Deficit Redux: How We All Learned To Stop Worrying And Embrace It

Michael Klein explains how in any given year, the difference between federal tax receipts and federal spending, including spending on servicing the outstanding federal debt, determines whether the U.S. Government has a budget deficit or a budget surplus.
Jeanne Sahadi notes that for fiscal year 2017, it hit $666 billion, $80 billion higher than the previous year. What does that mean?

The Deficit Redux

The deficit reached 3.5% of GDP whereas it was 3.2% of GDP in the year prior. Economists tend to make long-term comparisons using a measurement of the deficit as a percentage of gross domestic product. (The gross domestic product, or GDP, is a measure of the overall size of the U.S. economy.) The size of the federal budget deficit is tightly linked to how well the U.S. economy is performing. When the economy grows at a faster rate, this raises tax revenues and tends to lower spending on social safety net programs (since fewer people need these programs when the economy is doing well). Therefore, faster GDP growth reduces the budget deficit, even with no change in underlying economic policies.
This works in reverse, too; during a recession, the budget deficit increases. These automatic stabilizers help to mitigate the impact of cyclical downturns, even with no change in spending or tax policy. The rise in the budget deficit as a percentage of gdp would suggest that the economy is not as strong as it was a year ago.
The national debt is the public and intragovernmental debt owed by the federal government. Two-thirds of the U.S. debt is the Treasury bills, notes and bonds owned by to the public. They include investors, the Federal Reserve, and foreign governments. One-third is the Government Account securities owned by federal agencies. They include the Social Security Trust Fund, federal public employee retirement funds, and military retirement funds. It rose to $14.667 trillion as a percentage of gdp, falling slightly to 76.3%, down from 76.7% in the previous year. (Those figures don’t include the money owed to government trust funds like Social Security.)
The national debt can only be reduced through five mechanisms: increased taxation, reduced spending, debt restructuring, monetization of the debt or outright default. Remember, it’s the net accumulation of the federal government’s annual budget deficits: It is the total amount of money that the U.S. federal government owes to its creditors. Deficits are trees, the debt is the forest.
Total tax revenue as a percentage of GDP indicates the country’s output that is collected by the government through taxes. It can be regarded as one measure of the degree to which the government controls the economy’s resources. Tax receipts rose by $48 billion — or 1.5% — to $3.315 trillion, falling as a share of GDP to 17.3% from 17.7% a year earlier. This would seem to suggest there is less government control over the economy. Individual income taxes rose by $41 billion to $1.587 trillion while corporate income taxes fell by $2.5 billion year over year to $297 billion.
Spending also rose but faster than tax receipts. It went up by $129 billion — or 3.3% — to $3.98 trillion. Despite that, it too fell as a share of GDP to 20.7%, down from 20.9%.
Robert Greenstein, Joel Friedman, and Isaac Shapiro observed that total federal spending, including interest payments, rose considerably as a percent of the economy (gross domestic product or GDP) during the Great Recession and remained high in its immediate aftermath. But it is much lower now, due to the ongoing economic expansion and the expiration of most of the 2009 Recovery Act. In addition, policymakers have taken steps to reduce the deficit since 2010, primarily through program cuts required by the 2011 Budget Control Act.
Unsurprisingly, given the aging of the population, spending on Social Security and Medicare were up by 2.5% and 1.5% respectively. Kimberly Amadeo remarks how mandatory spending is currently estimated to be $2.535 trillion for FY 2018. The two largest mandatory programs are Social Security and Medicare. That’s 62 percent of all federal spending. It’s also three times more than the military budget.
Over the past 50 years, the U.S. federal government has run budget deficits every single year with the exception of five years — once in the late 1960s and during four years beginning in the late 1990s — such that the deficit averaged 2.8 percent of GDP between 1967 and 2016. In other words, we really don’t care about the deficit.



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