Thursday, March 12, 2009
These charts reflect revenue and spending data through February 2009, with my assumption for GDP growth (-4% real growth for the quarter, plus 2% inflation). The point is that spending and deficits are "off the charts." By the time we get to the end of this year or early next year, federal spending will be close to 30% of GDP, and the deficit will probably be 13% of GDP.
To be fair, a lot of the spending this year is "emergency" spending, and is not really spending per se. It is the result of government (and Fed) purchases of securities. So it might be appropriate to call it a type of investment, since not all the money spent on security purchases will be wiped out, and some securities may even result in a profit for the government.
Looking out over the long term, however, Obama's wish list budget calls for government spending to average about 22% of GDP. That's rather fanciful in my view, since a lot of the extra spending jammed into the budget already for this year will be very hard to reverse entirely in the years to come. A conservative estimate would be for government spending to average at least 23% of GDP and possibly more, if Congress acquiesces to all that the Obama administration is asking for. We haven't seen anything like that since WW II.
If government spending is going to be at least 23% of GDP in the future, whereas for the past 40 years revenues have averaged a bit less than 18% of GDP, then we are either going to have gargantuan deficits for as far as the eye can see (5% of today's GDP is $750 billion), or we are going to have a significant increase in the economy's tax burden. I pin my hopes for "change" on the fact that, no matter how high tax rates have been in the past (recall the 70% top marginal rates in the late 1970s and early 1980s), the federal government has never been able to grab much more than 20% of the economy's income. I think this economy is going to significantly resist a massive expansion of government and its attendant tax burdens. If it does, then that would be extremely bullish news for financial markets.
Posted by Scott Grannis at 6:05 PM