Deficit spending has been utilized by our government pretty consistently since the 1950s, but really began increasing in the 1970s. Since 1970, the yearly federal deficit (total revenues minus total outlays) has averaged about 2.6% of Gross Domestic Product (GDP). Interestingly enough, this percentage was the highest during the Reagan and Bush 41 terms. Reagan cut taxes, but he wasn’t able to cut costs to the same degree. During the first seven years of Bush 43, this percentage was a little below the historical average. However, the deficit includes the surplus of Social Security contributions over Social Security payments, and this surplus was much higher in the Bush 43 years. Excluding this surplus, Bush 43’s deficits through 2008 were about a little higher than the historical norm.
The historical level of deficit spending has hit a major blip with the current financial and housing crises. At 9.9% of GDP, the budget deficit in 2009 was almost twice the previous highest level (5.9% in 1983, after the Reagan tax cuts). The 2010 deficit will be about 9% of GDP. The deficit will exceed the total of individual and corporate income tax revenues in both 2009 and 2010. In other words, if we had all paid twice as much in federal income taxes in those two years, we still would have had deficits.
The 2009 federal deficit of $1.4 billion was $950 billion worse than 2008. About $450 billion of this was due to a drop in revenue. Individual income taxes were down 20% and corporate income taxes were down 55%. Net outlays for Social Security, Medicare, and Medicaid went up by $150 billion. When more people are out of work, less payroll taxes come in but the payouts don’t come down. Also, in poor economic times, more people become eligible for Medicaid. Bailouts (TARP, Fannie Mae, Freddie Mac, FDIC) cost the government $250 billion in 2009. Higher federal unemployment payments were up by $73 billion. Despite these tough financial conditions, Congress increased discretionary spending by 10%.
Fiscal year 2010 will be a little better than 2009, with the deficit going down by about $125 billion to $1.3 billion. Corporate income taxes are up, and the government received payments from TARP of $108 billion. However, other discretionary spending again up by 10% over last year. Much of that increase is of course the (non) Stimulus. In my last post I said that Congress spends when the economy is good and spends when the economy is bad. You would have to now add that they spend a whole lot more when the economy is really bad.
The Congressional Budget Office is projecting Federal deficits totaling $6.2 trillion over the coming decade. A deficit of $1.0 trillion is expected for 2011, and the average expected yearly deficit over the remaining 9 years is $576 billion. The projected yearly interest expense on the debt in 2020 is $778 billion, almost 3 and a half times what it will be for this year. As bad as this projection looks, you’ve got to consider the assumptions. They assume that the Bush tax cuts are not extended, the economy grows next year despite the increase in tax rates, health care costs decline with the new health care reform, unemployment is down to 5% by 2015, and inflation stays around 2% per year. Who wants to bet on that scenario?
From what this shows, there is no light at the end of the tunnel for deficit spending. Congress and the Obama Administration have not yet shown any indication of making tough decisions or acting financially responsible. This budget outlook could be called “Let’s just keep spending more and more to meet the our entitlement promises, maybe slow down discretionary spending a bit, and pray the economy gets a whole lot better fast”. Sounds like a plan to me! Just because the States are cutting spending doesn’t mean the Federal government would ever consider doing it too.
I apologize for putting in too many numbers this week, but I thought many might like a good picture of our government’s recent financial results without the ordeal of trying to wade through government web sites. Next week I’ll write about THE DEBT.