By Jill Schlesinger
Tribune Content Agency
The news cycle has prompted many of you to write in ask a number of questions about terms that you read and hear about. These answers are intended to help you understand what you need to know about various policy initiatives that could be coming.
Q: When Federal Reserve Chair Janet Yellen says “the economy is doing well,” what exactly does that mean?
A: After the most recent Fed policy meeting, where the central bankers announced the third quarter-point rate hike in 15 months, Yellen held a press conference in which she commented about the economy. In between a lot of technical jargon, Yellen was asked what consumers should take away from the Fed's rate increase and she responded with the “well” comment. Although Fed officials can be inscrutable, here's a way to figure out what Yellen meant.
The long-term economic growth rate (gross domestic product or GDP) averaged about 3 percent annually for the 50 years from 1966 through 2016. That said, the post-recession years, from June 2009 through the end of last year, have seen a lower growth rate of just over 2 percent per year. In their recent economic projections, Fed officials expect GDP growth to remain at around 2 percent per year for the next three years. That seems like the economy is doing well, but not exactly sizzling.
Q: What is the big deal about the alternative minimum tax (AMT)?
A: After a few pages of President Trump's 2005 tax return was recently revealed, there was a lot of freaking out about AMT, which the president paid in that tax year. Here's the deal: AMT was created in 1969 to ensure that wealthy taxpayers pay at least some minimum amount of federal income tax, regardless of deductions, credits or exemptions. In essence, it is a flat tax with two brackets, 26 percent and 28 percent. Originally intended to prevent perceived abuses by a handful of the very rich, it now affects almost 5 million filers.
Q: What are discretionary budget items?
A: When President Trump unveiled his budget blueprint for fiscal year 2018, I fielded a bunch of questions about terminology. Just like your own budget, there are items that are discretionary (dining out, entertainment) and nondiscretionary – or mandatory – such as a mortgage payment. Federal budgets also use those terms, though there are other implications.
Discretionary spending, which includes most defense, education and transportation programs, is determined through the congressional appropriations process. Mandatory spending is governed by law and includes entitlement programs, such as Social Security, Medicare,and Medicaid, as well as many smaller programs, including unemployment compensation, retirement programs for federal employees, student loans and deposit insurance. About 60 percent of all federal spending is considered mandatory.
Q: What's the difference between the debt and the deficit?
A: The deficit is a simple annual calculation – it's the money government takes in minus the money government spends. According to the Congressional Budget Office (CBO), the deficit for fiscal year 2017 is $559 billion or about 3 percent of GDP.
The national debt equals the total amount borrowed to fund the annual deficit, and it currently stands at $20 trillion. The national debt is divided into debt held by the public ($14.4 trillion) and debt that the government essentially owes itself ($5.5 trillion).
CBO projects that over the next decade, “if current laws remained generally unchanged, budget deficits would eventually follow an upward trajectory – the result of strong growth in spending for retirement and health care programs targeted to older people” – such as Social Security and Medicare – “and rising interest payments on the government's debt.”
Jill Schlesinger, CFP, is a senior business analyst for CBS News and the Senior CFP Board Ambassador for the Certified Financial Planner Board of Standards, Inc. Contact her at askjill@JillonMoney.com.
Printed in the April 16 – April 29, 2017 edition
