7
Chap. 15 – The Federal Budget and Spending
For FY 2009, the federal budget was $3.107 trillion – a mind-numbing figure!
1. Always consider federal budget figures in perspective (mainly relative to GDP) – see pgs. 401-402
2009 budget = 21.8% of nominal GDP
2. Fed. Govt. outlays = G + TR + INT (pg. 403)
where G is govt. spending on goods and services
TR is transfer payments
INT is interest on the national debt
a) G is usefully divided into military and non-military spending – both generally declined between the late 1960s and the late 1990s, but have increased since (See Fig. 1, pg. 404) [PP 1]
b) TR payments include primarily retirement benefits (social security), health benefits (medicare/medicaid), and income security (welfare) (See Fig. 2, pg. 408) [PP 2]
Transfer payments have generally increased during the last 40+ years, from <5% of GDP in 1960 to >12% in 2006 (Fig. 3, pg. 406) [PP 3]
c) INT payments on the natl. debt were <1 ½% of GDP before the late 1970s, increased to > 3 ½% by the late 1980s, and declined to <2% by 2003, but have risen since (Fig. 4, pg. 408) [PP 4]
Total govt. outlays ranged from a low of about 17% of GDP in 1966 to a high of about 23% in 1983, to between 20-21% in the last few years (Fig. 5, pg. 409) [PP 5]
Note that federal outlays increase during recessions and decrease during expansions because
q Govt. outlays for unemployment compensation and welfare increase during recessions
q Tax revenues decrease during recessions
q And this combination may have lasting effects on budget deficits and interest payments on the national debt
Another useful way of viewing federal outlays is to distinguish between mandatory spending (social security, medicare-medicaid, unemployment, welfare, and federal debt interest payments) and discretionary spending (everything else);
for FY 2008
· Mandatory spending was $1.82 tril. (62% of the budget)
· Discretionary spending was $1.11 tril. (38%)
The implication of this split is that options to reduce federal spending are severely limited by the government’s “social contracts” and necessity to service its debt.
3. Federal tax revenues (in 2008)
q Personal income taxes = 45.5% of total revenue
q Social security taxes = 39.9%
q Corporate income taxes = 9.8%
q Excise taxes and other receipts = 4.8%
a) The personal income tax (See Table 1, pg. 409)
q Is designed to be a progressive tax (i.e., increasing marginal tax rates with increasing taxable income
q But is it really as progressive as the marginal tax rates would indicate?
b) Social security taxes (FICA and Medicare/Medicaid) are definitely regressive taxes (as are sales taxes) – note discussion of S.S. tax on pp. 409-410
c) Corporate income (profit) taxes are a relatively minor portion of total federal tax revenue
d) As are excise taxes – e.g., gasoline, liquor, etc.
The time trend of federal tax revenues (relative to GDP) is shown in Fig. 6, pg. 411 [PP 6]
4. Federal govt. budget surplus or deficit and the national debt
a) Surplus: When govt. revenue > govt. outlays
b) Deficit: When govt. revenue < govt. outlays
(See Fig. 7a, pg. 413) [PP 7]
q Note that deficits increase during recessions, due to larger outlays and smaller revenues (Fig. 7a)
q Since 1959, the federal govt. has generally run deficits – mostly 2 – 3% of GDP; largest deficit 6% in 1983, largest surplus 3% in 2000
(See Fig. 7b, p. 413) [PP 8]
c) National debt: The cumulative total of money the federal govt. has borrowed to finance budget deficits (see pg. 413 – 414)
The national debt in context (Fig. 8, pg. 414)
q > 100% of GDP at the end of WWII
q decreased until mid-1970s
q increased early 1980s – early 1990s
q decreased mid-1990s - 2001
q increased since 2001 [PP 9]
Effect of econ. fluctuations on deficits and debt
q During recessions, TR increase, TX decrease, so that deficits increase (or surpluses decrease) so that the national debt generally increases
q During expansions, TR decrease, TX increase, so that deficits decrease (or surpluses increase) so that the national debt generally decreases
Deficit/debt changes that result from econ. fluctuations are referred to as the “cyclical deficit,” while deficit/debt changes that occur for reasons independent of econ. fluctuations are known as the “structural deficit” (see pgs. 415 – 417)
Some recent benchmarks in the natl. debt / GDP ratio: 1987 – natl. debt 49.6% of nominal GDP
1995 – 67.2%
2000 – 57.0%
2003 – 60.9%
2006 – 63.5%
2009 – 83.5%
Is the national debt an economic menace? (pgs. 418 – 422)
Check this out:
U.S. NATIONAL DEBT CLOCK
The Outstanding Public Debt as of 29 Mar 2010 at 05:06:45 PM GMT is:
The estimated population of the United States is 308,097,138
so each citizen's share of this debt is $41,230.31.
- - - a meaningless statistic, but a favorite of the media and the economic doom mongers!
Myth: The natl. debt is a problem because it must eventually be repaid.
As long as the debt can be serviced (interest payments made), there is no long run problem.
But if the debt
q Grows too rapidly ( > nominal GDP growth rate)
q And thus overly “burdens” taxpayers in the future (increased taxes just to pay interest on the debt) or restricts the government’s future budgetary flexibility, then there is a problem!
Bottom line: When the debt / GDP ratio rises, there will be a future cost to society, in the sense that we will face a
“. . . permanently higher tax burden, a period of inflation, or a temporary period of reduced government outlays or higher taxes to bring the debt-to-GDP ratio back down.” (Text, pg. 425 – emphasis added.)
“Using the Theory” (pgs. 422 – 425) is a good, topical discussion of interrelated budget – fiscal policy – public debt issues.
XXX Chap. 15