIP, and exchange subsidies) would grow from 5.6% of GDP today to 10.3% of GDP in 2035, and to nearly 20% by 2085. The 2010 Economic Report of the President also called the trajectory of future federal spending on Medicare and Medicaid unsustainable. GAO’s recent long-term fiscal simulations, under an alternative policy scenario, projected debt held by the public as a share of GDP to exceed the post World War II historical high in about 15 years.

Date of Report: February 1
7, 2012
Number of Pages:
Order Number: R
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