Federal Outlays since 1940 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 1940 to 2012 at the following links:

Outlays in Billions of Current Dollars
Outlays as a Percentage of GDP
Outlays in Billions of 2000 Dollars

The graph at the first link shows the total outlays and receipts since 1950. The actual numbers used to create this graph can be found at def08.html. As can be seen, total receipts have mostly been in the 17% to 19% of GDP range in the 52 years since 1954. They have only dipped below 17% of GDP in four years, reaching a low of 16.1% of GDP in 1959 and they have risen above 19% in eight years, reaching a high of 20.9% of GDP in 2000.

Outlays have been less stable. They were likewise in the 17% to 19% of GDP range for all but one year 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 over 20% of GDP. Hence, one could argue that a major contributor to deficits was the steady increase in spending from 1966 through 1983 and from 2000 to 2006 with no corresponding increases in receipts. However, these 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 and from 2004 through 2006. In any case, the graphs at the second and third link above show the components of federal spending from 1940 to 2012.

The second link 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 and second graphs shows seven major components of federal spending. As can be seen, National Defense spending has been generally decreasing, going from 9.3% of GDP in 1960 to 4.0% of GDP in 2000. There were increases from 1979 to 1986 and from 1999 to 2006 but the overall trend has been down. Social Security rose from 2.2% of GDP in 1960 to almost 5% of GDP in 1983 but it has since dropped back slightly to 4.2% of GDP. Medicare, on the other hand, has risen fairly steadily since its inception in 1967, reaching 2.5% of GDP in 2006. Health (of which Medicaid grants comprised 71% in 2006) rose from under 0.2% of GDP in 1960 to nearly 1% of GDP in 1979 but stabilized at that level through 1990. From there, it began to rise, reaching 1.9% of GDP in 2006. Income Security consists of General and Federal Retirement and Disability, Unemployment Compensation, and Housing, Food and Nutrition, and Other Income Assistance. It was between 1 and 2 percent of GDP from 1949 through 1970, rose to 3.2% of GDP by 1975, and has been between 2.5 and 3.6 percent of GDP since then. Net interest was between 1 and 2 percent of GDP from 1944 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 rose from 3.3% of GDP in 1960 to 5.5% of GDP in 1978 but dropped to a low of 2.1% of GDP by 1997. Since then, it has risen back to 3.2% of GDP.

The third and fourth graphs show a further breakdown of the all other spending category in the first two graphs. Of special interest might be Undistributed Offsetting Receipts which 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. Another notable item is Commerce and Housing Credit spending which has been very close to zero since 1960 but rose to over 1% of GDP in 2000 and 2001. This was due to an increase in Deposit Insurance spending to pay for the Savings and Loans bailout.

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 and other reasons, 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 third link above. The 2008 budget projects that the unified deficit will turn into a small $61 billion surplus in 2012. The first graph shows that, on the spending side, this is chiefly due to projected spending on National Defense and Other Outlays. National Defense spending is projected to increase through 2008 but it is then projected to drop to just under its 2004 level by 2012. Other Outlays spending is projected to start dropping immediately and to drop to under its 2002 level by 2012. The second and third graphs show that the cuts in this spending are chiefly in Education and in Community and Regional Development. Education spending is projected to drop to just below its 2002 level and Community and Regional Development spending is projected to drop to below its 2001 level. This latter drop likely assumes that there will be no unusual disaster spending since nearly 85 percent of this spending in 2006 was for disaster assistance.

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. Actually cutting real spending will present that much more of a problem.

In any case, one other interesting thing to note from the first graph is that National Defense spending has been moving in something of a sine wave since 1952 reaching maximums in 1953, 1968, and 1989 and reaching minimums in 1965, 1976, and 1998. It kept in the 240 to 400 billion range (in constant 2000 dollars) from 1952 to 2003 but broke above that in 2004.

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