How the 2009 Federal Budget Could Have Been Balanced.

Our government collected fewer taxes in FY2009 than it did in FY2000 – this can be said without adjusting for inflation. In 2000, the government took in 1.54 trillion dollars in on-budget taxes, but only took in 1.53 trillion in 2009.  This is despite spending twice as much money in 2009 than in 2000.   Tax receipts during the 90s grew fast.  That was partly do to higher taxes and also with a phenomenal increases in GDP and wealth.  Then came the 2000s.  Tax receipts languished from lower taxes, a recession, more tax cuts, another recession, a slow recovery, and then the Great Recession.  So as an academic exercise, let’s see where the budget deficit would be if tax revenue had grown instead of diminished during the 2000s.  You can see how revenue has slowly, but steadily, gone up during the 80s and 90s, but then went sideways during the 2000s.  I included the raw numbers, plus numbers that adjust for inflation.

recent_on-budget_receipts
(Click chart for larger image.  Click here for the numbers)

I always read some pundits claiming that the Clinton-era tax and GDP growth was unsustainable(see here for example).  Therefore, I calculated the tax revenue increases of 1993-2000.  The average growth was 8.78%.  However, since I’m adjusting for inflation now, I adjusted everything to 2009 dollars.  This yielded average growth of 6.01% in tax revenue from 1993 to 2000.  However, since people accuse that being unsustainable and unrealistic, I decided to chart out the slowest growth in tax revenue from the Clinton Era.  It was 5.9% if using non-adjusted numbers and 3.61% if using adjusted numbers.  Here’s what revenue would’ve been like if the 2000s had averaged the slowest rate of the 90s.

if_on-budget_receipts_growth_had_continued
(Click chart for larger image.  Click here for the numbers)

Whether or not you adjust for inflation, it would’ve put on-budget revenue at approx 2.6 trillion$ in 2009 and 2.74 trillion in 2010.  What that means is that the on-budget deficit would’ve only been 400$ billion dollars in 2009 if our spending patterns had been exactly the same.   However, if you strip out all the spending that was done because of the great recession, but keeping stimulus spending, that would’ve been 397$ billion in spending cut.  The 2009 budget could’ve been balanced if revenue had grown at the slowest rate it grew in the Clinton Era, and there had been no Great Recession.  No other adjustments necessary.

Now let’s explore another scenario.  Let’s say that tax revenue had grown even slower than the slowest rate it did during Clinton’s presidency.  I decided to take a look at what the average growth rate for tax revenue has been since 1962.  When adjusting for inflation, the average growth rate from 1962-2000 was 3.16%.  However, if you exclude the Clinton era completely it’s even lower.  From 1962-1992, the average growth rate was 2.4%.  You can see my raw numbers and other statistics here.  I added to the graph what would’ve happened if the 2000s had maintained revenue growth in accordance to the historical averages.  This time I only included the adjust for inflation numbers.

if_historical_receipts_increase
(Click chart for larger image.  Click here for the numbers)

If 63-2000 average tax revenue increases had occurred in the 2000s, the 2009 revenue would’ve been about 2.55 trillion.  That means the 2009 budget would’ve only had a 50$ billion dollar deficit once you take away the Great Recession spending.  That probably would’ve been easily covered if you eliminated the 2009 stimulus spending.

If 63-1992 average tax revenue increases had occurred in the 200s, the 2009 revenue would’ve been about $2.38 trillion.  That would mean that the 2009 budget would have to have been about 620 billion dollars lighter.  If, once again, we assume no Great Recession and remove $400 billion, that still leaves 220$ billion to cut from spending.  Not an easy task, but much less daunting than the 1,500 billion dollars we actually had because of sideways revenue.

If there had been no recession, where would you cut that 220$ billion from the 2009 budget?  Remember – I already removed the direct costs of the recession(and only those costs).

National Defense Spending Is Growing Fast

Yesterday I talked about all government spending related to security. Today I’m looking at the recent rise in National Defense spending.  And I do mean rise.  In the last 10 completed fiscal years, national defense spending has increased by 367$ billion and is expected to increase again by the end of this Fiscal Year.  Here’s our Defense spending since 1962.
national_defense_spending_since_1962

(Click here for Numbers)

You can see some trends in that spending.  The first trend was a quick rise in the late sixties – presumably caused by escalation in Vietnam.  Then, as U.S. involvement in Vietnam winded down, national defense spending trended slightly downward.  Then it started heading back up in the late seventies.  In the eighties that slight upward trajectory skyrocketed until 1990.  Presumably, it leveled off in the 90s because there was no longer a cold war to fight.

In 2002 the recent sky rocket in National Defense spending started after 9/11 with a renewed interest in HUMINT and the wars in Afghanistan and Iraq started.  The cost of National Defense has continued to rise as Afghanistan, Iraq, and the GWOT, have continued on.

While these numbers might seem large it actually gets worse.  I haven’t factored in the cost of VA benefits.  If there was no military, there would be no veterans, and therefore no VA, so it’s only fair to factor VA costs into total National Security Spending.

defense_and_va_spending_over_time

(Click here for Numbers)

While the VA doesn’t add a lot of spending, it does add enough that it’s going to put Fiscal Year 2010 spending over the 800$ billion mark.  That’s all spending, in a single year, just on National Defense – not counting law enforcement.

The recent rise in National Defense spending has been large and steady.  I graphed the percentage increase in National Defense spending for every year singe 1963.  So it will be negative when we spent less defense money and positive when increasing from the year before.  I show this to demonstrate that simple inflation does not explain away the large increases.

the_percentage_increase_in_military_spending

(Click image for larger view.  Click here for Numbers)

In the last decade, National Defense spending has risen by 5% or more every year for 9 years in a row.  The closest comparison is the timeframe of late 1970s to early 1980s.  That was a time when National Defense increases stayed above 5% or more for only 8 years.  This has been the most consistent large rise in national defense spending since 1962.

For those interested, I created a similar chart that shows the percentage increase of Defense and VA combined.  The number of years in a row where the increase is above 5% decreases by a year for both the recent increase and the 70s/80s time frame.

Whether you agree with all this national defense spending or not is irrelevant.  It’s putting a huge burden on the budget.  This huge increase is a part of the explanation for the rise in our budget deficits.  It’s hard to see how any hopes of a balanced budget can exist without reducing the National Defense budget.  It’s possible, but one would have to either drastically raise taxes, or drastically cut the rest of our spending.

Some might say that cutting down the rest of our spending is the way to go.  So let’s explore how we could maintain this level of national defense spending, balance the budget, and do so without raising taxes.  The last time we balanced the budget was FY2001.  In that year we spent 352$ billion dollars on the VA and National Defense.  In FY2010 we’re set to spend 814$ billion.  Let’s say that the 2010 estimate is off by 14$ billion and make it 800$ billion even.  Now, let’s say that we didn’t raise our defense spending at all since 2001, except for adjusting for inflation.  By rounding up (way up), I’m gonna say that the defenseVA spending should’ve stayed around 400$ billion.  That’s half of what we spend today.  So, to avoid raising taxes, balance the budget, and not decrease our military spending, it would take 400$ billion in spending cuts out of the rest of the budget to accommodate this recent rise in military spending.

Total on-budget spending in 2010 is estimated to be 3,164$ billion dollars.  800$ billion of that is National Defense and VA.  That leaves 2,364$ billion for everything else.  We have to find 400$ billion to cut from that.  That’s a 17% (across the board) budget cut.  That would be 17% that would have to be made in addition to accommodating the historically low tax rate and the rest of the spending increases since 2001 being cut.  This 17% cut would also have to apply to things like border security, customs, and all the other things that keep us safe. Otherwise, the spending cuts would have to be even higher.

Of course its possible to do all this, however, I can’t imagine that there is a political will among the people or the politicians to support the kind of drastic spending cuts this would take.  Bottom line, to balancing the budget is going to require some combination of cutting defense spending, cutting other spending, and higher taxes.