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).

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.

total_on-budget_deficit

(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.

on-budget_deficit_&_spending

(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.

on-budget_deficit,_spending,_and_receipts

(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.

change_in_deficit,_spending,_&_receipts

(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)