Commentary by Robert Kleine: Is Anyone Really Serious about the Federal Budget Deficit?

Is Anyone Really Serious about the Federal Budget Deficit?

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 available at: 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 2013.

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 rhetoric.

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