Tag: cbo

Federal Spending Hits $4.1 Trillion

If you looked at the new CBO report on the budget, you may have noticed that federal spending this year will be $3.6 trillion.

In fact, federal spending this year will top $4 trillion. But virtually all reporters and budget wonks (including me) routinely use the lower number when discussing total federal spending. I don’t think the higher $4 trillion number even appears anywhere in the CBO report.

The $3.6 trillion figure is “net” outlays. But “gross” outlays, or total spending, is quite a bit higher. The difference is caused by “offsetting collections” and “offsetting receipts.” These are revenue inflows to the government that are netted against spending at the program level, agency level, or government-wide level. Some examples are national park fees, Medicare premiums, and royalties earned on mineral deposits. There are hundreds of these cash inflows to the government that offset reported spending.

Details on these revenue offsets can be found in Chapter 16 of OMB’s Analytical Perspectives (pdf). In fiscal year 2010, net federal outlays were $3.456 trillion, but gross outlays were $4.057 trillion. Thus, gross outlays were 17 percent larger than widely reported net outlays.

In FY 2011, OMB expects gross outlays to be about 15 percent larger than net outlays. Thus, gross outlays this year will be $4.1 trillion, compared to net outlays of $3.6 trillion. As a share of GDP, gross outlays will be about 27.3 percent of GDP, compared to net outlays of 23.8 percent.

Accounting for offsets in this manner is a long-standing convention, but it is one of the sneaky ways that Washington tries to hide its large intrusion into the economy. Certainly, the CBO and OMB should include more prominent presentations of gross outlays in their regular budget updates.

For citizens and reporters, a rule-of-thumb to remember is that total federal spending is 3 to 4 percentage points of GDP larger than usually reported by officials.

New CBO Numbers Confirm - Once Again - that Modest Spending Restraint Can Balance the Budget

The Congressional Budget Office has just released the update to its Economic and Budget Outlook.

There are several things from this new report that probably deserve commentary, including a new estimate that unemployment will “remain above 8 percent until 2014.”

This certainly doesn’t reflect well on the Obama White House, which claimed that flushing $800 billion down the Washington rathole would prevent the joblessness rate from ever climbing above 8 percent.

Not that I have any faith in CBO estimates. After all, those bureaucrats still embrace Keynesian economics.

But this post is not about the backwards economics at CBO. Instead, I want to look at the new budget forecast and see what degree of fiscal discipline is necessary to get rid of red ink.

The first thing I did was to look at CBO’s revenue forecast, which can be found in table 1-2. But CBO assumes the 2001 and 2003 tax cuts will expire at the end of 2012, as well as other automatic tax hikes for 2013. So I went to table 1-8 and got the projections for those tax provisions and backed them out of the baseline forecast.

That gave me a no-tax-hike forecast for the next 10 years, which shows that revenues will grow, on average, slightly faster than 6.6 percent annually. Or, for those who like actual numbers, revenues will climb from a bit over $2.3 trillion this year to almost $4.4 trillion in 2021.

Something else we know from CBO’s budget forecast is that spending this year (fiscal year 2011) is projected to be a bit below $3.6 trillion.

So if we know that tax revenues will be $4.4 trillion in 2021 (and that’s without any tax hike), and we know that spending is about $3.6 trillion today, then even those of us who hate math can probably figure out that we can balance the budget by 2021 so long as government spending does not increase by more than $800 billion during the next 10 years.

Yes, you read that correctly. We can increase spending and still balance the budget. This chart shows how quickly the budget can be balanced with varying degrees of fiscal discipline.

The numbers show that a spending freeze balances the budget by 2017. Red ink disappears by 2019 if spending is allowed to grow 1 percent each year. And the deficit disappears by 2021 if spending is limited to 2 percent annual growth.

Not that these numbers are a surprise. I got similar results after last year’s update, and also earlier this year when the Economic and Budget Outlook was published.

Some of you may be thinking this can’t possibly be right. After all, you hear politicians constantly assert that we need tax hikes because that’s the only way to balance the budget without “draconian” and “savage” budget cuts.

But as I’ve explained before, this demagoguery is based on the dishonest Washington practice of assuming that spending should increase every year, and then claiming that a budget cut takes place anytime spending does not rise as fast as previously planned.

In reality, balancing the budget is very simple. Modest spending restraint is all that’s needed. That doesn’t mean it’s easy, particularly in a corrupt town dominated by interest groups, lobbyists, bureaucrats, and politicians.

But if we takes tax hikes off the table and somehow cap the growth of spending, it can be done. This video explains.

And we know other countries have succeeded with fiscal restraint. As is explained in this video.

Or we can acquiesce to the Washington establishment and raise taxes and impose fake spending cuts. But that hasn’t worked so well for Greece and other European welfare states, so I wouldn’t suggest that approach.

Debunking the Left’s Tax Burden Deception

I testified yesterday before the Joint Economic Committee about budget process reform. As part of the Q&A session after the testimony, one of the Democratic members made a big deal about the fact that federal tax revenues today are “only” consuming about 15 percent of GDP. And since the long-run average is about 18 percent of GDP, we are all supposed to conclude that a substantial tax hike is needed as part of what President Obama calls a “balanced approach” to red ink.

But it’s not just statist politicians making this argument. After making fun of his assertion that Obama is a conservative, I was hoping to ignore Bruce Bartlett for a while, but I noticed that he has a piece on the New York Times website also implying that America’s fiscal problems are the result of federal tax revenues dropping far below the long-run average of 18 percent of GDP.

In a previous post, I noted that federal taxes as a share of gross domestic product were at their lowest level in generations. The Congressional Budget Office expects revenue to be just 14.8 percent of G.D.P. this year; the last year it was lower was 1950, when revenue amounted to 14.4 percent of G.D.P. But revenue has been below 15 percent of G.D.P. since 2009, and the last time we had three years in a row when revenue as a share of G.D.P. was that low was 1941 to 1943. Revenue has averaged 18 percent of G.D.P. since 1970 and a little more than that in the postwar era.

To be fair, both the politician at the JEC hearing and Bruce are correct in claiming that tax revenues this year are considerably below the historical average.

But they are both being a bit deceptive, either deliberately or accidentally, in that they fail to show the CBO forecast for the rest of the decade. But I understand why they cherry-picked data. The chart below shows, rather remarkably, that tax revenues (the fuschia line) are expected to be back at the long-run average (the blue line) in just three years. And that’s even if the Bush tax cuts are made permanent and the alternative minimum tax is frozen.

It’s also worth noting the black line, which shows how the tax burden will climb if the Bush tax cuts expire (and also if millions of new taxpayers are swept into the AMT). In that “current law” scenario, the tax burden jumps considerably above the long-run average in just two years. Keep in mind, though, that government forecasters assume that higher tax rates have no adverse impact on economic performance, so it’s quite likely that neither tax revenues nor GDP would match the forecast.

$2 Trillion in Cuts in Perspective

Congressional Republicans have said that spending cuts must be at least as large as an increase in the debt ceiling. Negotiations over lifting the debt ceiling are ongoing, but the “magic number,” so-to-speak, would be around $2 trillion in spending cuts.

Cutting $2 trillion in federal spending sounds like a lot, but it’s actually relatively small because the cuts would likely occur over ten years. According to the Congressional Budget Office’s most recent budget baseline, the federal government will spend almost $46 trillion over the next ten years.

The following chart shows what $2 trillion in spending cuts over the next ten years looks like when measured against the CBO’s baseline. Even with the cuts, federal spending would still increase by $1.8 trillion:

Rather than actually cutting spending, federal spending (and debt) would continue to grow – just at a slightly lower rate. And as Chris Edwards continues to warn, there is a strong possibility that some or all of the “cuts” could be phony.

Federal Budget Cap at 3%

The federal government is approaching its legal borrowing limit, and fiscal conservatives in Congress are wondering what spending reforms they can extract in return for supporting a debt-limit increase. Various sorts of balanced budget amendments and debt limits relative to GDP are being kicked around. I support those ideas, but I fear that they may be too complicated to gain traction right now.

A simpler idea would be to impose a statutory limit on annual spending growth of 3 percent. If total federal outlays in a year were $4 trillion, the government couldn’t spend more than $4.12 trillion the next year. It would be that simple.

Such a limit would be easy for policymakers and the public to understand and enforce. It would put ongoing pressure on Congress to cut discretionary programs and reform entitlements. With spending growth limited to 3 percent, the budget would be balanced in just over a decade and growing surpluses would be generated after that. The federal government would shrink as a share of GDP. The math is simple: federal revenues and GDP are expected to grow substantially faster than the 3 percent spending limit over the next decade and beyond.

I want Congress to enact major cuts to spending, not just to limit spending growth. But one advantage of an annual growth cap is that it would lock-in any spending cuts that are made, and thus spending would be ratcheted downwards.

Under such a limit, the OMB and CBO would issue regular reports showing spending for the coming fiscal year relative to the projected legal cap, which would make it clear to political leaders, reporters, and voters how much needs to be cut. The president would also be required to propose a budget each year that fit under the estimated legal cap. If the beginning of a new fiscal year arrives and spending is still expected to be above the limit, the president would be required by law to impose an across-the-board cut to bring spending into line.

In the past, I’ve proposed a spending growth cap equal to the sum of inflation plus population growth. (This sum is expected to be about 3 percent in coming years). But a fixed and explicit percent cap would be even simpler and easier to enforce. A fixed percent cap would also encourage policymakers to support a low-inflation policy by the Fed because the lower was inflation, the higher the budget limit in constant dollar terms.

The chart shows the proposed spending in Obama’s new budget compared to spending capped at 3 percent. The spending cap line assumes that the GOP’s discretionary cuts are put in place this year. It also assumes that spending grows at the maximum 3 percent each year, but if spending were restrained more than that, the cap would ratchet down to a lower level. The chart also shows projected federal revenues based on CBO data, assuming the extension of current income tax cuts and AMT relief. (See page 22).

Limiting spending growth to 3 percent is a modest goal, but over time the results would be quite dramatic compared to Obama’s no-reform spending plan. Spending in 2021 would be about $1 trillion less than the president is projecting—$4.7 trillion rather than $5.7 trillion. As a share of GDP, Obama’s 2021 spending of 23.9 percent would be cut to 19.9 percent. And the budget would be closing in on balance that year with revenues at 18.6 percent of GDP with tax relief in place. (Figures based on OMB GDP).

At DownsizingGovernment.org, I’ve proposed spending cuts that would take the federal government down to 15 percent of GDP or less. But getting a new budget mechanism signed into law takes centrist support, and I think that a 3 percent growth cap to balance the budget in a decade or so is a reasonable goal that could gain broad agreement.

Finally, it makes sense to include in such a budget law the ability of policymakers to spend over the cap temporarily for emergency war funding with a two-thirds vote in both House and Senate. Without such a temporary escape hatch, Congress would likely simply repeal the law when it entered a costly war.

I’ve discussed a spending growth cap in more detail here and here and here. Dan Mitchell has made similar observations about spending growth rates. The folks at One Cent Solution are recommending a tighter cap.

Spending Still Increases with GOP Cuts

House Republicans engineered a continuing resolution for fiscal 2011 that would trim $61 billion in “regular” discretionary budget authority versus fiscal 2010. The Obama administration and the Democratic majority in the Senate balked at the cuts, and a two-week continuing resolution will be passed in order to avoid a “government shutdown” and give the sides more time to reach an agreement.

Based on the Congressional Budget Office’s score of the continuing resolution containing $61 billion in funding cuts, and the CBO’s recent budget projections, both discretionary and total federal outlays (actual spending) would still be higher in fiscal 2011 versus fiscal 2010.

Keep these charts in mind the next time you hear or read that the Republicans’ supposedly “major spending cuts” will lead to reduced economic growth and hundreds of thousands of jobs lost.

As If Gov’t Spending Had Nothing to Do with It

This is how a front-page story in this morning’s Washington Post portrayed the cause of this year’s $1.5 trillion deficit:

Record U.S. Deficit Projected This Year
CBO forecasts tax cuts will push budget gap to $1.5 trillion

The still-fragile economy and fresh tax cuts approved by Congress last month will drive the federal deficit to nearly $1.5 trillion this year, the biggest budget gap in U.S. history, congressional budget analysts said Wednesday.

Federal spending and federal tax revenue play equally important roles in creating the federal budget deficit.  Yet the Post blames the deficit only on inadequate tax revenue.  Federal spending isn’t too high, the Post implies, tax revenue is too low.

This may not be an example of media bias.  But it is an example of why supporters of limited government believe that major news organizations like the Washington Post are biased toward bigger government.  At a minimum, the Post has some explaining to do.