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November 2018 Budget Commentary

The Congressional Budget Office did not publish its monthly estimates for October, but Daily Treasury Reports indicate a deficit of about $100 billion for the month.

The New Gridlock

Not so long ago, the “gridlock” caused by a divided Congress was viewed as positive for the federal deficit—the reasoning being that the split in control would make it more difficult for the politicians to institute costly new programs.  Now, however, federal spending is essentially on autopilot, with most areas of the budget automatically reauthorized year after year.  The few highly-publicized and ideologically-based outlays which are actively debated (while important as a means to energize the base of each party) amount to budgetary loose change.   As a result, federal spending will maintain a steady upward climb of 2-3% plus COLA—unless there is a recession, in which case the government will (rightly) spend more to alleviate the downturn.  Instead of thinking of the budgeting process as a car which needs a push to move faster, we might more accurately view it as a vehicle which is already slowly accelerating and requires considerable effort to brake.

What Causes the Deficit?

Since this commentary talks a lot about the deficit as a unified number, it makes sense to occasionally look at the various government programs and the contributions they make to it.  First off, we can divide revenue into Social Security, Medicare Part A (hospitalization insurance), and everything else, since except for some small exceptions (the federal gasoline tax, for example) Social Security and Medicare Part A are the only programs with specific revenue sources (payroll taxes).  In the table below, we can see that Social Security and Medicare Part A largely pay their own way.  Medicare Part B (medical insurance) and Part D i(prescription drugs) have some income from user premiums, but most of the cost is covered from the general fund

Part B and D income is composed of premiums paid by participants.  OASDI Income includes money received from taxes on Social Security benefits.  Medicare spending figures are estimates based on the Trustees report for 2017. 

As far as the rest of the budget goes, the CBO divides spending into four areas: Medicaid, Defense, Interest on the Debt and Everything Else.  (As a reminder, Medicaid is a program intended to provide healthcare to the poor, funded by the federal government but administered by the states.)  These sectors of the budget along with Medicare Parts B and D are supported by the remaining federal revenues–individual income taxes, corporate income taxes and excise taxes, etc.  If we allocate the 24 % revenue shortfall evenly across all of the spending categories, we can come up with a rough idea of how much of the deficit is due to each of the major areas.

It is a common trope in budget discussion to bemoan “entitlements” and opine that spending on them will “bankrupt” us.  These sentiments invariably lump Social Security, all parts of Medicare, and Medicaid together.  However, a more accurate picture would suggest that Social Security and Medicare Part A are better funded than the rest of the budget

Or as they say, a picture is worth a thousand words:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  

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