With the threat last week of a budget shutdown, I’ve been spending a good bit of time researching the federal expenditures, debt, and deficit.  I’m guessing that many find this whole matter very confusing and find themselves throwing up their hands up when the topic comes up.  I’m also guessing that most, when they hear discussions about billions in spending, savings or cuts, see this as a significant amount.

What I’m going to try to do in this post is put this all in terms that everyone can understand.  First let’s take on the words “debt” and “deficit”.  The term “debt” describes how much you owe to someone else.  For example, when you buy a house you have established a debt to the lending agency for whatever you have borrowed.  The term “deficit” refers to spending more money than you take in during a specific period.  For example, if you spend all of the money you bring in from paychecks and still have to run up your credit cards to cover your expenses you are in “deficit spending”.  In terms of our federal government, we have had a national debt for quite some time, and we continue to spend more each year than we take in (“deficit spending”), which will just increase the size of the national debt going forward.

Now let’s look at revenues and expenditures.  We all deal with this on a daily basis.  Many of us create household budgets, take time to balance checkbooks, balance credit card statements to what we believe our expenditures were, and pay a variety of bills on a daily, weekly, monthly, and annual basis.  So, I decided to create an Everyman family of four with a totally made-up income and expenses.  My Everyman family breadwinner (only one of the parents works outside the home) is earning a gross salary of $61,350.  Now they set aside 5% for their 401k and they pay 16% in federal and state income taxes.  That means they bring home a net income of roughly $48,960 to manage their expenses.  Below I have created an example of possible annual expenses for the family.  Please note that in creating these estimated amounts I did a did a good bit of research on the internet regarding normal, family of four, expenses and I tried to always include an average if I could find one.  Here goes:

As you can see, our Everyman family’s expenses have significantly exceeded their income.  They already have a debt because they are buying a home and car(s) and they have sizable credit card balances that they have to pay interest on.  In addition, because they are going to incur expenses of $63,610 this year, on only $48,960 in net income, they have deficit spending of $14,650… and their debt will be going up by that amount.

If this was your family’s situation, what would you do?  Well, you could look at eliminating that $4.00 per day latte you buy on the way to work ($4 x 365 = $1460).  You could cut back on the clothes you buy, and you could cut back on entertainment.  However, if you did all of this it is, at most, going to cut your expenses by a little under $5,000.  While any little bit helps, these savings aren’t going to really have a major impact on your deficit spending or your debt.  In looking at our Everyman family I’d suggest that there are only a couple of things that would really make any impact.

• They could increase their income. Maybe one of the parents takes on a part-time job.  If they added $10,000 to that net income, they’d cut their deficit spending by almost 70%.  However, they may now have to factor in the cost of daycare, a discussion for another day.
• They could also look at ways to reduce their major areas of spending: housing, cars, food / consumables, healthcare, utilities, and internet / streaming / phone. These six expense areas make up almost 85% of Everyman family’s expenses.  All of the other expense areas combined total to just over $10,000.  They could cut them all and still be in deficit spending.

This means that they are faced with hard choices.  Are they going to look for additional work, which will reduce family time, but increase revenues?  Are they going to look at moving somewhere else that would allow them to cut their housing expenses?  Are they going to sell a car or cars and then buy cheaper ones or use mass transit?  Are they going to try and figure out ways to cut their food, healthcare and / or utilities?  Are they going to reduce their internet, streaming and cell phones?  None of these choices are without pain and risk; but if they want to put their family in better shape financially, they are probably going to have to do several of them.  What would you do?

Now, there is an interesting thing about my Everyman family income and expenses: they mirror the situation with our federal government.  The difference between the two is 8 zeros.  My Everyman family net income is $48,960, and the 2022 federal revenues were approximately $4,896,000,000,000 (8 zeros difference).  The Everyman family had $63,610 in expenses, and the 2022 federal expenditures were approximately $6,361,000,000,000 (8 zeros).  The Everyman family had $14,650 in deficit spending, and the 2022 federal deficit was $1,465,000,000,000 (8 zeros).

Finally, while there are numerous federal expenditure categories, the top half (eleven out of 22) make up over 85% percent of the total expenditures.  Just like the Everyman family, they could eliminate all the other expenses entirely and still not cover more than about 60% of the deficit spending.  (Note, if you’re a numbers geek like me, I’ve included a summary of Federal Expenditures for 2022 at the end of this article.)

So, it seems to me that the federal government is faced with the same hard choices that our Everyman family had to deal with (assuming the Federal government really wants to cut deficit spending) and even harder choices if it actually wants to reduce the national debt.

• The Federal government could increase revenues. However, the federal government doesn’t have the option of looking for additional work.  To increase revenues the Federal government would have to increase taxes; whether that would be on targeted groups or across the board would have to be determined.
• The Federal government could look at ways to reduce expenditures in high-cost areas.
  • It could raise the retirement age, or pro-rate social security payments based on need, and thereby cut social security expenses. For example, does an individual earning over $200,000 really need the small amount they could get in social security payments?
  • It could consider cutting defense spending. For example, currently the U.S. spends around 39% of the world’s total expenditures on defense, and U.S. expenditures are more than the next ten nations combined.
  • It could look at cutting Medicare spending. There appear to be three possible ways: increase the amount the Medicare beneficiary pays, cut services offered, and / or look at ways to reduce costs by dealing with the providers.  For example, in 2021 Medicare Part D spent $216 billion for pharmaceuticals.  Considering how much is paid by other payers or by other countries, imagine how much negotiating this expense might cut costs.

The list continues but I think you see where I’m going.

This brings me to my final point.  You hear a lot about various government expenditures and where some pundit thinks we should be cutting.  Going forward, I’d ask you to think of the information I’ve shared and ask how this expenditure compares with total Federal spending.  It’s actually pretty easy.  Just eliminate the first nine digits from the left (or eight with a decimal), for whatever amount they are talking about, and divide that by $6,400.  That will tell you approximately how much that amount is compared to total Federal expenditures.  Here’s some examples I pulled up today:

• President Biden announced he is going to provide $9,000,000,000 (9 billion) in student debt relief. If we eliminate the first nine digits, we end up with the following formula 9 / 6400 = 0.14% of federal expenditures.  For the Everyman family, that is roughly equal to buying twenty-two lattes.
• In 2022 Homeland Security was provided about $16.3 billion for customs and border protection. Now this is probably low because there are additional expenditures for border protection under the coast guard and defense, but let’s still do the formula: 16.3 / 6400 = 0.25%.  That’s roughly 2 to 3 gas tank fill-ups.
• Since Russia invaded Ukraine, the U.S. has provided about $113 billion in assistance. 113 / 6400 = 1.77%.  That’s roughly what the Everyman family will pay in interest on their credit cards for a year.

Now, I can’t guarantee that all my numbers are totally accurate, but I do think that they are all in the ballpark, and I really tried to use credible sources, averages, and estimates.

I hope this helped you understand federal expenditures, debt, and deficits a bit better by relating it to a family’s situation.  I also hope that I’ve given you additional information to critically evaluate the significance of various federal expenditures compared to the total.  Finally, I hope that I’ve helped you come to recognize what dollars are really required to have an impact on federal spending, and what amount to the cost of a latte…