Every day we are being bombarded with breaking news about proposed spending cuts at the federal level. The reaction of people from all walks of life seems to range from fear to anger to relief and even joy. The variance of course is understandable. But the financial stakes have never been higher, and it is incumbent upon all of us to dig in and be logical.
Let’s first acknowledge that our reaction to these proposals is influenced by very real and legitimate factors. This might include one’s own critical dependency on programs, views about the role and responsibilities of the federal government, how we perceive the intent or the aims of a policy, or any one of many determinants. But these mainly serve to help us form our views about whether or not we deem the proposed spending worthwhile. We must add another layer of discernment and consider if each initiative is worth borrowing to accomplish.
Almost none of the cuts being proposed are from programs that are being funded by current tax dollars. Consider that in fiscal year 2024 we generated $5.1 trillion of federal tax revenue. That covered Social Security, Medicare, debt service, and veteran’s benefits — leaving about $1.4 trillion for Medicare/ACA related healthcare spending and national defense.
So consider this sobering fact: Medicare/ACA and national defense, each often associated with a different side of the political spectrum, totaled over $1.8 trillion. Already we were in a serious shortfall.
Before we got even close to funding federal education programs, disease prevention in Africa, disaster relief, infrastructure spending, economic development in Poland, culture related progressive spending, or Sesame Street-like programming in Iraq, we were already having to borrow. The funds for nearly one-third of ACA/Medicaid and the defense of our nation, some of our most sacrosanct spending, could not be completed without taking out some pretty hefty loans.
Who did we borrow from? And who will pay it back?
Well the latter question is easy. Our children and their children will most certainly pay for it — both directly with taxes from their earnings and indirectly with higher interest rates that will result from our country’s exploding debt levels.
As for the former question, we of course borrow these shortfalls through our issuance of treasury notes and bonds to thousands of investors who are willing to serve as our unlimited line of credit providers. The largest and most willing of these investors are foreign governments who provide about 35% of our borrowed funds. Our mega bankers? Well that would be China and Japan (one friendly, one not so friendly).
So while reasonable people can disagree about whether it makes sense to fund water infrastructure in developing nations — or if we should continue to subsidize weapons programs in Europe — all of us must be adjusting our formula to determine if each spending item meets a more rigorous test.
The critical question is what spending is worth us taking loans out to pay for, especially when we are borrowing from hostile nations and saddling our children and their children with paying it all back. Costly programs and initiatives might look very different to us viewed through a lens which acknowledges we are not a country with free cash flow.
We don’t have the funds. So for each expenditure under consideration, the question we have to ask is: assuming one supports the proposed initiative, is it compelling enough to in effect put it on the nation’s variable rate credit card to pay interest on for years to come?
I am not suggesting that the answer is always going to be no. But Americans should consider applying a higher standard within their own process of evaluation and reaction.
Families, and companies in the private sector, tend to have a pretty logical way of evaluating spending. If it’s critical to their existence and well being, most households will borrow, but only as a last resort. In large corporations excessive borrowing is also eschewed and the mantra that often makes it down the management line is “spend for necessary, not for nice.”
Budget cuts are quickly digested, and the resulting pain is accepted with an understanding that they are unavoidable. Our nation requires a heavy dose of that kind of realism.
As we race toward a financial cliff in this country — and we most certainly are — for the sake of our children and future generations, Americans must consider what federal expenditures they deem necessary. At this time in history we simply don’t have the funds for nice.
Brian L. Maryott is a certified financial planning professional, a former mayor of San Juan Capistrano, and the founder of PLAN4it Inc.