Federal Receipts and Expenditures

I was interested to take a look at the trends in receipts and expenditures of the U.S. federal government over the last 40 years.

The top panel in the graph below plots federal expenditures as a percentage of GDP since 1972. There were a few years when this fell below 20%, but it has averaged about 22% over this whole period and for the last 3 years has been above 25%.

Federal expenditures and receipts as a percentage of GDP, 1972-2011. Horizontal line at 20.0. Data source: CBO

Federal receipts, in the bottom panel, have rarely been above 20% of GDP, and historically averaged about 19%. The difference (22 – 19 = 3) is the 3% deficit the U.S. has maintained on average over this period. For the last 3 years, receipts have been below 17%.

With expenditures in 2011 3.2% higher as a percent of GDP than average, and receipts as a percent of GDP 2.4% lower than average, we had a federal deficit in 2011 equal to 8.6% of GDP, or 5.6% higher than average.

Next consider breaking spending down into its 3 main components: defense, entitlements, and other. The graph below plots each of these as a percent of GDP, with horizontal lines indicating the historical averages. U.S. defense spending at the moment is right at its historical average of 4.7% of GDP, though at one point it had been as low as 3.0%, a value reached in 2000. Spending on categories other than defense and entitlements is also close to its historical average. From a long-term perspective, all the growth in spending has come from entitlements.

Components of federal expenditures as a percentage of GDP, 1972-2011. Horizontal lines drawn at historical averages for each series. Data source: CBO

In particular, Medicare has gone from 3.6% of all federal spending in 1972 to 15.6% in 2011, Medicaid from 2.0% to 7.6%, and income security, which includes unemployment compensation, Supplemental Security Income, and welfare, has gone from 7.1% to 11.2%. As the population ages and relative medical costs increase, entitlement spending will become even more dominant.

In addition to these long-run trends, it is also interesting to look in particular at the changes over the last decade. Economic Policies for the 21st Century examined what turned the surpluses that the Congressional Budget Office had been projecting in 2001 (the blue line in the graph below) into the actual large deficits (red line). One important factor is that GDP did not grow as fast as CBO had been predicting; the contribution of unanticipated “economic and technical changes” is summarized by the green line. A bigger contribution came from the fact that discretionary spending (chiefly defense) was higher than anticipated by CBO in 2001 (purple line). The tax cuts also made a material contribution.

Source: Economic Policies for the 21st Century

Here is E21’s calculation of the respective contribution of the various factors.

Source: Economic Policies for the 21st Century

The implication of a simple look at the numbers should be obvious to any objective observer. To return to long-run fiscal solvency, the U.S. will need both tax increases, defense cuts and significant entitlement reform.

The fact that I don’t hear more people delivering the same clear message suggests to me that we don’t have enough objective observers.

About James D. Hamilton 244 Articles

James D. Hamilton is Professor of Economics at the University of California, San Diego.

Visit: Econbrowser

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