The war has just begun

Its season again to track the budget.

A budget proposal is essentially a document to propose how and how much the US government will spend money for the next fiscal year and how it will manage its debts. The next fiscal year is FY2016, which is the time between Oct 1 2015 and Sep 30 2016.

What’s making news is just the proposal, which sometimes the media calls a political statement, because it reflects the President’s desires to spend it in a particular way. There is a drawn out process for this to get approved by the Congress, and recourse available if the Congress doesn’t approve it in time. Given that both chambers have Republican majority, there is every reason to believe that this process wont be smooth. This also being Obama’s last term as President, he is going to go “all out” for a left-leaning budget and Republicans will make sure there is a standoff.

Lets cover basics again –

Revenue – The government gets money, for the most part through taxes. To give an idea, the government got $2.16t, $2.3t, $2.45t, 2.78t and $3.02t per year starting 2010 to 2014. This number may change mostly based on tax policies, but also based on people’s income levels (where it can be roughly correlated with GDP). Tax policies in particular can be subject for much debate – who to tax, how much to tax etc…are the important questions. This chart should help.

Spending – US’ states are sovereign states. Most matters pertaining to education, health, infrastructure and others are handled by state governments. By contrast, the federal government’s budget, if you look at the categories of spending, is surprisingly simple. Between Medicare, Medicaid, Social Security and Defense, US spends about 66% (2013) of their budgeted expenses. With macro changes (such as bringing back troops from Iraq or Afghanistan) or a significant change in the healthcare policies, you can expect this 66% to go up or down, but will still be a significant percentage. Expense items like Social Security are awarded as an entitlement to the citizens and items like defense are typically non-negotiable i.e. if there is a national priority, its got to be done regardless of partisan politics. Of course, you can question the righteousness if US, for example, triggered military action against Russia in favor of Ukraine, but there’s another discussion.

Deficit – US has a history of spending more than it has in cash, year after year. Naturally, it builds up a deficit every year. The period between 2009 and 2012 were probably the worst in recent times, accumulating over $1t in deficit each year. In 2014, we are looking at a deficit of $483b, lower than recent years (good), but higher than further-back years (bad). In case you are curious, the most recent year where US had budget surplus is 2001. I guess you could speculate that 9/11 changed everything – but there is history of both surplus and of deficit long before 2001.

Debt – Someone’s gotta fund the deficits. The treasury issues bonds, which are nothing but promissory notes, in exchange for money. People that give money are both individual and institutional. More importantly, ~34% of the debt is financed by foreign governments, most significantly of China and Japan (together 15% of all the money the US government owes anyone). The total debt as of few months ago stands at $17.8 trillion, which is more than the entire output of the country in a full year. There are checks and balances that control how much US can be indebted, which explains the debacle of Debt Ceiling Crisis (here and here), that occurs once every few years. In Obama’s administration alone, a debt ceiling increase occurred 5 times, 2 of them with the crisis, political standoffs and brinksmanship. And yes, before you ask, the President to have seen most debt ceiling increases is Ronald Reagan (18 times)

FY 2016

Obama’s budget as-is would entail a spending of close to $4t, whereas in the same year, the federal government’s revenues would be $3.5t. So, if the current version were to be enacted in law, he is already looking at adding little under 500 billion to the debt situation. His vision is that long-term benefits exceed short-term inconveniences, which is likely the mantra of anyone borrowing money.

But more importantly, his budget likely includes plans to punish the rich to favor the poor/ middle class (redistribution at the broadest sense), education and other freebies (handouts at the broadest sense), a more glorious implementation of Affordable Care Act (dubbed Obamacare, viewed as extreme socialism and fiscally unviable by the GOPs). His plans also include tax proposals to punish companies such as GE and Microsoft making enormous money outside US and start new infrastructure projects. Whether you view these initiatives as noble or as squandering of money depends on where you sit on the political spectrum.

Deviation

If you a normal guy with some financial sense, you are thinking – its just a budget. What about actual spending? What is spending exceeds budget? Its surprisingly common to see actual spending actually falls more or less in line with the budget. When there are gaps, its usually for good (actuals < budget) or the deficit is usually less than $200b which is not a big deal.

Debtors

Though it is not strictly “mandatory spend” – one expense the US just cannot “not spend” is the interest charges. This is the money in interests that bond-holders expect US to give every month, much like the interest fees or minimum payment on your credit card. When the country defaults on this, it is likely to face credit downgrades, attract other penalties and face a lot, a massive lot, of negative publicity.

The budget war has just begun. Check this White House link for the President’s Budget Proposal for the year FY 2016.