Monday, July 12, 2010

Decreased Spending Alone Can’t Fix the Budget Deficit

As we all know the size of the budget deficit has grown enormously in the last couple years. One only has to look at the increasing size of the budget deficit over the last decade to see why there's cause to be concerned about it. Starting in 2008 the deficit has shot up several hundreds of billions of dollars.
(Click Chart for larger view. Click Here for the Numbers )
If you ask most people why this is, they would tell you it's because of an increase in spending. Both pundits and voters will tell you that. They would tell you that for good reason, spending is increasing pretty drastically as you can see below.
(Click Chart for larger view. Click Here for the Numbers )
However, you'll notice that government spending has not increased as sharply as the deficit. Thanks to (presumably) the recession and tax cuts, government revenue has decreased just as drastically as spending has increased.
(Click Chart for larger view. Click Here for the Numbers )
While spending has increased every year since 2000, revenue(tax receipts) is about the same level as it was in 2000. Accounting for inflation, that means that in 2009, people and companies paid fewer taxes than they did in 2000 when the budget was balanced and there were far fewer tax payers.
Looking at these numbers it's hard to see how cutting spending can be the only strategy to cutting the budget deficit. Especially, when decreases in revenue has every bit to do with how we got here. If you don't believe me, let's look at the data another way. See the chart below.
The chart may require a little explaining. The Blue line is how much the budget deficit increases every year or the "rate of increase". For example, in 2001 the "deficit's rate of increase" went up by 119 billion when we went from an 86 billion surplus to a 32 billion deficit.1 The red line is the amount of increase in spending. The orange is the decrease in tax receipts. Therefore, adding blue and orange together will get you the blue line. If you want to decrease the budget deficit, you want all 3 of these lines to be negative.
(Click Chart for larger view. Click Here for the Numbers )
In 2001 to 2003, the budget deficit was increasing quickly because spending was going up at the same time tax receipts were going down. Then in 2004 through 2007 the deficit started decreasing despite an increase in spending. This was because of an increase in tax receipts. For 3 years the budget deficit was heading in the right direction. In 2007 the amount of government spending increased, but not as dramatically as in previous years.
Then in 2008 when the recession hit, both the rate of spending increase and the rate of lost tax receipts increased rapidly. Once both were positive, the rate of the deficit increase skyrocketed. In 2009, the gigantic increase was caused by a 500 billion in increased spending and 400 billion in lost tax receipts.
It's hard to see how any plan to balance the budget can work if it doesn't somehow recover that 400 billion lost in tax receipts. It might be a tough pill to swallow for many, but increased spending wasn't the only thing that got us here, therefore decreasing spending can't be the only thing that gets us out.
(1Numbers don't appear to match because of rounding)
(The source for all these numbers is the Public Budget Database)
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