The Federal Budget-Part 3. Six Numbers and Three Graphs

There are those who believe federal government spending, as a percent of GDP is up because of a weak economy. There are others who believe federal spending is up because spending has grown at a much higher rate than our economy.

The facts support the latter belief. GDP for 2011 is expected to be 4% higher than the peak of 2008. But federal spending is expected to rise 22% from 2008 levels. And little of this is due to automatic stabilizers or stimulus spending. Simply put, federal spending is high as a percent of GDP because federal spending has expanded dramatically over the past three years.


The graph below shows US GDP in 2008 and 2011 (estimate). The National Bureau of Economic Research dates the peak of the prior cycle in the December 2007 quarter, but we've used GDP for 2008 since according to CBO GDP in 2008 was higher than 2007. GDP fell in 2009. But as is obvious from the graph, GDP in 2011 is expected to be higher than the peak of the prior cycle, by about 4%. Economic growth is weak, but GDP is higher now than it was at the peak of the past cycle. That is, spending to GDP isn't up because GDP is lower, because GDP isn't lower at all. It is higher. All time high.

Source: "CBO The Budget and Economic Outlook: Fiscal Years 2011 to 2021," January 2011.

The next graph is Federal spending over the same time period. Federal spending is expected to grow about 22% over the past three years. One may ask how much of this is driven by automatic stabilizers (payments made by the federal government that rise with lower economic activity, like unemployment payments), and the answer is not much. CBO estimates about $63 billion of Federal spending in 2011 will be from automatic stabilizers.

Source: "CBO The Budget and Economic Outlook: Fiscal Years 2011 to 2021," January 2011.

Which leads to our third graph, federal outlays to GDP. Well, if the numerator goes up 22% and the denominator goes up 4%, it's pretty obvious what happens. Federal spending, as a percent of GDP has gone up from 20.7% to 24.1%.

Source: "CBO The Budget and Economic Outlook: Fiscal Years 2011 to 2021," January 2011.

The Federal Budget-Part 2

This post summarizes the major plans Congress and the President are considering.

This first graph is cumulative receipts for the Federal government for the ten years ending 1999, 2009 and the estimated amount for the ten years ending 2019 under the Simpson-Bowles, the President's alternative Baseline and the Paul Ryan plan. As you can see, NONE OF THESE PLANS anticipate a reduction in federal receipts.

Federal Receipts in billions of $

This next graph shows the cumulative outlays for the Federal government for the ten years ending 1999, 2009 and the estimated amount for the ten years ending 2019 under the Simpson-Bowles, the President's alternative Baseline and the Paul Ryan plan. As you can see, NONE OF THESE PLANS anticipate a reduction in federal outlays.

Federal Outlays in billions of $

Finally, this last graph shows the cumulative deficits of the Federal government for the ten years ending 1999, 2009 and the estimated amount for the ten years ending 2019 under the Simpson-Bowles, the President's alternative Baseline and the Paul Ryan plan. As you can see, NONE OF THESE PLANS anticipate a reduction in federal deficits.

Federal Deficits in billions of $

We will reiterate our point from yesterday. All of the plans to reduce the deficit $1 trillion over the next ten years are rather puny when placed in the context of what the federal government is spending.

Let's Talk about the Federal Budget-Part 1

Jim Himes hosted a telephonic town hall last week on the Federal debt, where in typical Himes fashion he supported ..... Wait. What did he support? I think he supported the Simpson-Bowles plan. Maybe. Sort of. Or was it the Gang of Six plan. Maybe. Sort of. Definitely not Paul Ryan's plan. Too radical. Not sure if he had an opinion on the President's budget, which was voted down by the Senate 97-0.

But we did learn some things. For instance, Himes is in favor of eliminating loopholes in the tax code so he can introduce more loopholes in the tax code. Specifically, he wants to get rid of deductions oil and gas companies take on their tax returns so he can replace that with deductions solar and wind energy producers will take on their tax returns. He wants to replace ethanol subsidies with green energy subsidies. Reminds us of The Who line, "Meet the new boss. Same as the old boss."

But the main topic of the call was the Federal deficit, the debt ceiling and the budget. Let's start with some numbers. In (fiscal) 2010 the Federal Government spent $3.456 trillion. The biggest items were $707 billion on Social Security, $693 billion on Defense, $622 billion on Medicaid and other Income Security programs. and $451 billion on Medicare.

The President commissioned a group to study the budget and suggest changes. This group, headed by Alan Simpson and Erksine Bowles published their conclusions late last year. They suggesting growing the Federal budget from $3.456 trillion in 2010 to $5.1 trillion in 2020.

President Obama submitted a budget that suggested increasing Federal spending from $3.456 trillion in 2010 to $5,629 trillion in 2020.

Finally, Congressman Paul Ryan, in April, put forth a plan to increase Federal spending from $3.456 trillion in 2010 to $4.544 trillion in 2020.

In brief:
Paul Ryan spending increase 2010-20 equals 31.5%.
Simpson-Bowles spending increase 2010-20 equals 45.0%
President Obama spending increase 2010-20 equals 62.9%.

For all of these plans, the US would still have a budget deficit in 2020. President Obama's would top $1 trillion.

Some more perspective. The cumulative spending, from 2012-2021, which is the period all of these budget debates are discussing is somewhere around $45 trillion. Simpson-Bowles suggest somewhere around $44 trillion, President Obama around $47 trillion and Paul Ryan around $40 trillion.

The debate on budget cuts are NOT debates on spending cuts; they are debates on cutting the growth of spending. They are debates on cutting proposed budgets. Exactly like the debate we had on the Board of Ed budget where reducing the growth of spending from 8% to 4% was characterized as a severe hardship. Bah.

The other thing to keep in mind is really how puny these cuts are. The President, as best we can tell, has agreed to a trillion or two of cuts to his budget, which would bring his ten year spending projection down to $45 trillion and a deficit in 2020 still in excess of $1 trillion.