Much of how government behaves stems from a little-known characteristic known as a “structural deficit” with an outsize impact on future budgets and policy.

Annually, the federal government via Congress develops and approves a budget. If there is an excess of expenditures over receipts, that is referred to as an annual deficit (the reverse is a surplus).

As these deficits occur, the federal government borrows money to make this payment differential.

The government first goes to the Social Security and Medicare Trust Funds to see if those funds have an annual excess – more money coming in than going out – and if they do, the rest of government borrows those monies (and does so at an intertest rate set by the Funds’s Trustees), effectively giving the trust funds an IOU for what is taken.

These IOUs represent a pledge from the taxpayers to repay these monies at some future time. If more is needed than the trust funds have available, the government borrows the money which increases the national debt (much of which is held by foreign countries including China).

Of course, this increases the annual interest payments the government must pay to carry that debt. The higher the debt, the greater the annual interest payments. As interest rates rise, so does the interest that must be paid by the government on its debt.

In the current environment whenever the federal budget is being developed by Congress, any new program expenditure needs to be paid for by some type of increased inflow.

It’s kind of like: Wanna spend a dollar? Find a dollar. These “pay fors” can be expenditure reductions (which is less common) or tax increases or assume revenues from increased enforcement.

The folks developing the budget estimates determine how the “pay fors” can be created. As they do this, if they want the program to be adopted, they tend to be optimistic about the anticipated amounts associated with that “pay for”. In short, they tend to err on the higher side when preparing the “pay for” estimates.

Once any program is created, there is the stimulus effect whereby more folks use the program than was originally envisioned. This makes sense. Programs are intended for a purpose and the more the program gets publicized, the more it gets used.

This tends to result in expenditures that are much greater originally envisioned. The result is that revenues tend to be lower than forecasted and expenditures then to be higher. This differential is called a “structural deficit.”

Going forward the “pay for” and the expenditures theoretically become disassociated from one another and are just rolled into the next year’s budget.

The mismatch in the “pay for” program funding revenues versus expenditures does not get made up the following year; Quite the reverse. Going forward the expenditure gap gets bigger.

Because government rarely addresses these issues; structural deficits tend to become huge over time. This is where we are today and why the federal deficits and national debt continue to expand.

Budget and policy makers appear to ignore this effect when creating new programs and the cycle repeats itself – again and again and agin. To stop the cycle, we must be honest about structural deficit and consider it more carefully.

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Jayne Koskinas Ted Giovanis
Foundation for Health and Policy

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Highland, Maryland 20777

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