The federal government deficit has been widening sharply the 2007-2009 Great Recession — and pandemic-related spending has pushed it to its current level of $1.1 trillion.
By Manuel Gutierrez, Consulting Economist to NKBA
Unlike the states and most households, which are usually restrained from spending more than they take in, the federal government can spend as needed, borrowing the funds through the sale of U.S. Treasury notes on the open market.
The dire need to prop up the economy resulting from the pandemic’s disruption was one such instance, and the government’s deficit spending over the past six months has been unprecedented.
It’s no surprise that for the last few decades, the federal government has been spending far more than it has been taking in.
The history of the U.S. government’s overall finances is illustrated in Figure 1. The left panel shows the long-term trend in federal spending, or outlays, indicated by the blue line. The black line indicates total government receipts from all sources, several of which are shown in the right panel. The red line in the left graph shows the deficit, or difference between outlays and receipts. The deficit has been mostly negative over the last few decades, except for a brief period around 2000.
“The federal budget deficit is at all-time high, and will only increase with the latest cash infusions due to the pandemic.”
The gray vertical line marks 2020, indicating the year of the latest operational budget. Points to the right of this line are the projections made in last year’s budget, which are shown by the three numbers. The top one is Outlays, at $4.8 trillion last year, which is higher than the $3.7 trillion in revenues. Their difference is at the bottom of the chart, the $1.1 trillion deficit.
One thing evident in Figure 1 is that the gap between outlays and receipts widened sharply in the 2007-2009 Great Recession, and that gap has not been reduced since. Just over the last 20 years, since 2000, federal government receipts have increased at a 4.2% annual average, but outlays have risen at twice that rate, at 8.4%. The gap, or deficit, is getting more pronounced each year, and it promises to be even larger still, if the current proposed budget is approved by Congress.
The biggest sources of government revenue, shown in the right panel of Figure 1, are individual taxpayers — including the income tax that generated $1.72 trillion last year or Social Security payments, which contributed $1.24 trillion. Over half of Social Security revenues are paid directly through payroll deductions, and by self-employed individuals who pay for both the individual and the business portions of the tax.
Income and Social Security taxes account for the bulk of revenues: 85% of them in 2020.
Corporate taxes were $230 billion, just 7% of total government receipts. The low percentage raised from corporate sources suggests that plans to increase taxes on corporations will not make a significant dent in the overall deficit.
Additionally, examining historical trends, government administrations have shown a propensity to make revenue projections that do not materialize.
Figure 2 shows the budget projections for four different years. The green line is for the 2000 budget, blue for 2005, Red for 2010, and pink for 2015. The chart clearly illustrates the gap between the typically optimistic projections, shown by the colored lines, and actual revenues, the black one.
One point is clear, seen in Figure 2: the gap between actual and projected revenues is getting larger each year.
Finally, Figure 3 shows the use of government funds. The largest department, capturing 27% of total government spending, is Health & Human Services. It includes, among others, well-known agencies such as Centers for Disease Control (CDC), Medicare and Medicaid services.
Second in order of magnitude is the Treasury department, which accounts for about 16% of total government spending. Much of this is from agencies such as the Internal Revenue Service, with outlays totaling $689 billion. The Defense department is nearly equal in size, with $654 billion spent in the last year, or 15% of the federal total.
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