Federal Outlays, 2010

“Federal Outlays, 2010 (Billions of Dollars)” fall into the mandatory category—that is, outlays that are required by existing law. Less than 40 percent of outlays in 2010 were discretionary, and half of those were national defense spending. The remaining outlays were mandatory spending or payment of interest on the outstanding debt. [7] If the government were to pass a balanced-budget amendment, in other words, the hard job of cutting spending or raising taxes would remain. Recall Section 3 of the amendment that we quoted in the chapter opener: “the President shall transmit to Congress a proposed budget…in which total outlays do not exceed total receipts.” Even with a balanced-budget amendment, the president would still have to propose either major cuts in existing popular programs or increases in taxes. However, such an amendment might provide “political cover” for the president and Congress: they could explain their support for unpopular spending cuts or tax increases by saying that the balanced-budget amendment gave them no choice. The Intertemporal Government Budget Constraint We discussed in Section 14.1.2 “The Single-Year Government Budget Constraint” that the single-period government budget constraint links spending and revenues to the deficit (or surplus) of the government each year. There is a second constraint faced by the government, called the intertemporal budget constraint, linking deficits in one year to deficits in other years. When you take out a loan, you will ultimately have to repay it. The same is true of the government; when it takes out a loan, it will ultimately have to repay the loan as well. If the government chooses to pay for its expenditures today by borrowing instead of through current taxes, then it will need additional taxes at some point in the future to pay off its loan. The intertemporal budget constraint is just a fancy way of saying that, like everyone else, the government has to pay off its loans at some point. [8] As a consequence, tax and spending decisions at different dates are linked. Although governments can borrow or lend in a given year, the government’s total spending over time must be matched by revenues. To express the intertemporal budget constraint, we introduce a measure of the deficit called the primary deficit. The primary deficit is the difference between government outlays, excluding interest payments on the debt, and government revenues. The primary surplus is equal to the minus of the primary deficit and is the difference between government revenues and government outlays, excluding interest payments on the debt. In our example in Table 14.1 “Calculating the Deficit”, the deficit in year 1 was 30. If payment of interest on outstanding debt was 5, then the primary deficit would be 25, and the primary surplus would be −25. The intertemporal budget constraint says that if the government has some existing debt, it must run surpluses in the future so that it can ultimately pay off that debt. Specifically, it is the requirement that current debt outstanding = discounted present value of future primary surpluses.