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North Carolina legislators are still debating the state budget, but while they’ve been doing so, a very important report has come out of Washington.  Each year the Congressional Budget Office (CBO) releases a report on a 25-year forecast of federal spending.  The noteworthy concerns raised by the CBO are the levels of federal government spending, federal debt held by the public, and the shift toward federal revenues becoming more dependent upon the personal income tax than in the past.  To sum this all up, the government is spending more, and taxpayers are going to be paying the bill.  Budget writers in North Carolina need to be aware of the federal government’s budget situation, since almost half of the state’s total budget is made up of federal dollars.

Here are some of the facts from the report:

  • The gap between federal spending and revenues will widen over the long term if the current spending and tax policies remain.
  • Current federal debt held by the public is 74 percent of GDP; by 2039 that is expected to exceed 100 percent, a level experienced only once after WWII in 1946.
  • Causes for the projected growth in federal spending include an aging population, growth in spending per capita on health care, and the expansion of federal health care programs.  The leading driver is an aging population, as between now and 2039 the number of people aged 65 and older will increase by 80 percent.
  • Spending for Social Security and major health care programs is projected to increase to more than 14 percent of GDP by 2039.  That’s twice the average over the last 40 years.
  • Individual income taxes are expected to rise as a percentage of GDP because of the structure of the tax system.  People’s income is expected to grow faster than inflation pushing more taxpayers into higher tax brackets over time.
  • With large and growing deficits, debt will exceed its current percentage of GDP after 2020 and continue rising, a path that would ultimately be unsustainable.

So what does this mean for North Carolina, and why does this report matter?  When evaluating state government, it is important to remember that many of the programs are funded jointly by the state and federal governments.  When you look at our nation’s history, the largest amount of federal debt held by the public and the highest budget deficits occurred during and shortly after World War II.  That was before many of the social programs that exist today were even created.  For example, the major reasons for the forecasted increase in spending at the federal level are an aging population; increased costs from Social Security; and major health care programs such as Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies for health insurance purchased through the Affordable Care Act exchanges.  When Social Security was created in 1935, only 6 percent of the total population were over the age of 65 and neither Medicare nor Medicaid existed.  Today approximately 40 million Americans are 65 or older, they account for 13 percent of the total population, and Medicaid is the largest item for many states’ budgets.

The CBO’s report is static, meaning it takes the current situation and forecasts into the future with existing laws and policies.  It does not account for the long-term effects these policies will have on economic growth or job creation.  In addition, many other things have the potential to affect the federal budget such as wars and military challenges, recessions, new expensive spending programs enacted by future congresses or presidents, higher interest rates, or changes to current spending caps under the Budget Control Act.  All of those things could affect the federal government’s budget and have a trickle down effect on the states.

According to the Statewide Single Audit report, North Carolina had received over $22 billion in federal grants by the end of fiscal year 2013.  To put that into perspective, North Carolina’s total state spending is around $51 billion dollars, so a little less than half of the entire state’s budget is comprised of federal funds.  Of that total figure, $12.7 billion went to Health and Human Services, $2.56 billion went the University of NC System, $1.4 billion went to the Department of Public Instruction, and $2.8 billion went to the Department of Commerce.

What happens if there is a federal budget crisis and 5, 10, or even 20 percent is reduced from North Carolina’s federal grants?  No one in state government is prepared for that to happen.  Budget writers have maximized their dependence on the federal government in order to balance the state’s general fund.  This method of budgeting will have dire consequences if there is a federal shortfall and the state’s funding is reduced.  Legislators need to be aware of the budget situation in Washington, because its not IF the federal government cuts our funding, but WHEN.  The CBO’s report does not paint a bright picture for federal government finances in the future; North Carolina needs to take this as a warning sign and prepare to be more independent when it comes to our budget and spending priorities. 

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