Wednesday, August 20, 2008

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.

Tuesday, August 5, 2008

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.

About Me

I became interested in U.S. budget and economic matters back in 1992, the first time that I remember the debt becoming a major issue in a presidential election. Along with this blog, I have a website on the subject at http://www.econdataus.com/budget.html. I have blogged further about my motivations for creating this blog and website at this link. Recently, I've been working on replicating studies such as the analysis at this link.

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