Congressional Budget Office

Presentation to the

National Association for Business Economics

Four Observations about the 

Federal Budget

March 7, 2011

Douglas W. Elmendorf

Director
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1. The gap between spending and revenues is likely to remain 

very large even after we return to normal economic conditions.

2. Fiscal policy cannot be put on a sustainable path just by 

eliminating waste and inefficiency; the policy changes that are 

needed will significantly affect popular programs or people’s 

tax payments or both.

3. Policymakers face difficult tradeoffs in deciding how quickly to 

implement policy changes that would reduce future budget 

deficits. 

4. There is more focus in Washington on federal budget 

problems today than there has been since the late 1990s, and 

that focus has led to a range of proposals for tackling the 

problems.

Four Observations about the Federal Budget
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The gap between spending and revenues 

is likely to remain very large even after 

we return to normal economic conditions.

Observation #1
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Deficits Under CBO’s Baseline or with a Continuation of 

Certain Policies, Compared with Past Deficits and 

Surpluses

Percentage of GDP
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Federal Debt Held by the Public Under CBO’s Baseline or 

with a Continuation of Certain Policies, Compared with 

Past Debt

Percentage of GDP
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Debt Burden Across Countries in 2009

Source: For the United States, debt held by the public net of financial assets. For other countries, general government debt 

net of financial liabilities as reported by the Organisation for Economic Co-operation and Development.

Percentage of GDP
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Fiscal policy cannot be put on a sustainable 

path just by eliminating waste and 

inefficiency; the policy changes that are 

needed will significantly affect popular 

programs or people’s tax payments or both.

Observation #2
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Shares of Federal Spending in 2010

Percent

Transfer payments to people in the United States 47

Grants to state and local governments 14

Purchases of goods and services for defense 19

Purchases of goods and services for nondefense 9

Interest 8

Other (includes transfers to people outside the U.S.) 4

Source: National Income and Product Accounts.
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Outlays for Some Major Federal Programs Compared 

with Total Federal Revenues

Percentage of GDP
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Projected Federal Revenues and Spending in 2021 

with a Continuation of Certain Policies
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Components of the Federal Budget 

1970 2007

2021 

January 

Baseline

Percentage of GDP

Revenues 19.0 18.5 20.8

Outlays 19.3 19.6 24.0

Social Security, Medicare, Medicaid, 

health insurance subsidies, and 

other health programs

3.8 8.2 12.0

Defense 8.1 3.9 3.6

Other mandatory spending 

and nondefense discretionary 

spending

6.0 5.8 5.0

Net interest 1.4 1.7 3.3

Deficit 0.3 1.2 3.2

Note: Figures are shown net of offsetting receipts where relevant.
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Observation #3

Policymakers face difficult tradeoffs in 

deciding how quickly to implement policy 

changes that would reduce future budget 

deficits. 
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Disadvantages of Reducing Deficits Gradually Rather 

than Quickly

 Reduces the amount of U.S. savings devoted 

to productive capital investment.

 Requires greater federal spending on interest 

payments.

 Gives policymakers less flexibility to respond 

to unexpected problems.

 Increases the likelihood of a fiscal crisis.
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Advantages of Implementing Major Budgetary 

Changes Gradually

 Possibly helps older generations.

 Minimizes the drag of spending cuts or tax 

increases on the economic expansion.

 Gives families, business, and state and local 

governments time to plan and adjust.
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Making Decisions Soon About How to Put Fiscal 

Policy on a Sustainable Path Would Be Beneficial

 Enacting policy changes soon:

– Would allow for gradual implementation while 

still limiting further increases in federal debt; and 

– Would probably provide some boost to economic 

activity by reducing uncertainty and holding 

down interest rates.
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Observation #4

There is more focus in Washington on 

federal budget problems today than there 

has been since the late 1990s, and that 

focus has led to a range of proposals for 

tackling the problems.
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Plans to Narrow the Budget Gap

 The plans are diverse: They reflect widely varying 

priorities, with some emphasizing spending cuts 

and others emphasizing tax increases.

 Yet, they are similar in some significant ways. 

The plans propose policy changes that:

– Are large in magnitude;

– Are fairly well-specified; and

– Would fundamentally alter the tax code and some 

of the activities of government.