How The President's Budget Would Look In 2023

Apr 18, 2013 | Budgets & Projections

Our next blog post in our series analyzing the President's budget will look at where the budget leaves revenue and spending by the end of the decade and the composition of that spending and revenue.

As highlighted in our initial analysis, the budget would put the debt on a downward path to 73 percent of GDP by 2023 through a mix of tax increases and spending cuts. In terms of revenues in the proposal, OMB estimates that they would rise from 16.7 percent of GDP in 2013, to 17.8 percent in 2014, 18.9 percent by 2018 and finally reaching a peak of 20.0 percent by 2023. You can see the policy changes that the President makes on the revenue side here. Meanwhile, spending would fall from 22.7 percent of GDP in 2013 to 21.7 percent in 2023. We've discussed some of the President's spending proposals already, specifically the switch to the chained CPI and the health care changes.

Readers of the blog are likely familiar by now with what revenue, spending, deficits, and debt look like under the President's budget and what policies are used to achieve those numbers. But another important question is how the composition of spending and revenue change over time.

Going forward, increases in revenue are largely driven by increases in individual income taxes. In fact, it entirely accounts for the increase as a percent of GDP from 2014 to 2023, with other factors offsetting each other. This build-up in income tax revenue from 8.1 percent of GDP in 2014 to 10.3 percent in 2023 is due to the economic recovery, some new tax increases, and the tendency for income to grow faster than inflation, thus pushing some taxpayers into higher tax brackets and producing higher revenue. Other categories of revenue are a much smaller factor. Payroll taxes, estate taxes, and other sources of revenue rise slightly as a percent of GDP while corporate income taxes and excise taxes remain constant and revenue from the Federal Reserve falls as quantitative easing winds down. As a percent of total revenue, individual income taxes and estate taxes rise between 2014 and 2023 while every other category of revenue decreases.

[chart:8554]
[chart:8555]

Source: OMB

The spending side largely reflects the story of the federal budget over the next decade and beyond. Interest spending will rise from 1.3 percent of GDP in 2014 to 2.9 percent, largely due to expected increases in interest rates. Social Security spending would rise from 5.1 percent to 5.4 percent (counting the chained CPI savings), while Medicare and Medicaid would increase from 4.9 percent to 5.3 percent. Other spending would decline as a share of GDP. Discretionary spending would fall from 7.3 percent to 4.9 percent, reflecting both the war drawdown and the discretionary spending caps, while other mandatory spending will fall from 3.6 percent to 3.2 percent, in part reflecting the economic recovery. As a share of spending between 2014 and 2023, interest would jump from 5.9 percent of spending to 13.5 percent, while Social Security would rise from 22.7 percent to 24.8 percent. Medicare and Medicaid will take up 24.6 percent of spending in 2023 as opposed to 21.9 percent in 2014. Discretionary spending will fall from one-third of spending to 22.8 percent, the decline being split roughly equally between defense and non-defense (NDD), and other mandatory spending will fall from 16.4 percent to 14.5 percent. 

[chart:8545]
[chart:8546]

Source: OMB
Note: OMB separates out the chained CPI in its tables. We have attributed it to Social Security for these charts. We have also attributed a placeholder for disaster spending to non-defense discretionary spending, although some portion of it may be mandatory spending.

In short, the President's budget, at least on spending, largely reflects the trends of the budget that we are seeing: increased spending on health care, Social Security, and interest with relatively less on everything else. That spending will be financed increasingly with revenue from the individual income tax.