Part IV

Before I dive into my budget analyses, there is some explaining I should do first. The Federal budget is a complex beast with lots of different kinds of programs that are funded in different ways. But broadly speaking there are three types of government spending: “Discretionary,” “Mandatory” and “Debt." You may have heard about these in the news, and if you have ever wondered what they mean than today is your lucky day.

Discretionary is the most straightforward. This is the amount that Congress gives Federal Agencies and programs to run them for that year. It is a fixed amount and the agency must make the funds last until the next year (unless the agency petitions Congress for more money). Think of this as your grocery bill when you budget. You set aside amount of money each month for groceries, you decided the amount based on your needs and if the end of the month rolls around and the amount money you set aside wasn’t enough you have to decide whether to live on peanut butter and jelly sandwiches until your next pay day or spend more than you planned on, but in either case the decision is up to you. This is the simplest part of the budget for Congress to control. If Congress wanted to increase or decrease an agency’s or program's budget one year, they can, when they draw up a budget to submit to the President to sign. This type of spending made up about 38 percent of the national budget in 2010.

Mandatory is a little more complex. Mandatory spending is spending that is based on expenses that the government is obligated to pay based on laws it has already passed. Congress cannot change these amounts without changing laws that are already on the books. Think of this as your phone bill. You don’t “decide” how much your phone bill is or the rates you pay, the amount is based on the phone plan you signed up for and how much you use it and once the bill comes at the end of the month your cannot “decide” that you do not want to pay it, you could change your plan at the end of the month, but you would still have to pay your bill that you received under the old plan. An example of this kind of spending is Social Security retirement benefits or the child income tax credit. Congress does not decide how much it will spend on Social Security or a child income tax credit each year. Congress passed laws that set out how much Social Security will pay or how much tax credit will be given for each child. After that, the amount is calculated though out the year based on the criteria set forth by Congress. This type of spending is harder to change because it requires a change of law so it is not as simple to alter. This type of spending made up about 56 percent of the national budget in 2010.

The last type is national debt interest. This is pretty simple, this is the amount that the government has to pay on securities that have matured and the amount with interest that was borrowed from government trusts. This amount is not decided by Congress it is simply the amount that needs to be paid to keep the US in good standing as a debtor and keep government trust solvent. Think of this as the minimum payment on a credit card, if you do not make the payment they will close your account. This type of spending made up about 5 percent of the national budget in 2010. Now it is worth noting that the Federal government has a lot interest bearing trust of its own, for example, when you pay taxes throughout the year the government invests part of it in securities, then before you get your tax refund the government cashes out the security, pays you back the amount of the original overpayment but keeps the interest (clever huh?). The government uses the interest it receives on the securities it owns to pay its own debts. If the government did not do this debt interests would require more than twice the amount of tax dollars that it needs now (the actual percentage of the overall budget that goes to debt interest is about 12 percent, but tax revenue only needs to cover about 5 percent. The rest is covered by government investment profits).

These are the three types of spending. Many times when you read about the budget, or hear about it in the news they only talk about discretionary because that is all that the congress has direct control over. This can be a little deceptive because the majority of spending is not discretionary but is mandatory. For my analysis of the budget I will be considering the budget as a whole as it is impossible to balance the budget unless you consider the whole budget. This can be a little tricky to calculate at times because many agencies received both discretionary and mandatory funding. For example, the Department of Defense gets a fixed amount each year to run operations (i.e. discretionary funds) but it also receives funds to pay retired members of the military (i.e. mandatory funds). My goal is to analyze various ways to balance the budget and in each case I want to stay in the realms of what is realistic and legally possible (in other words real solutions and not catch phrases and slogans). So I will be drawing a distinction between discretionary and mandatory spending at times because it would require different action to change each one. Hopefully with this explanation it will help it make sense.

My next post will be the start of my analysis of plans to balance the budget. As I go through, there is a magic number to keep in mind, 1,293 billion, that is how big the deficit was in 2010. So each idea will be measured in how effective it would be at reducing this number.