The Shape of the Federal Budget

The Shape of the Federal Budget

The Shape of the Federal Budget

The release by the Congressional Budget Office of the “The Budget and Economic Outlook: 2022 to 2032″ (May 2022) offers an excuse to review a few facts and projections about the federal budget.

A first fact is that although one can always hear assertions about how federal spending or federal taxes have been climbing out of control for years or decades, the actual spending and taxing totals for the federal government have been remarkably stable for a half-century. The horizontal dashed blue line at 20.8% shows average federal spending as a percent of GDP from 1972 through 2021. The horizontal dashed green line at 17.3% shows average federal revenues during that time. Yes, spending spiked during the pandemic and to a lesser extent during the Great Recession of 2008-2010. There have been other times, like the dot-com boom of the 1990s when spending was well below its average and taxes were well above. But it is remarkable to me that the projections for the next year or so have total federal spending and taxes very much in line with what they have been for a half-century.

 

Total_Outlays_and_Revenues.jpg

But although the totals for federal spending haven’t changed much, the main areas of spending have shifted substantially–and are projected to keep shifting. Social Security spending is up from 3.2% of GDP in 1972 to 4.9% of GDP now, and headed higher. Major health care programs, Medicare and Medicaid leading the way among them, were 1% of GDP in 1972, and now 5.8% of GDP and headed higher. Net interest spending rises and falls, but it’s now 1.6% of GDP and headed higher. Conversely, defense spending was 6.5% of GDP back in 1972, and it’s now at 3.1% of GDP and trending lower. As I have noted before, the nature of the federal government is shifting in front of our eyes. It’s more and more about cutting checks for older people and health care providers, and less and less about defense or about building social infrastructure of various kinds.

CBO_Baseline.jpg

However, after five decades of more-or-less stability, the pressures are building on US government deficits and debt. This figure shows the standard measure of federal debt held by the public. (The reason for “held by the public” is so that it doesn’t count situations like the trust fund for Social Security, where the federal government holds its own debt–and thus where one part of the government has borrowed from the rest.) As you can see, the rise in the debt/GDP ratio from 2009 up to the present is similar to the rise that happened when the costs of World War II were paid for with borrowed money.

Federal_Debt_1900-2052.jpg

However, federal debt/GDP dropped sharply after World War II, and kept falling for decades. At present, the already high debt/GDP ratio is projected to stay roughly the same for a decade or so, and then to climb higher, due largely to the projections for higher health care and Social Security spending, combined with the way in which this higher spending would drive up federal interest payments.

There are options here. One is to accept that the elderly share of the US population is growing, and that Social Security and federal health care costs are going to keep rising, which implies that federal spending is going to undergo a long-term pattern of moving above its half-century average of 20.8% of GDP. The sharp increases in borrowing projected after the mid-2030s are likely to be undesirable, so there will be pressure for federal taxes to start edging higher as well. The alternative is to think seriously about America’s health care and retirement systems, and to stop kicking those two particular cans down the road.

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Timothy Taylor

Global Economy Expert

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.

   

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