Monday, July 13, 2009

Federal budget continues to deteriorate


As these charts should make clear, we are in uncharted territory when it comes to the federal budget. Revenues are down 15% in the past 12 months, the steepest decline on record, while spending has soared 26% over the same period, also a record. The budget deficit is now 10% of GDP, $1.4 trillion: Federal spending is now 25.5% of GDP, while tax receipts are a mere 15.4%.

Some of the spending this year will roll off next year, but if Obama's budget is passed, spending will most likely remain at a new high plateau of about 24% of GDP, which is roughly 20% higher than it has averaged over the past 40 years.

If the healthcare bill is passed in its current form, spending would certainly rise significantly, and the outlook for the deficit could deteriorate further, since the projections for savings from an expanded government-run healthcare system are most likely being overstated, and the potential costs are likely being understated.

If the cap and trade bill passes, it is almost axiomatic that the future growth rate of the U.S. economy will be negatively impacted, with the only question being by how much. Cap and trade can only achieve its stated purpose—significantly reduced carbon emissions—if carbon-based fuels become radically more expensive, and that means much higher costs for electricity and transportation fuels. That in turn will result in an economy that is much more expensive to run, and that means we will have much less growth than we would have otherwise. This is not a partisan rant, it is a simple statement of economic fact.

To me this all looks not only unsustainable but like a non-starter politically. How all the proposed spending gets financed is mind-boggling, if not almost impossible to imagine. I think that the more people see and ponder charts and consequences like these, the more they will demand smaller government. I think that process is already underway, and it helps explain the rather significant erosion in Obama's approval ratings of late, and the growing opposition to both the cap and trade and healthcare legislation.

14 comments:

Old Guy said...

BALTIC DRY INDEX? What now?

alstry said...

This could be your best blog...EVER!!!!!

Donny Baseball said...

This is underplaying it...do you know how much lower than projections tax receipts will be for calendar 2009? Soooooo much lower. Not that upstanding Americans would cheat our anything but I think alot of those LLCs will report as close as they can to zero taxable income - hell, they have the economy as an excuse and why not run a few personal expenses through the business if you object to the profligacy going on in Washington. We will only wish these deficit projections hold a year from now.

j said...

I don't believe that the United States is about to commit economic suicide, so I remain a long term optimist. I expect cap and trade to fail and only some type of incremental healthcare package to be enacted. I also look for the pro union Freedom of Choice bill to fail. I think the blue dog democrats have seen the results of the republicans mindlessly following G.W. Bush and will not make the same mistake of following Obama over a cliff.

Scott Grannis said...

j: It's good to know that I'm not the only rational optimist!

alstry said...

Scott,

You made the following comment in the previous post:

alstry: If Obama cut spending it would be fantastic. Government is a very inefficient spender, so less spending would free up resources that the private sector could better utilize. Less spending would also reduce expected tax burdens, and that would help unleash animal spirits. I devoutly hope that both Obama and Sacramento are able to significantly reduce planned spending. It can be done and it would be terrific.

Scott,

Almost half of Federal Government spending is borrowed money AND not a current transfer from taxpayers. You yourself admit in this blog that the Federal Government spend is now 25.5% of GDP. Consequently, if Obama balanced the budget and cut spending, the GDP would contract by over 10% immediately.

I actually think this would be the correct course of action for the long term. But you recently stated the recession is over. How can you have it both ways by calling for a balanced budget and simultaneously calling the end of the recession when balancing the budget would mathematically put our country into a severe Depression?

Slingblade9119 said...

This is what happens when you elect radical leftists into office

Scott Grannis said...
This comment has been removed by the author.
Scott Grannis said...

alstry: for heaven's sake, be reasonable. Nobody is calling for federal spending to be cut in half. You have lost what little credibility you had. If you can't debate in an intelligent manner or otherwise contribute constructively to the dialog here, please stop wasting my and other's time.

alstry said...

Then how much should Federal spending be cut if Obama inherited a government where Federal Tax Receipts are about half by the end of his first year in office?

By my estimations, Federal Tax Receipts will drop to half 2008 levels within six months. We are already approaching these levels now.

Even if Obama simply maintained Bush's ridiculous spending levels, he would still be running unprecedented and unsustainable deficit levels.

So which is it, cut spending dramatically or increase the deficit?

The math is pretty simple when you choose to apply the real numbers.

Slingblade9119 said...
This comment has been removed by the author.
Slingblade9119 said...

What is needed - is Govt intervention that will really STIMULATE economic activity and growth - NOT just spending.

Perhaps we could address our corporate tax rates which are the 2nd highest in the world?

Perhaps we could eliminate the capital gains tax - at least for a period of time

Perhaps we could re-establish federal tax free "enterprise zones" in blighted areas (like Detroit) that have been decimated by leftists.

There needs to be something - something that provides a real jump start to capital investment and sustainable economic activity.

And while we are at it we should do eliminate significant amounts of government spending on programs and departments that are non-essential. Waste is everywhere in government - the same thing happens in business too - except at some point, the waste gets eliminated out of necessity to survive and compete - something government agencies dont currently have to deal with.

Just some thoughts to chew on...

Rick said...

I think that many underestimate or choose to ignore the effect of the first Obama stimulus upon the future federal budgets. That law increased the budgets of most federal departments. Since future year budgets are "scored" partly based upon past year expenditures, how much will future department budget baselines increase when these stimulus add-ons are counted in the formula? Politically, how confident can we be in Congressmen to vote to return FY2011 federal expenditures to pre-stimulus levels given that they will be running for re-election next year?

Scott Grannis said...

Rick: you make an excellent point. I have tried to factor that in to my budget projections, which is why I figure that if things don't change, spending as a % of GDP will be signficantly higher than what Obama is projecting in his budget.