The Decline in Spending Projected by the Bush Budgets

In my prior post, I quoted this link which stated that "the near-term balanced budget projections are illusory" for four reasons. The third reason was that the "Administration projections assume unrealistic deep cuts in nondefense discretionary programs that fund infrastructure, education, public health, disaster relief".

This has not been the first time that the Bush Administration has projected deep cuts in outlays that never came to pass. The following graph shows federal receipts and outlays as a percent of GDP since 1980:

The actual numbers and sources are here. The red and black lines show the outlays and receipts from the most recent budget, the one for fiscal year 2009. The portions of these lines from 2008 on (to the right of the dotted line) are projections from the 2009 budget. The orange, yellow, green, sky blue, blue, indigo, and violet lines show the projections from the 2008 through 2002 budget, respectively. As can be seen from the red line, outlays as a percent of GDP have generally gone up since 2000 with small declines in 2004 and 2007. However, every prior Bush budget has projected a general decline in outlays over that period. The following table summarizes the periods during which outlays were projected to decline or stabilize in the Bush budgets:

Budget      First    Declining or
Fiscal  Projected  Steady Outlays
  Year       Year       Projected
------  ---------  --------------
  2002       2001       2002-2006
  2003       2002       2002-2007
  2004       2003       2003-2008
  2005       2004       2004-2009
  2006       2005       2005-2010
  2007       2006       2006-2010
  2008       2007       2006-2012
  2009       2008       2009-2012

As can be seen from the above graph, the Bush Administration's most recent projection is that outlays will decline rapidly from 20.7% of GDP in 2009 to 18.5% of GDP in 2012. This will be about equal to the low in outlays reached in 2000, before the War on Terror began and the prescription drug benefit (Medicare Part D) was implemented. Hence, this projection seems no more likely to occur than the projections from the prior seven budgets.

It may be tempting to blame the rise in outlays from 2000 to 2007 for the current deficits. However, the graph above shows that there was an even steeper decline in revenue from 2000 to 2004. In fact, the Bush Administration's Fiscal Year 2005 Mid-session Review conceded that the taxcuts played a role in the deficits. The pie chart on page 5 and Table 7 on page 28 of that report give the causes of the cumulative change in the federal budget from projected surpluses to actual deficits from 2001 through 2004. They show that 49 percent of this swing was due to reestimates, 29 percent was due to tax relief, and the remaining 22 percent was due to the war, homeland, and other spending. Hence, both the drop in revenues and the increase in spending have led to the current deficits.

Mid-Session Review for Fiscal Year 2009

On July 28th, the Office of Management and Budget released the Mid-Session Review of the U.S. Budget for fiscal year 2009. The following table summarizes updated projections of the deficit and debt from that document, both in billions of dollars and as a percent of GDP:

        RECEIPTS, OUTLAYS, DEFICITS, AND DEBTS (billions of dollars)

                            Actual  Estimate
                              2007   2008   2009   2010   2011   2012   2013
===========================  =====  =====  =====  =====  =====  =====  =====
Receipts...................   2568   2553   2651   2916   3084   3288   3439
Outlays....................   2730   2942   3133   3094   3187   3230   3410
---------------------------  -----  -----  -----  -----  -----  -----  -----
Unified deficit(-)/surplus.   -162   -389   -482   -178   -103     58     29
On-budget deficit..........   -343   -574   -663   -378   -321   -168   -172
Gross federal deficit......   -499   -672   -815   -505   -482   -375   -380

Debt held by the public....   5035   5421   5958   6137   6251   6208   6194
Debt held by gov't accounts   3916   4203   4480   4806   5175   5592   5986
---------------------------  -----  -----  -----  -----  -----  -----  -----
Gross federal debt.........   8951   9623  10438  10943  11425  11800  12180

          RECEIPTS, OUTLAYS, DEFICITS, AND DEBTS (percent of GDP)

                            Actual  Estimate
                              2007   2008   2009   2010   2011   2012   2013
===========================  =====  =====  =====  =====  =====  =====  =====
Receipts...................   18.8   17.9   17.9   18.7   18.7   18.9   18.9
Outlays....................   20.0   20.6   21.1   19.8   19.3   18.6   18.7
---------------------------  -----  -----  -----  -----  -----  -----  -----
Unified deficit(-)/surplus.   -1.2   -2.7   -3.3   -1.1   -0.6    0.3    0.2
On-budget deficit..........   -2.5   -4.0   -4.5   -2.4   -1.9   -1.0   -0.9
Gross federal deficit......   -3.7   -4.7   -5.5   -3.2   -2.9   -2.2   -2.1
                                                                            
Debt held by the public....   36.8   38.0   40.2   39.3   37.9   35.7   34.0
Debt held by gov't accounts   28.6   29.5   30.2   30.7   31.3   32.2   32.8
---------------------------  -----  -----  -----  -----  -----  -----  -----
Gross federal debt.........   65.5   67.5   70.4   70.0   69.2   67.9   66.8

As can be seen, the unified deficit is projected to reach $482 billion in 2009. In nominal dollars this is a record, surpassing the prior record of $413 billion reached in 2004. As a percent of GDP, however, the unified deficit will just reach 3.3 percent of GDP. This is far short of the prior post-World War II high of 6 percent of GDP reached in 1983.

However there's two serious problems with focusing on the unified deficit as an indicator of our financial condition. First of all, it doesn't include the monies that are being borrowed from the trust funds, chiefly Social Security. As the above table shows, the on-budget deficit is projected to be $663 billion in 2009. The on-budget deficit does includes the monies that are being borrowed from Social Security and the Postal Service. Including the monies being borrowed from ALL of the trust funds gives the gross federal deficit. This is the change in the gross federal debt and is projected to be $815 billion in 2009.

Secondly, and more importantly, we should be focusing on the debt not the deficit. It is the debt, not the deficit, that we will have to pay interest on forever (unless we pay it back). The only lasting significance of the deficit is that it is added to the debt. As the above table shows, the gross federal debt is projected to reach $10.438 trillion in 2009. That's 70.4 percent of GDP, far above the level of 39.9 percent of GDP that we reached in 1983 (see this link). It's even well above the prior high since 1955 of 67.3 percent of GDP reached in 1996. And the worst part is that we are 25 years closer to the Boomer retirement than we were in 1983. In fact, the first Boomers are just now eligible for early retirement and will be eligible for Medicare in just 3 years. Hence, we are arguably in much worse financial shape than we were back in 1983.

The following graph shows the projected deficits and debts as a percentage of GDP:

As can be seen, the gross federal debt as a percent of GDP is projected to start improving slightly after 2009 due to a rapidly improving deficit. However this link states that "the near-term balanced budget projections are illusory for the following reasons":

1. The projections fail to include war funding for Iraq and Afghanistan beyond mid-2009 -- which is highly unrealistic even assuming that a withdrawal from Iraq begins next year, as well as the bipartisan expectation that resources for operations in Afghanistan will have to increase.

2. The budget assumes only a one-year (2008) "patch" for the Alternative Minimum Tax (AMT), despite widespread expectations that AMT relief is likely to be provided in each of the next 5 years.

3. The Administration projections assume unrealistic deep cuts in nondefense discretionary programs that fund infrastructure, education, public health, disaster relief.

4. The near-term projections are based, in part, on Social Security surpluses--that will decline and disappear by 2017 as the boomers retire.

In any event, additional data from the Mid-Session Review can be found at this link.