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Setting Our Priorities

Many seemingly important functions of government receive tiny portions of the total federal budget, while 65% of the current budget is virtually untouchable.

If you really want to know what people value most, look at how they spend their money. This is true of individuals, households and whole nations.

In this national election year, you'll hear a lot of talk about reordering our priorities -- spending more tax revenue on this, less on that. As a useful prelude to this debate, let's see how Congress and the executive branch spend our federal revenues right now.

The first thing you need to know is that many seemingly important functions of government receive tiny portions of the total federal budget. Washington allocates 1% or less to environmental protection and natural resources, child-nutrition programs, research in the physical sciences (including space exploration), energy research and alternative fuels.

Each of the following receives 2%, more or less: aid to education, medical research and public health, support for state and local law enforcement, and homeland security. Transportation -- interstate highways, airports, port improvements and the like -- consumes about 3%.

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Some things that Congress fights over with ferocity are really small crumbs on the banquet table, each getting 1% or less: farm subsidies, foreign aid, welfare and disaster relief.

The lion's share

All the functions listed above total about 14% of the federal budget. So where do the big bucks go? Well, about 9% of each year's spending goes to pay the interest on the accumulated budget deficits of the past half-century.

Then there is military spending, swelled these days by the wars in Iraq and Afghanistan. But the Pentagon's share of federal spending -- 21% -- is probably less than most Americans would guess. It's higher than in the 1990s, but lower than in 1983 (26%) and 1968 (46%), during the Vietnam War. Our division of the budget pie still hasn't accounted for even half of total federal spending. So where do the majority of your federal tax dollars go? To your fellow citizens, in direct payments and benefits.

All of these "transfer payments" combined -- for the elderly, civil-service and military retirees and poor people without medical insurance, and for orphans, the unemployed and the disabled -- make up about 56% of annual federal spending.

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The lion's share of this -- about one-third of all federal spending -- goes out as Social Security benefits and Medicare payments. Medicare's budget share has more than doubled since 1983, to about 13% today. Health care for the poor -- Medicaid, a cost split with the states -- has tripled its budget share since 1983, to 7% today.

Pensions for federal civilian and military retirees, plus health care for veterans, consume a combined 6.6% of the budget. Besides Medicaid, other benefits for the poor (such as food stamps, housing vouchers and the low-income tax credit) total about 4%.

The vexing problem of reordering national priorities is that 65% of the current federal budget (56% in transfer payments and 9% in interest on debt) is virtually untouchable. Restraining entitlements would require a contentious overhaul of benefit formulas for Social Security, Medicare and Medicaid. Even if the Pentagon's budget share were cut in half, it would free up only 10% of federal dollars. And the problem will only get trickier as baby-boomers retire and the costs of Social Security and Medicare really soar.

Prioritizing

As a nation, we face tough choices: Do we allow entitlements -- especially health care -- to squeeze out funding for virtually every other function of government? Boost tax revenues to enlarge the budgetary pie? Reform entitlements to rein in future cost increases? Or do we map out a plan that combines all of these?

In the coming election, let's demand that the candidates give us some straight talk -- and clear thinking -- on these very difficult issues. And make your preferences known.

Columnist Knight Kiplinger is editor in chief of this magazine and of The Kiplinger Letter and Kiplinger.com.