Federal Outlays since 1962 and Their Role in Deficits

There has been a great deal of discussion about the role of spending in the current and past deficits of the federal government. Since the most commonly referenced deficit, the unified deficit, is equal to federal revenues minus federal outlays, deficits are affected by all items that affect revenues and outlays. These items include tax rates, economic activity, and spending. Regarding spending, I have posted a number of graphs and tables that look at spending from 1962 to 2008 at the following URLs:

http://home.netcom.com/~rdavis2/outcur04.html (Outlays in Billions of Current Dollars)
http://home.netcom.com/~rdavis2/outgdp04.html (Outlays as a Percentage of GDP)
http://home.netcom.com/~rdavis2/outpc04.html (Outlays per Capita, in 1996 Dollars)
http://home.netcom.com/~rdavis2/outcon04.html (Outlays in Billions of 1996 Dollars)

The graph at the first URL shows the total outlays and receipts since 1950. The actual numbers used to create this graph can be found at http://home.netcom.com/~rdavis2/deficits.html. As can be seen, total receipts have mostly been in the 17% to 19% of GDP range in the 50 years since 1954. They have only dipped below 17% of GDP twice, reaching a low of 16.1% of GDP in 1959 and they have risen above 19% in eight years, reaching a high of 20.8% of GDP in 2000.

Outlays have been less stable. They were likewise in the 17% to 19% of GDP range from 1954 through 1966. However, they then began to rise steadily, reaching a high of 23.5% of GDP in 1983. From there, they began a long decline, finally getting back in the 17% to 19% of GDP range in 1999 through 2001. However, they have now risen again to nearly 20% of GDP. Hence, one could argue that a major contributor to the deficit was the steady increase in spending from 1966 through 1983 with no corresponding increase in receipts. However, the deficits were also exasperated by the sharp drop in receipts from 1981 to 1983 and from 2000 to 2003 and were relieved by the growth in receipts from 1992 through 2000. In any case, the graphs at the second through the fourth URL above show the components of federal spending from 1962 to 2008.

The second URL above shows the outlays as a percentage of GDP. This is a useful measure of the stability (or lack thereof) of the growth in receipts and outlays. Because wages tend to grow at the same rate as the GDP, receipts tend to remain at the same percentage of GDP, given that tax rates and economic activity stay at the same relative level. If outlays can likewise be kept at the same percentage of GDP, then the budget can be kept at the same level of balance.

The first graph shows six major components of federal spending. As can be seen, National Defense spending has been generally decreasing, going from 9.2% of GDP in 1962 to 3.0% of GDP in 2000. There was a temporary increase of over a percent of GDP from 1979 to 1986 but the overall trend has been down. Social Security rose from 2.5% of GDP in 1962 to almost 5% of GDP in 1983 but has since stabilized between 4 and 5 percent of GDP. Medicare, on the other hand, has risen fairly steadily since its inception in 1967, reaching 2.0% of GDP in 2000 and projected to rise to 2.5% of GDP by 2008. Health (of which Medicaid grants comprised 76% in 2000) rose from 0.2% of GDP in 1962 to nearly 1% of GDP in 1979 but stabilized at that level through 1990. From there, it began to rise, reaching 1.6% of GDP in 2000 and projected to reach 2.4% of GDP by 2008. Net interest was between 1 and 2 percent of GDP through 1980, rose to about 3% of GDP from 1985 through 1997, and has now dropped back to the 1 to 2 percent level. Finally, all other spending was generally between 5 and 6 percent of GDP from 1962 through 1970, rose to between 8 and 9 percent of GDP in the late seventies, and has generally dropped back to the 5 to 6 percent level since 1987.

The second graph shows a further breakdown of the all other spending category in the first graph. The first three components make up the outlay category called Income Security. These three components are General and Federal Retirement and Disability, Unemployment Compensation, and Other Income Security. Retirement and Disability rose from about 0.5% of GDP in 1962 to about 1% of GDP in 1975 and has remained at about that level. Unemployment Compensation has generally remained under 1% of GDP, peaking in 1976, 1983, 1992, and 2002. Meanwhile, Other Income Security rose from 0.5% of GDP and has been between 1 and 2% of GDP since 1975. Undistributed Offsetting Receipts consist chiefly of the payments federal agencies make to retirement trust funds for their employees and are counted as negative outlays. They have gone from about -1% of GDP in 1962 to -0.5% of GDP now. Commerce and Housing Credit spending has been very close to zero since 1962 except in 1999 through 2001 when it rose to over 1% of GDP. This was due to an increase in Deposit Insurance spending to pay for the Savings and Loans bailout. Finally, all other spending (excluding the first five items in both graphs) can be seen to have been at about 5% of GDP from 1962 through 1983 with a slight rise in the late 70s to about 6% of GDP. It then began to drop and has been between about 3 and 3.5 percent of GDP since 1988.

Now, if revenues grow with the GDP and the budget is currently balanced, outlays can grow with the GDP and the budget will remain balanced. If the budget is running a deficit however, such a growth in spending will insure continued deficits. For that reason, it's also instructive to look at how spending is growing in constant (inflation-corrected) dollars. This is shown in the graphs and tables at the fourth URL above. One interesting thing to note from the first graph is that National Defense spending has been moving in something of a sine wave since 1962 reaching maximums in 1968 and 1989 and reaching minimums in 1976 and 1998. The average spending has been about $300 billion in 1996 dollars.

There is a major problem with trying to restrain spending to the increase in inflation. Because programs are having to support a growing population, such a restraint would represent a decrease in per capita spending. For that reason, it may be better to look at spending growth in per-capita, inflation-corrected terms than just in inflation-corrected terms. This is done in the graphs and tables at the third URL above.

The first graph at the third URL shows that National Defense has been generally decreasing in per-capita, constant dollars. However, Social Security, Medicare, and Health have all been rising steadily since 1962. Net Interest likewise grew from 1962 through 1995 but dropped sharply through 2003. All other spending grew from $895 (in per-capita, 1996 dollars) in 1962 to $1872 in 1980 and stayed between that level and $1400 through 2001. It is projected to rise to the $1900 to $2000 range through 2008.

As before, the second graph shows a further breakdown of the all other spending category in the first graph. Most of the categories have been fairly stable since 1980. An exception is Other Income Security which had a per-capita spending of under $200 billion (1996 dollars) from 1962 through 1974, between $200 and $400 from 1975 through 2001, and over $600 since then. The all other category now shows an increase from $745 in 1962 to about $1300 in 1978. Spending then dropped to the $800 to $1000 range from 1987 through 2001. It is projected to be in the $1000 to $1200 range through 2008.

In summary, the categories in which most of the real, per-capita growth in spending has occurred since 1962 are Social Security, Medicare, Health, and to a lesser extent, Net Interest and Other Income Security. Except for a temporary increase in the late seventies and the Savings and Loans bailout in 1989 through 1991, there has been little real, per-capita growth in all other spending since 1962. Such spending decreased fairly steadily through the eighties and stayed at about the same level through the nineties. Hence, it would seem incorrect to suggest that a growth in this other category of spending (chiefly non-defense, discrestionary spending) contributed to the growth in the large deficits of the eighties, at least not as a whole. At best, one might suggest that the growth in such spending before the start of the eighties was a contributing factor.

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