When $2.3 trillion doesn't quite get it done
First, the good news: revenue. The United States Treasury is a money-printing (or collecting) machine, which took in $2.3 trillion in 2011. Here's the link to the revenue infographic.
Revenue as a percentage of GDP, while increasing in absolute terms, has actually decreased as a percentage of GDP over the past 20 years—from 17.8 percent to 15.4 percent. As you can see in the Trends in Revenues section below, individual income taxes make up nearly half of revenues. This source increased throughout the 1990s thanks to an eight year bull market for stocks, which led to higher capital gains and general wealth effects.
Perhaps the most disturbing trend here is that post-2000, individual income tax revenue, again as a share of GDP, has trended decisively lower. Traders would call this a series of lower lows and lower highs, which is a hallmark of an ongoing bear market. And even with the S&P 500's gangbuster rally since 2009, we have still not eclipsed the most recent "local" high in 2007.
Another bad trend is social insurance (payroll) taxes trending down and heading lower in recent years. I presume this is because the U.S. economy remains mired in a bit of a non-hiring malaise.
Let me do a little "back of the envelope" math here (and pardon me while I slip on my rose colored glasses). If the next President (Obama or Romney) and Congress are able to pull a sleight of hand and boost revenues as a percentage of GDP back up to their 1991 levels, revenue levels would rise to around $2.66 trillion. Hey, look, we just pulled $366 billion out of our hat!
Which would be fantastic progress towards closing that budget gap— if only it wasn't for those darn expenses...
Let me spend $3.6 trillion and I'll show you a good time, too
To paraphrase our investing hero Jim Rogers, you would think that $3.6 trillion being spent on 300+ million people yearly might be enough to deliver happiness across the land. Unfortunately, you'd be wrong!
We've already boosted our fantasy revenue to $2.66 trillion with some simple algebra (that admittedly took me longer than it should have), and some optimistic assumptions. Can the same formula also work its magic on federal spending? First, let's check out "mandatory" spending.
Mandatory spending, or: Don't touch that, I earned it
They don't call it mandatory for nothing! Take a look at this spending infographic, and let me know which of these entitlement programs are politically acceptable to cut, or even scale back:
Medicare, Medicaid, and Social Security combine to account for over $1.5 trillion of the $2 trillion spent on mandatory spending in 2011. It's tough to imagine a universe in which a U.S. politician can suggest cutting spending on these programs back, at least anytime soon.
While this already takes up $2 trillion of the $2.3 trillion actually collected, the real problem here is the trend. Mandatory spending as a percentage of GDP has trended higher—from 10.1 percent in 1991 to 13.6 percent in 2011—and we know that this is almost guaranteed to head even higher in the years and decades to come, given the demographic situation in the US (as in, the baby boomers are starting to collect this stuff).
So if we assume that mandatory spending is really mandatory, we need to look at discretionary spending as our last hope of making ends meet.
How much of this is really discretionary?
Let's grab our ax from the shed and see how much of this discretionary spending we can possibly cut—without the masses calling for our collective head.
At a high level, we see that as a percentage of GDP has held the line since 1991—and it would likely have declined if it weren't for a pesky decade-long war or two!
Again, let's take the most optimistic assumption and assume that defense spending can pull back to pre-September 11 levels (again as a percentage of GDP). That could take us from 2011 levels of $699 billion down to approximately $448 billion, so we'd save $250 billion. Not bad, but we still have a gap of over $700 billion.
The non-defense side of the ledger is quite a bit more convoluted, and would really require broad-based cuts across the board. Unfortunately to almost balance the budget, it would all need to go!
A Balancing Act Much Harder Than It Looks
These infographics really illustrate the cold hard math of the current budget situation. Closing a $1.3 trillion shortfall is not as easy as it sounds on TV! When potential discretionary cuts are tossed around Congress like cold cans of Natty Ice at a college party, the seriousness imparted to each situation by respective participants is not that far off. It's going to take more than light defense and nondefense cuts to get this math to pencil out.
Nobody wants to talk about the elephant room, but it won't be enough to merely stem the growth of mandatory spending to balance this gap—it's going to take actual cuts in Medicare, Medicaid, and Social Security—and that's not a pretty picture!
Brett Owens is chief executive and co-founder of Chrometa, a Sacramento, Calif.-based provider of time-tracking software that records activity in real time. Previously marketed to the legal community, Chrometa is branching out to accounting prospects. Gains include the ability to discover previously undocumented billable time, saving time on billing reconciliation and improving personal productivity. Brett can be reached at 916-254-0260 and email@example.com.