The State of Federal Finances

The economy is one of the most popular topics among Americans. Both business and non-business individuals concentrate on the fed’s annual budget to help predict which direction the economy will move. The federal budget is garnering much interest now that the presidential election is coming closer, the next interest hike is being anticipated to take place in the near future and the many domestic and international issues are taking the spotlight at the moment.

So let us discuss some of the areas where the allocation of federal funds will be especially important. In order of % of the federal budget, the following are the main budget areas:

Medicare & Medicaid (27%)

• Medicaid and Children’s Health Insurance Program enrollees will total 68 million people in 2016
• Runoff costs over the next decade are estimated to be $146 billion
• 31 states participate in the Obamacare program

Social Security (23%)

• Has been running on a deficit since 2010
• Number of people receiving social security: 65.3M (Feb. 2016)
• Number of people in labor force who are employed: 151M
• Current social security tax rate is 6.2% for both employer and employee (12.4% total)

Non-Defense Discretionary (16%)

• Programs include education, scientific research, infrastructure, law enforcement, courts, national parks and forests,  and other national needs
• Bipartisan Budget Act of 2015 expires in 2018
• Projected to fall to historic lows; less than 8% of GDP beginning in 2018

Defense (15%)

• Consumed slightly over 21% of 2015 federal budget
•  Department of Defense projects a budget averaging $534 billion from 2016-2020
• Defense as a share of federal spending at all-time lows since 1950

Other (12%)

Net Interest (6%)

The federal budget deficit has been decreasing drastically since the millennium highs of 2009. However, the deficit is expected to increase steadily beginning in 2016 through 2026, though not as intensely as ’08-’12 levels. It is estimated that this will mean an increase in federal net debt, in the same period, of about 12%. If this materializes, this means federal net debt in 2026 will be equal to 85.6% of GDP.

The Congressional Budget Office predicts 10-year U.S. Treasury notes and 3-month U.S. T-bills interest rates to rise to 4.1% and 3.2%, respectively. These levels are thought to be reached and held, beginning 2021-2026. These rates will need to be tracked closely, T-bills especially, given that the interest rates have not changed much since 2009.

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