United States Annual Budget, Part I
Some day I’d like to write an Owners’ Manual to the United States with a summary of how our country operates – things many of us know hazily but can get easily confused on the details. In the meantime, the showdown over the debt ceiling has me going back to basics of the government. Part I will look at overall spending by the federal government in recent decades and years, and Part II will look at what that spending is for.
This is pretty elementary stuff, but even for someone who has been following these budget debates for a while, it may be useful to see a summary of the latest numbers.
The federal deficit is the difference between government spending (also called outlays) and government receipts (money the government receives from taxes and other sources such as natural resource fees). In the [unfortunately rare] event of spending being less than receipts, the difference is called a surplus instead. The federal deficit shouldn’t be confused with the trade deficit (basically the difference between how much the US sells to and buys from other countries).
Let’s Look At The Numbers
Taxes have not gone up. Statistics for spending and receipts since the 1930s (see figure, left panel) shows that federal receipts grew tremendously at about the time of World War II, but since the 1940s, have generally hovered between 16% and 18% of gross domestic product (GDP).
The actual dollar amounts have grown tremendously because the population has more than doubled since 1940, a dollar has gone down in value by more than a factor of ten since 1950, and in real terms (that is, adjusting for inflation), just since 1960, the value of the goods and services per person that America produces has more than tripled. But the more relevant measure is how big a chunk of national income is going to taxes, not how big the number has grown due to there being more people, or inflation, or because everybody is making more money (including people being paid by the government).
So, if someone says that taxes are out of control, note that they are actually a bit lower than in the 1990s.
This does not directly say if your taxes have gone up or down. Even aside from individual incomes going up and down over time, tax rates on specific incomes have changed over time, and differences regarding capital gains, payroll taxes, etc., add lots of complexity. But all in all, the federal government captures around the same fraction of the economy now as it did in 1990 or even 1960.
Federal spending has crept upwards. In the 1950s, it was about 16% of GDP, about equal to receipts. Since the 1980s, the four-year average has fluctuated between about 19% and 22%, with a peak during the Trump administration of almost 26%. Note that the left-hand panel groups together years from the 2nd year of a presidential administration to the first year of the next administration (for example 2018-2021 for Trump) because the new term begins in the middle of the fiscal year (FY 2023 began in October 2022), leaving presidents little time to exert much influence on the budget in their first year.
Deficit is growing almost exponentially. After the tremendous deficit spending of World War II, represented by a spike showing four years with an average annual spending of over 32% of GDP, deficits were generally 1% or less in the 1950s and 60s. In the 1970s and 80s, they grew to over 2%. Despite a pause in deficit spending – including a brief period of surplus in the late 1990s – the last 5 4-year-periods have had an average deficit of around 5% of GDP.
Recession and Covid have controlled recent spending. Looking at the right panel of figure, we see that spending rose after the 2008 recession, partly because many social programs automatically spend more when large numbers of people lose their jobs, and partly because the government spent money to prevent the recession from getting worse. The government made an even larger spending increase in 2020-2021 to curb the financial pain due to people staying home during Covid. Also receipts dropped in the early 2000s (Bush tax cut), dropped more sharply in 2009 because of the recession, and dropped slightly after 2015 (perhaps in part due to the Trump tax cut). I’m not sure why they increased in 2004-2007 and 2020-2022, though the Obama increase may have been due to recovery from the recession.
The Bottom Line
The United States federal government has been collecting taxes and other receipts at a stable rate of 16-18% of GDP since the 1950s. Spending has been on a slightly upward trajectory, from about 16% in the 1950s to over 20% in the 1980s, then down to under 19%, before going above 28% for two years due to the Covid pandemic. The combination of these two trajectories yields a situation of the 4-year-average annual deficit growing from 1% of GDP to peaks of 7% and 9% during the Great Recession and Covid, respectively. In FY2022, the last for which data is available, the annual deficit has returned to a still-high 7%.
Data Source
All data from FRED, the data hub for the Federal Reserve Bank of St Louis, Net Outlays as Percent of Gross Domestic Product and Federal Surplus or Deficit [-] as Percent of Gross Domestic Product.