Is Anyone Really Serious about the Federal Budget
This week the U.S. House voted to extend the Bush tax cuts for
another year at a cost of $403 billion. Republicans claim
they want to reduce the budget deficit but appear to be only
interested in cutting taxes.
Clearly federal spending needs to be reduced but there is no way
that the deficit can be eliminated or even significantly reduced
without raising taxes. Lets look at the facts.
First, taxes in the U.S. are among the lowest in the developed
world. In 2009, all U.S. taxes (federal, state and local) as a
share of GDP were 24.8%, down from 29.5% in 2000, and lower than
all of the 34 OECD countries, except Chile and Mexico. (The data is
In comparison tax rates in the Scandinavian nations are the
highest, averaging 44.7% of GDP.
Second, Federal revenues as a % of GDP were 15.4% in FY 2011,
the lowest percentage since 1950, when taxes were 14.4% of GDP. In
1950 we did not have Medicaid and Medicare and Social Security was
about 1% of GDP, which is the main reason 40% of senior citizens
lived below the poverty line in the 1950s. (Federal spending
averaged 17.7% in the 1950s.)
In 2011, Medicaid, Medicare, and Social Security were 10.3% of
GDP. Defense spending was 5% of GDP in 1950 and 4.7% in 2011.
In 1950, Federal spending on all programs other than Social
Security was 13.3%, or 8.3% excluding defense. To balance the
budget with revenues at only 15.4% of GDP would allow spending of
only 5.1% on all programs other than Medicare, Social Security, and
Medicaid, and with defense spending at 4.7% of GDP, only 0.4% could
be spent on the remainder of the Federal budget, which would not
even be enough to pay the interest at the debt (1.7% of GDP).
To be clear, there would be no money to spend on programs
that we spent over 8% of GDP on in 1950. I have assumed no
reduction in the % of GDP spent on the major entitlement programs
because these programs will have to be cut significantly due to the
retirement of the baby boomer generation just to keep the
percentage from increasing.
If the Bush tax cuts and the payroll tax cut were not extended,
CBO estimates that Federal revenues would be 17.8% of GDP in FY
What should be the level of Federal spending? The Republicans
are suggesting 18-19%. Federal spending in 2011 was 24.1% of GDP.
Excluding defense and the three major entitlement programs federal
spending was 9.2% of GDP, not significantly higher than in 1950 ,
despite spending to fight the deepest recession since the 1930s. If
you assume a 10% reduction in defense spending to 4.2%, maintaining
Medicaid, Medicare and Social Security spending at 10.3%, and
reducing all other spending to 7.5% of GDP, you are at 22% of
GDP. Make no mistake this will still require some very
difficult spending cuts. If Federal revenues can be returned to the
2000 level of 20.8% by a combination of higher economic growth and
revenue increases, the deficit would be only 1.2% of GDP.
Decimating the Federal budget would clearly be a prescription
for economic disaster and America would soon become a second rate
nation, as there is no successful democratic nation in the world
that currently has less government than the United States.
This is an issue that should be debated but with facts not