US federal budget receipts and outlays : Actual and estimates 1789-2019 | Scenario 2025 | 

The US federal government is haunted by an irresistible attraction to overspending. Over the 119 years since 1901, including the government estimates extending through 2019, the federal budget is 89 times (75% of the time) on the red (deficit), and only 30 times (25%) on the black (surplus). In the chart, the red line clearly subdues the blue one.

A closer view reveals that the two budget lines hovered very close to each other until well into the 20th century. They took both a steeper slope and split paths around 1950. Looking at how deficits and surpluses are distributed along the time line, one finds that until 1949, the two are rather balanced: there are 18 (45%) surplus periods, and 22 (55%) deficit periods. However, from 1950 onwards, we count an overwhelming 61 (87%) deficit years, against only 9 (13%) surplus years. The 1950 milestone indicates the point where federal budget deficit ceased to be the result of a combination of circumstances such as war engagements or economic depressions, to become a structural phenomenon inherent to the federal budgeting behavior.

Earlier deficits were related to the rise of war expenses, or to receipt crunches caused by economic downturns or depression. The 1861-1865 Civil war, the 1898 Spanish war, the 1899-1902 Philippine war, combined with the 1890 depression, account for the deficit of about $1 billion accumulated in the years 1850-1900. A period of more or less balanced budgets followed. World War I brought back large deficits, reaching $23.2 billion for the period 1917-1919. Thereafter budgets showed surpluses during 11 consecutive years. The Great Depression followed by World War II resulted in a long, unbroken string of deficits that were historically unprecedented in magnitude, attaining $216 billion for the period 1931-1946. Deficits became rampant since the early 1950s, although large deficits were incurred in time of major wars (Korea 1950-53. and Vietnam 1964-73) or as a result of recessions (the 1973 OPEC oil price shock).

Meanwhile, fundamental changes had taken place on the receipts side of the budget. Until 1913, federal receipts consisted mainly of customs taxes, subsidiarily of the sale of public lands during the 19th century, and of (indirect) excise taxes. These sources would clearly not be enough to adequately fund the growing array of federal expenditures. Accordingly, income tax both individual and corporate would be enacted in 1913. Income tax grew quickly in importance, amounting to 60% of federal receipts in 1930, and 79% in 1944. Furthermore in 1935, social insurance and retirement taxes, also known as payroll taxes, were introduced by means of the Social Security Act. These new sources of funding would fuel the budget growth as portrayed by the upward trend of the blue line in the chart. By 2013, the breakdown of federal receipts was as follows: individual income taxes 47.4%, corporation income taxes 9.9%, payroll taxes 34.2%, excise taxes 3%, and other receipts 5.5%.

As from 1950, federal budgets were plagued by a chronic deficit disorder, caused both by extraneous and by endogenous causes :

1. The United States embarked in a sort of permanent war demanding a huge buildup of military expenditure : 1950 Korean war, 1964 Vietnam war, 1991 Gulf War, 1993 Bosnia war, 1999 Kosovo war, 2001 Afghanistan war, 2003 Iraq War, not to mention other military interventions in Cambodia, Grenada, Lebanon, Libya, Panama, Somalia and Yemen.
2. The cycle of economic crises changed to high gear. The 1973 OPEC oil price shock led to the 1975-1976 recession. The 1980 savings and loan crisis fueled the decade-long deep recession, and its 1990 resurgence led in 1990-92 to another recession of the economy already weakened by the 1987 Black Monday stock crash. The 1998 collapse of Long-Term Capital Management and the 2000 dot-com bubble paved the way to the 2001 recession. Thereupon, after the catastrophic and costly Gulf Coast hurricanes of the summer of 2005, December 2007 inaugurated the most severe and longest financial and economic crisis since the 1929-1939 Great Depression. These upheavals caused a salient fall of tax revenues on the one hand, and on the other hand a devastating augmentation of spending with federal programs targeted to restore the financial markets and fight the recession, and with payments for individuals (e.g. provision of medical care, subsidies to reduce the cost of housing, unemployment compensation, food and nutrition assistance), all of which are strong deficit-inducing factors.
3. The budget structure itself imposes the sourcing of "trust funds" to finance such mandatory programs as Social Security, Medicare, unemployment insurance, and other programs subject to an income or asset test (e.g. Medicaid, SNAP, formerly food stamps, Supplemental Security Income, and other). Sheer demographics, namely an aging and longer-living population, combined with an anemic economy, cause these categories of spending to swell at a faster rate than receipts, thus fostering budget imbalances.
4. Receipts have also been badly impaired by a series of large tax reductions (early 1980s, 2001, 2007, 2008, 2009), both for corporations and high-income individuals, which failed to deliver the promised economy growth that would supposedly compensate for the shrinking tax collection.
5. Federal debt held by the public has piled up as a consequence of the prevailing annual deficits. From 31.4% of GDP in 2001, it grew to 70.1% of GDP in 2012, and is estimated at 74.4% of GDP in 2018. Net interests on federal debt to be paid to the public have therefore increased significantly, further inflating the outlays side, and facilitating further deficits. They amounted to $206.2 billion (current) in 2001, grew to $220.9 billion in 2013, and are estimated at $464.6 billion in 2019.

Budget deficit is not an evil in and of itself. Everyone and every state may find themselves short of cash momentarily without being broke: it is just a cash-flow complication. But what is normal occasionally is not viable in the long run. Repeated deficits have a self-feeding behavior: they breed debt, which generates interests to be paid, which consume resources that could be used otherwise to stimulate prosperity, and must ultimately be financed by further deficit, thus reinforcing the upward spiral. How can the risk be mitigated? Let us try and brainstorm a few ideas:

• Grow the economy at a much faster pace than the outlays. Tax receipts will swell and generate budget surplus.
• Boost tax receipts by getting the money where it is — tax the wealthy and the corporations instead of squeezing the impoverished majority.
• Chop expenditure by curtailing social aid programs: let individuals "sink or swim" unaided.
• Stop the waste: end the wars and curtail the military buildup altogether.
• Screw creditors: default on payments of interests and principal and renegotiate the whole package.

Whatever course is followed, there will be consequences and bruises. That is the price citizens have to pay for their distraction. Voters find it expedient to delegate to the state the chores that they do not have the time or the willingness to take care of by themselves. It is the wrong bet. Before they wake up, the state siphons their money off, deprives them of the services they should be expecting in return for their taxes, and drives the ninety-nine percent of them to farthest levels of poverty.

Sources: US Government Printing Office and BEA - US Bureau of Economic Analysis.

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   US federal budget receipts and outlays : Actual and estimates 1789-2019 | Scenario 2025 | 

The White House and the Congress recurrently issue statements of good intentions, promising to repent from profligacy and to return to balanced finances. It is interesting to leave out the rhetoric, check the trends, and assess how well-grounded such pledges can be. To put it in a nutshell, should the underlying behaviors of the past prevail in future federal budgets, the deficit gap would deepen dramatically, leading to the piling up of debt, and the inescapable bankruptcy.

The chart describes such a scenario, showing the blue line of receipts rapidly slowing down, while the red line of outlays climbs steeply, the chasm between the two digging an abyssal deficit. The year of 1985 is a crucial milestone. The yearly growth of forecast outlays surpasses the growth of forecast receipts, producing, other things remaining equal, a structural deficit unstoppable by conventional means.

The scenario is a plain nonlinear extrapolation of the actual budget data for 1929-2013, after adjustment of current dollars to real dollars, 2009=100, by applying a series of chain-weighted price indexes to the current dollar data base ( done by the source ). Dots indicate actual data, and the curves, the computed forecast values.

Granted, it is just a what-if mathematical scenario. But it delivers a sobering message. Stumbling along the road doing our best, does not work — it will simply produce more of the same, building a situation that entails a price nobody is ready or can afford to pay. The situation calls for more radical thinking — it calls for actions directed at the root causes, not the symptoms of the imbalances, at the real culprits, not at the scapegoats.

Sources: US Government Printing Office and BEA - US Bureau of Economic Analysis.

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