Wednesday, July 13, 2011

Federal budget update

Here's an update of the federal budget situation. It's still in awful shape, but on the margin things have improved a bit. Spending growth has slowed, revenues continue to grow faster than spending, and the deficit has consequently shrunk a bit.

With all the talk in Washington about the need for higher taxes, I note that federal revenues have grown about 9% in the past year. That's what usually happens during a recovery, as more people return to work, incomes rise, corporate profits grow, and capital gains get realized. It doesn't take higher tax rates to get more revenue, it just takes a bigger and stronger economy. Considering that the economy has been recovering a pace that is definitely subpar, 9% revenue growth is actually pretty impressive. If we could get the economy to grow at 5% or better, we would probably see a huge pickup in tax revenues.

The biggest problem, therefore, is spending. Spending is very elevated by any measure, and it will only balloon further if current law and programs are unchanged (social security and Obamacare promise to be real budget-busters). As I've argued repeatedly, excessive government spending is likely one of the chief causes of a disappointingly slow recovery. Cutting back spending should be the top priority, and from what I see of the goings-on in Washington and the opinion polls, most people understand this. Higher tax rates are not only unnecessary, they could easily jeopardize the recovery by reducing the after-tax incentives to work and invest.


brodero said...

If you do a study of Postponable
Purchases ( Durable Goods,Residential Investment and
Equipment and Software Spending)
to GDP you will see why we have a slow recovery....

Bill said...

Do you really think that the slow recovery is due entirely to federal spending? How about the fact that we built too many houses because money was too easy from 2001 to the crash and folks also used their houses as ATMs for other purchases. Since those sources of funds are no longer available, is it any wonder things are slow?

Benjamin Cole said...

I find both right- and left-wingers cite convenient reasons for the recession. I think it was extremely poorly timed Fed tightening.

It is worth noting that federal tax revenues as fraction of GDP has been mildly declining for decades. So I guess we are not overtaxed, though I would like to cut that rate down another several percent.

Right now, it is the Fed's game. They can do a Japan, or they can get tough and do a China.

John said...

Wow, federal spending as a percentage of GDP really dropped during the Clinton administration.

Does the graph include off-budget spending to fight the wars, beginning in 2001?

Anonymous said...

Love all the commentary on this blog thanks to Scott's keen insights. I'm no financial authority but I consider myself relatively informed in relation to the general public. I'm NYC police officer in what could be considered the beleagured middle class of an over taxed northeastern state. I've managed my own brokerage Accts over the past 20yrsand come out ok which cannot be generally be said out most gov employees or private citizens there for my opposition to private social security Accts and medical Accts most people just can't handle them that's where my liberal side ends. I'm a fiscal conservative and Benjamin if we don't cut spending by reforming entitlements and not raise taxes for short term revenue at expense of future growth of the small business which truly is the dynamo of this country. People hurt when gas goes up they hurt when food goes up and even though they say theres low inflation why does the gas pump stop when my mini van takes over $100 lol. We need to stop printing money and start paying down more than our minimum balance on our national credit card. We need to stop devaluing. No more free trade agreements that give away the store and jobs for big corporations get us fair trade agreements that level the playing field for big and small business and for the American worker so he doesn't have to worry about his job shipped to god knows where because those geniuses that thought wevcoulf give away all our shipping and manufacturing jobs have a service economy never thought a third world genius would be coming for there job. Sorry for what appears to have turned into a tirade but anyway Thanks for your positive analysis of the market Scott over the last few years when most would have you believe the sky is falling you've saved me if not made me a couple of bucks I truly value your blog and
all the those that regularly post here.

Scott Grannis said...

John: the chart includes all government spending, including that for wars.

John said...

Isnt't higher government spending a consequence of higher productivity in a competitive global market? Businesses can increase profits 3 ways" sell more stuff, sell the same amount of stuff at a higher price, or increase productivity. In recent history, productivity has come from reducing unit labor costs.

Reduction of unit labor costs includes layoffs, reduced health benefits, and reduced pension benefits. The cost of all these private sector divestments in the workforce has shifted to the government.