Author’s Note: For source information, see Note 1
A. PROJECTED DEFICITS ─ 2011 THROUGH 2021.
When Bill Clinton raised taxes and cut spending, the deficit was eliminated and replaced by a modest surplus by the time he left office. And, the conservative mythology about tax increases killing jobs notwithstanding, the economy hummed along quite nicely under Clinton. Real GDP growth averaged 3.9%, far higher than in the administrations of Bush (father and son), and higher than when Reagan was in office, even though the latter goosed the economy with $1.3 trillion in deficit spending, a fact that conservatives conveniently overlook especially while they are expressing fierce indignation about Barak Obama’s deficits.
TABLE III-1
Average Growth in Real GDP
| |
Reagan
|
3.4%
|
Bush I
|
1.7%
|
Clinton
|
3.9%
|
Bush II
|
2.1%
|
Source: See Note 2.
Figure III-1 picks up where Figure I-3 left off. It shows how George W. Bush quickly converted Clinton’s budget surplus into a deficit through a combination of tax cuts and spending increases. His policies left the country with an ongoing or structural deficit equal to 4.5% of GDP (C). And in the fall of 2008, (which happens to be the first quarter of FFY 2009) the financial crisis exploded and the economy went into a tailspin, inflating the deficit to nearly 11% of GDP (D). Predictions of what will happen to the budget and economy in the future have always been difficult to make with any degree of confidence and the task is even more difficult in the tumultuous political environment that currently prevails. That said, the most widely accepted authority on those issues has been the Congressional Budget Office. Their most recent projections (posted in January, 2011) call for a recovery to begin sometime in 2012 at which time the country will be left with an structural deficit of roughly 3.5% (E). Economic indicators posted since January suggest that the recovery will be begin later and take longer than the CBO project in January. However, even if the timing of the recovery deviates from the CBO projections, there is no reason to think that the projected structural deficit will ultimately be any different.
FIGURE III - 1
Source: See Note 3
I have used the CBO projections of the on-budget deficit, which do not include social security deficits or surpluses. The CBO projections assume the following:
1) The Extensions of unemployment compensation, the one year reduction in the payroll tax, and the two-year extension of provisions designed to limit the reach of the alternative minimum tax all expire as scheduled at the end of 2011;
2) The cuts in personal income tax pushed through Congress by President Bush in 2001 and 2003 expire as scheduled at the end of 2012; and
3) Funding for discretionary spending (which includes all military spending) increases with inflation rather than at the considerably faster pace seen over the dozen years leading up to the recent recession.
4) The cuts in Medicare payments to physicians called for by the Sustainable Growth Rate (SGR) formula will be implemented.
5) Military commitments in Iraq and Afghanistan will be winding down.
6) Rapidly rising debt and higher interest rates will boost net interest costs from $225 billion in 2011 to just over $790 billion in 2021. As a result of the increasing magnitude of US debt creditors will demand higher interest rates. Interest on 3-month Treasury bills will rise from less than 0.25 percent in 2011 to 4.4 percent in 2021, and the rate on 10-year Treasury notes will increase from 3.2 percent to 5.4 percent.
I have adjusted the CBO figures by eliminating the SGR cuts (4) which will not occur[1], even though the law requiring them is still in place. This adds $20 billion to Medicare expenditures.
More details about the CBO estimates and their underlying assumptions is available in Note 2.
The long and the short of it is that, under the laws currently on the books the us will have to contend with a long-term deficit of 3.5% of GDP which, in 2015 will amount to $641 billion dollars.
ANALYSIS OF POST-RECESSION DEFICITS
As already noted in Part 2, deficits are the product of both spending and taxation policies. In this section I will first describe how spending will affect future deficits and then move on to a discussion of the role taxes will play.
(1) Spending
The spending categories that will be the primary drivers of future deficits are shown in Table III-2a (in billions) and in Table III-2b (as a % of GDP). Future deficits will be caused chiefly by health care costs and, to a lesser extent, by rising interest expenses[2].
TABLE III-2a
Spending (billions)
|
Change
| |||
2008
|
2015
|
billions
|
%
| |
Defense
|
$616
|
$752
|
$136
|
18%
|
Medicare and Medicaid
|
$599
|
$1,050
|
$451
|
43%
|
Net Interest
|
$253
|
$459
|
$206
|
45%
|
Other spending
|
$1,515
|
$1,220
|
-$295
|
-24%
|
TOTAL
|
$1,468
|
$3,481
|
$2,013
|
58%
|
Deficit
|
$642
|
$1,080
|
$438
|
41%
|
GDP
|
$14,394
|
$18,195
|
21%
| |
Source: See Note 4
Table III-2b is based on the same data as Table III-2a but spending and deficits are expressed as percentages of GDP rather than in billions of dollars.
TABLE III-2b
Spending as a % of GDP
|
% Change
| ||
2008
|
2015
| ||
Defense
|
4.3%
|
4.8%
|
11%
|
Medicare and Medicaid
|
4.2%
|
6.7%
|
38%
|
Net Interest
|
1.8%
|
2.9%
|
40%
|
Other spending
|
10.5%
|
7.8%
|
-35%
|
TOTAL
|
10.2%
|
14.4%
|
29%
|
Deficit
|
-4.5%
|
-5.9%
|
-1.4%
|
Source: See Note 4
The reader will note that, as a percentage of GDP, the deficit for 2015 grows 29% compared to 41% in Table where the calculations are based on actual dollars. this is because GDP grows by 21% over the 7-year period III-2a. state. This, of course, is because GDP is expected to grow 21% over the seven year period and 2015 expenditures are a lower percentage of revenues than would be the case had the economy remained stagnant.
So, as a percentage of GDP which, again, is our national income, our expenditures increase, but the increase is smaller than in Table III-2a because our income has increased along with our expenditures. Nonetheless, a deficit equivalent to 5.9% of GDP would be devastating if it were to become a reality. Fortunately, it can be eliminated, as I will show in Part 5, although its elimination will involve tax hikes as well as spending cuts. Before presenting my cure for the deficit, however, I would like to address the objections that I know conservatives will raise about tax increases. It is an article of faith with the right wing that tax increases kill jobs and slow economic growth. In Part 4, I will present the evidence that this is simply not true.
=========================================
NOTE 1 - Wherever possible I have provided original source citations for data cited in this series. In addition to these citations, I have posted Excel workbooks containing the underlying data for Tables, Figures, and my calculations for derived numbers.
Workbook 1 - Budget 2008 to 2012.xls
Workbook 2 - Budget Historical Data.xls
Workbook 3 - CBO Projections Jan 2011.xls
The workbooks can be found at Google Docs at:
Each workbook contains an index with clickable hyperlinks to the data sources for specified Tables and Figures. The hyperlinks do not work in Google.docs but will work if you download the document to your computer.
NOTE 2 - Budget of the US Government,2012, Historical Tables, Table 10-1. My calculations can be found in Workbook 2(10-1]
NOTE 3 - The data for Figure 3 come from the CBO report “Long Term Budget Outlook” Table1-4. I have consolidated the data in Workbook 1.3 and 1.4, published in January, 2011. http://www.cbo.gov/doc.cfm?index=12039. I consolidated the information and created Table II-2 in Workbook 3[Solution].Numbers in blue font are from Budget CBO Projections jan 2011.xls[1-4 Baseline Drficits]
The CBO projections are based on the following assumptions:
1) Extensions of unemployment compensation, the one year reduction in the payroll tax, and the two-year extension of provisions designed to limit the reach of the alternative minimum tax all expire as scheduled at the end of 2011;
2) Other provisions of the 2010 tax act, including extensions of lower tax rates and expanded credits and deductions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and ARRA, (i.e. the Bush tax cuts) expire as scheduled at the end of 2012; and
3) Funding for discretionary spending (which includes all military spending) increases with inflation rather than at the considerably faster pace seen over the dozen years leading up to the recent recession.
4) The cuts in Medicare payments to physicians called for by the Sustainable Growth Rate (SGR) formula will be implemented.
5) Rapidly rising debt and higher interest rates will boost net interest costs from $225 billion in 2011 to just over $790 billion in 2021. The increasing magnitude of US debt will result in a demand for higher interest rates by creditors. The interest rate paid on 3-month Treasury bills will rise from less than 0.25 percent in 2011 to 4.4 percent in 2021, and the rate on 10-year Treasury notes will increase from 3.2 percent to 5.4 percent.
I have modified the CO’s baseline figures in two ways:
· In keeping with my practice of excluding social security from my analysis of the deficit, I have removed revenues and expenditures of the social security trust funds.
· Because the SGR reductions in Medicare physician payments will never take place, I have removed those “savings” by increasing Medicare expenditures by $23 billion.
NOTE 4 - The data for Figures III-2a and III-2b are in Workbook 2 [1-4 Baseline Deficits]. The data comes the CBO report “Long Term Budget Outlook” Tables 1.3 and 1.4, published in January, 2011. http://www.cbo.gov/doc.cfm?index=12039
[1] As explained elsewhere, the law requiring the cuts is still on the books, but Congress has over-ridden the cuts every year since 1996 and will continue to do so until a permanent fix is legislated.
[2] The US is fortunate in that interest rates are currently at historic lows. If other countries begin to lose confidence in the safety of US bonds and the stability of the US dollar, that could change very quickly and the consequence would be a huge increase in our interest payments.
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