The growth of the national debt, which is considered unsustainable under current policies, continues to be one of the central issues of domestic federal policy making. On August 2, 2011, Congress adopted, and the President signed, the Budget Control Act (BCA; P.L. 112-25 ), which might be viewed as an initial step in addressing long-run debt issues. It had been recognized for some time that the growing long-term debt is an issue, and this concern was reinforced with Standard and Poor's downgrading of U.S. Treasury securities from AAA to AA+ on August 5, 2011. As part of the BCA, the Joint Committee on Deficit Reduction (sometimes referred to as the Super Committee) was appointed to find ways to achieve a specified amount of deficit reduction. The committee failed to reach agreement, which triggered a set of automatic spending cuts, largely on discretionary spending, that were put into effect in FY2013. At the end of 2012, however, concerns about the effect of recent spending cuts and tax increases about to take effect (called the fiscal cliff ) on economic recovery became a central issue. Action to address this problem resulted in retaining tax cuts compared with present law by making most expiring tax cuts permanent and increasing discretionary spending levels. These decreases in revenue collection and increases in spending resulted in higher budget deficits. This report examines alternative approaches to reducing the deficit, relating to the immediate issues arising from the BCA and the extended tax cuts as well as to ongoing, longer-term decisions about how to bring the debt under control. It focuses on the trade-offs between limiting the provision of defense and domestic public goods, reducing transfers to persons including entitlements for the elderly and those with low income, reducing support for state and local governments, and raising taxes. Using projections of the debt and deficit, it also addresses how limiting reliance on one source of deficit reduction creates pressure on other sources. The BCA, the result of months of negotiation, combined a multistep increase in the debt ceiling with proposals to begin reducing the deficit. As part of the legislation increasing the debt ceiling, the BCA adopted caps that cut discretionary spending by $741 billion from FY2012 to FY2021. Along with mandatory spending reductions of $20 billion and savings in interest of $156 billion, these measures were estimated to reduce deficits by $916 billion over the FY2012-FY2021 period. The act also directed a newly created joint committee, composed of 12 members (3 each from the House majority, the House minority, the Senate majority, and the Senate minority) to find an additional $1.2 trillion over 10 years in deficit reduction for a total of 1% of gross domestic product (GDP) over that period from the act. In addition, the plan contained a process and enforcement mechanism. The committee was unable to reach agreement by the deadline of November 23, 2011, setting into motion automatic spending cuts ( sequestration ) that took effect on January 1, 2013. Congress faced, at the end of 2012, the expiration of the Bush tax cuts, which would increase revenues by 1.5% of GDP. In addition, at the end of 2012, some other temporary tax cut and expenditure provisions were scheduled to expire, including the 2 percentage point reduction in the payroll tax and some temporary increases in unemployment benefits. These reductions in spending were set to occur in addition to the cuts contained in the BCA, and the full set of spending cuts and tax increases came to be referred to as the fiscal cliff . Concern developed about the fiscal cliff's short-run contractionary effects on the economy. At the end of the 112 th Congress, the American Taxpayer Relief Act ( P.L. 112-240 ) made most of the Bush tax cuts permanent. Some other tax cuts (although not the payroll tax reduction) were extended, reductions under the BCA were delayed (and a portion of them were eliminated), and unemployment benefits continued for another year. These actions reduced, but did not eliminate, the contractionary effect of the fiscal cliff. In December 2013, the Bipartisan Budget Act of 2013 ( P.L. 113-67 ) increased the discretionary spending caps for FY2014 and FY2015. The caps for FY2016 and later years were not changed. How much should be done to address the budget issues, and how quickly, is a topic of some debate. As noted above in relation to the fiscal cliff, there was concern about front-loading deficit reduction at a time when the economy was operating well below potential. The economy's recovery from the 2007-2009 recession was slow, although by October 2014 the unemployment rate had dropped to 5.8%, close to the full employment rate. At that time, labor force participation was still below prerecession levels, as was part-time and long-term unemployment. According to the Congressional Budget Office (CBO), the output gap (the difference between potential and actual output) was at 3.5%. For that reason, some believed the deficit should not be significantly reduced until the economy fully recovered. Indeed, although the budget plan agreed upon on August 2, 2011, had limited spending cuts in FY2012, critics of the plan suggested at that time that it might be inappropriate given current economic conditions. Others suggested it did not go far enough. However, the budget plan may be viewed as an initial step toward addressing the long-run budget challenges. A case can also be made that once the economy recovered it would be important to move quickly to address the deficit. The greater the debt-to-GDP ratio grows, the more burdensome interest payments become and the more the debt compounds. For example, in CBO's long-run budget projections, under the agency's alternative baseline, which reflects current services, interest payments are projected to rise to 3.3% of output by FY2024 and 4.7% by FY2039. CBO also projects that a sustained reduction in the deficit of 1.2% of GDP would be required to stabilize debt at 74% of GDP, its current level, under the standard baseline, whereas a 2.6% cut would be required to bring debt to the average of the last 40 years (39%). If the reduction is delayed for 5 years, the required decreases would be 1.5% and 3.2% of GDP; if delayed for 10 years, 2.1% and 4.3% of GDP. The need to not move too slowly can also affect the optimal approaches to deficit reduction. For example, it is difficult to change current entitlements for the elderly (such as Social Security, Medicare, and part of Medicaid, which funds nursing home care). Many already-retired individuals have little leeway to adjust to such changes and could be particularly burdened by benefit reductions, which suggests that benefit changes be adopted in the near term but applicable to the future. Changing discretionary spending or increasing taxes can be achieved more quickly, although, as discussed below, the long-run gap between spending and taxes is too large to be addressed with discretionary spending revisions alone. Addressing a federal budget deficit that is unsustainable over the long run involves choices. Fundamentally, the issues require deciding what government goods, services, and transfers are worth paying taxes for. Most people would agree that the country benefits from a wide range of government services—air traffic controllers, border security, courts and corrections, and so forth—provided by the federal government. Yet, as shown below, federal government provision of goods and services, outside of defense, constituted only 10% of federal spending and 2% of GDP in 2007, the last normal year before the recession. Transfers, including interest payments, accounted for around 70% of the federal budget. Finding budget savings by reducing nondefense federal government services alone would fall short of what is needed to address the deficit. Transfers, including interest payments, accounted for 75% of the federal budget in FY2014, up from the 70% figure from FY2007. Outside of the 10% for provision of domestic goods, defense spending for goods and services constitutes about 20% of federal spending. In this area as well, there are limits to the savings that might be found without compromising national security. Therefore, to address the budget shortfalls facing the country over the long run, it is likely that transfer payments to or on behalf of individuals (such as Social Security and Medicare), which already account for almost half of federal spending and are growing, must be reduced; transfers to state and local governments must be reduced (which would shift the budget problem to a different level of government); taxes must be raised; or some combination of the above. The next section of this report examines the allocation of government spending, the method of its financing, and how these shares and sources have changed over time. It demonstrates that the surge in the debt is a recent phenomenon that has occurred with the recession and is inherently transitory. Going forward, however, as shown in the subsequent section, the growth in transfers to the elderly and spending for health car—a trend that has been under way for some time but was offset by a decline in spending for other purposes, relative to GDP—will increasingly contribute to unsustainable deficits. The following section addresses philosophies for approaching deficit reduction, as embodied in a number of proposals. It discusses how different approaches to and constraints imposed on deficit reduction will have consequences for the menus of other choices available. For example, if deficit reduction begins with a constraint that taxes will not rise, policy would almost certainly require significant cutbacks in Social Security and Medicare. If the benefits of these programs are to be maintained, an increase in taxes would likely be required. Central findings of this analysis include the following: A comparatively small share of federal spending is for direct provision of domestic government goods and services, which many people may think of when considering federal spending.