Lexington, KY - There continues to be news of the federal government budget, with the stimulus plan, the omnibus budget bill, proposals for mortgage relief, and more talk about federal money for the financial sector. It all seems like it will add up to some pretty large numbers. And it does - uncomfortably large numbers.
The table below is my attempt to illustrate this. It's historical data on government spending and the federal deficit from the Congressional Budget Office and from the new administration's release of its budget proposal by the Office of Management and Budget (OMB). Row one pertains to the U.S. economy average for 1977 to 2007. During this time, federal government spending averaged 20.9 percent of all spending in the economy and the federal budget deficit averaged 2.5 percent of GDP. During fiscal 2008 (shown in row two), federal spending was at this historical average of 20.9 percent of GDP, and the deficit was somewhat higher than its average at 3.2 percent.
As is evident from the table, the federal presence in the economy has been quite large for decades, directing about one-fifth of our resources. Yet this presence will become even larger. Row three of the table shows the Congressional Budget Office (CBO) forecast for 2009 under outgoing President Bush's budget. This budget entails a large increase in federal spending, rising to nearly one-fourth of GDP and the deficit more than doubling to 8.3 percent of GDP. These are figures not seen since the tail of military spending in 1946 during the aftermath of World War II. And yet this does not reflect any programs of the Obama administration.
Row four shows the spending figures for the President's budget proposal for 2009. If enacted as proposed, this would raise spending and the deficit as shares of GDP to 27.7 percent and 12.3 percent. Part of this sharp rise is due to the fact that we are in a recession. Another part is due to the stimulus spending, which is intended to be temporary. However, even in fiscal 2010, the administration's forecast is for spending to be over 24 percent of GDP and the deficit 8 percent.
The final column of the table shows the percent increase in total forecasted federal spending in each of the scenarios compared to 2008. If the Obama administration had done nothing, we would have had the Bush budget increase of 19 percent. It looks as though a 32 percent increase in federal spending is likely.
Regardless of your politics, this is a big change in the direction of having more of the federal government in our economy and our lives. If you are content with the efficacy and competence of the federal government, this ought to warm the cockles of your heart. If, like me, you are dubious in this regard, you are likely to experience the opposite emotion.
For those of us in the latter category, we might be reassured by the claims that efforts are being taken to eliminate inefficiency and waste in government and to cut the budget deficit in half. Indeed, the OMB budget proposal shows a smaller deficit for 2010, mostly due to financial rescue dollars dropping off the budget, and indicates the 2010 deficit falling by more than half by 2013. However, a closer look still leaves cause for concern.
There are only two ways to cut the deficit - reduce spending or raise taxes - and there are no plans for overall spending reductions between 2010 and 2013. In fact, the OMB document calls for federal spending to increase by $304 billion and taxes to increase by $942 billion. This might be doable with the robust economic growth the OMB assumes. But even with strong economic growth, this budget would require that 34 percent of the growth in GDP be devoted to paying the additional federal taxes.
If the strong economic growth assumed by OMB does not emerge, we are left a more difficult task of finding $942 billion of tax revenue to come up with to fill the gaping yaw of a deficit that otherwise would emerge. This is no small order. In fact, this is greater that the sum total of all federal payroll taxes paid in 2007 of $842 billion. What about those folks who earn over $250,000 who are expected to bear the brunt of tax increases? Figures for 2006 for those earning over $200,000 (the closest reported category) paid a total of $537 billion in income tax. If this is the source of revenue to plug the deficit, their taxes would have to more than double. Even if you are one who has no compunction about taxing this group, you have to wonder whether this scenario is feasible.
The conclusion is that with robust economic growth, we will have a substantially increased tax burden in the future. Any growth short of that leads us to continuing historically large deficits or ever larger tax increases will have to reach deeply into society. Both pretty discomforting.
John Garen is department chair and Gatton Endowed Professor of Economics at the University of Kentucky.