Federal Deficit Still Smaller than the 1980s

Federal Deficit Still Smaller than the 1980s
November 1, 2003



If current federal laws and policies do not change, the federal government will incur a total budget deficit of $374 billion in 2003 and $480 billion in 2004, the Congressional Budget Office (CBO) projected in its August and October Updates.

Comparison of Bush Budget (FY2004) with Past Budget Averages
  FY2004 Proposal Post-WWII Average (FY1946-2002) Clinton Budgets (FY1994-2001) G.H.W. Bush Budgets (FY1990-1993) Reagan Budgets (FY1982-1989)
Total Receipts as percent of GDP 17.0 17.9 19.4 17.7 18.0
Total outlays as percent of GDP 19.7 19.5 19.6 22.0 22.3
Deficit (-)/Surplus as percent of GDP -2.7 -1.6 -0.1 -4.3 -4.3
Annual growth in total receipts (average % change from previous fiscal year, FY1996 $) 2.7 2.9 4.9 0.5 2.5
Annual growth in total outlays (average % change from previous fiscal year, FY1996 $) 2.2 2.3 1.5 1.9 2.7
Defense spending as a percent of total outlays 17.5 35.5 17.1 21.7 26.7
Non-defense discretionary spending as a percent of total outlays 19.2 19.4* 17.6 16.6 17.1
Net interest costs as percent of total outlays 7.9 10.5* 13.9 14.5 13.2
Other mandatory spending as a percent of total outlays 55.4 41.6* 51.4 46.2 42.9
Debt held by public at end of fiscal year as percent of GDP 36.9 44.0 43.0 46.3 36.7
Gross debt at end of fiscal year as percent of GDP 64.8 56.2 63.4 61.8 45.4
* includes data only back to 1962, since the distinction between discretionary and mandatory began only in that year
Source: Tax Foundation

Although these deficits represent “record levels in dollar terms,” at about 3.5 percent of gross domestic product (GDP) they are “smaller than the deficits of the mid-1980s and early 1990s relative to the size of the economy,” according to CBO.

In the absence of further legislative changes, the recent surge in deficits will peak in 2004, CBO estimates. After that, annual deficits will “decline steadily” before giving way to surpluses early in the next decade (2012). During the last deficit cycle, the federal deficit as a percent of GDP peaked in 1983 at roughly 6 percent.

The President’s Office of Management and Budget (OMB) generally agrees with this outlook. In its Mid-Session (2003) Review of the Budget, the OMB noted, “The deficit ... is projected to increase slightly to $475 billion in 2004.”

According to these two sources, then, triple-digit deficits are indeed back, but not out of line when measured against the historical economy. This is the conclusion reached by three 2003 studies of the data from the American Farm Bureau Federation, Tax Foundation, and economist Brian Wesbury of Griffin, Kubik, Stephens & Thompson.



American Farm Bureau Federation

According to an Economic Analysis Team report from the American Farm Bureau Federation, “The current episode of budget deficits is not out of line when compared to the budget deficits run in the 1980s. While current deficits (2004-2008) will run at about 2.3 percent of GDP on average, only a single year from 1975 to 1995 had a deficit less than 2 percent of GDP--the rest were much higher.

“At first glance, FY2003/FY2004 budget deficits in excess of $400 billion per year are a bit unnerving,” notes the report. “When placed in the perspective of measuring the deficit as a percentage of Gross Domestic Product (GDP) the figures become more palatable. In fact, over the past 50 years, the current deficit cycle in relation to the size of the economy is no worse than average.”

Based on the CBO and OMB outlooks, by 2008, the deficit will be 1.4 to 1.7 percent of GDP. That would also be close to the “average deficit” of the past 50 years.



Tax Foundation

According to the Washington, DC-based Tax Foundation, the average post-WWII deficit as a percent of GDP is 1.6 percent (1946-2002). Over the entire 50 years, only eight years have been in surplus.

In the Tax Foundation report, total receipts and outlays for 2003-04, as a percent of the economy, fare well when measured against various historical periods. The budget deficit as a percent of the economy for FY04 is higher than the post WWII average, but lower than that for George Bush Sr. and Ronald Reagan.

“It is important to put the current budget proposal into historical context,” note the report’s authors. “To do so, it is necessary to translate current spending and revenue proposals into real terms either by adjusting for inflation or by expressing the proposal in terms of the broader economy. Looking merely at the budget in nominal terms that do not account for inflation or economic growth is misleading and inaccurate.”

A table produced by the Tax Foundation compares the current budget with the post-World War II era and the past three administrations. Highlights from the Tax Foundation include:

  • The President’s budget proposes spending $390.4 billion on defense-related activities in FY 2004. This amounts to 17.5 percent of all spending and 3.5 percent of GDP. This level is roughly the same as defense spending was in 1996, which amounted to 17.0 percent of all federal spending and 3.5 percent of GDP. Defense spending in 1987, the height of the Reagan build-up, was 28.1 percent of all federal spending and 6.1 percent of GDP.
  • The President’s budget proposes a fiscal year 2004 budget deficit of $307.4 billion, which is 13.8 percent of all spending and 2.8 percent of GDP. This level is roughly the same as the deficit was in 1994, which amounted to 13.9 percent of all spending and 2.9 percent of GDP. Deficit spending in 1983, the highest point during the Reagan administration, was 25.7 percent of all spending and 6.0 percent of GDP.



Economist Brian Wesbury

Economist Brian Wesbury is also not alarmed by the upcoming Bush deficits; he is more concerned with unfunded liabilities that may hurt the economy the most.

“Publicly held federal debt this year is roughly $3.5 trillion, but this pales in comparison to the unfunded liabilities of Social Security and Medicare, which are now $5 trillion and $13 trillion, respectively,” writes Wesbury. “Promises exceed future revenues in these two programs by $18 trillion, more than 1 1/2 years of national income, and eight times 2002 federal government spending.

“It is this future burden that holds the potential to cause economic damage, not current budget deficits; and general fund surpluses can never be large enough to cover these liabilities.”

According to Wesbury, “Dealing with this as soon as possible is absolutely essential. If you want to worry about something, make it future Social Security and Medicare spending. These are the deficits that threaten the economy.”

Just two years ago, in January 2001, the Clinton OMB projected a surplus of $307 billion for 2003. But a recession that began during Clinton’s last year in office, combined with the fastest growth in government spending in more than 10 years during 2002, created deficits.

“While some say tax cuts caused these deficits, they would have existed even if the 2001 Bush tax cuts had never passed. More importantly, to the extent that the tax cuts helped boost growth, deficits would have been worse,” notes Wesbury.

In addition, “Despite conventional wisdom, which says that deficits boost interest rates, the financial markets are not listening and interest rates are at (close to) 40-year lows. The deficit theory suggests that government borrowing ‘crowds out’ private borrowing, driving up real interest rates. The idea is that tax cuts, which create deficits, will boost interest rates. On its face, this theory seems correct. But its proponents forget an important fact. That fact is that taxes also drain resources from the private sector.”

Wesbury closes with, “No matter how the government finances its activities--by borrowing or taxing--the private sector will have fewer resources. It is the amount of spending that matters, not whether government finances that spending by borrowing. In fact, when taxes are used to narrow a deficit, investment incentives are reduced. Borrowing, on the other hand, is voluntary and neutral on incentives. But all of this noise about deficits becomes moot if we look at the future liabilities of Social Security and Medicare.”



Spending Orgy?

Like Wesbury, Congressman Ron Paul (R-Texas) is most worried about excessive federal spending.

“Has Congress responded to this new reality with spending freezes or other austerity measures? Hardly. Its response has been exactly the opposite, passing a 2003 budget that is a whopping 22 percent higher than just two years ago,” says Paul.

“This rate of growth cannot be sustained unless Congress truly intends to bankrupt the federal government,” Paul continues. “What’s another 10 million dollars, they reason, for a pet project or favor for a lobbyist?”

Paul concludes, “How long could your family survive if it spent 5 or 10 percent more money each and every year? All Americans must become aware of how truly unrestrained federal spending has become, and realize that voters represent the last line of defense against the complete bankruptcy of the U.S. government.”


Scott Hodge is president of the Tax Foundation. His email address is hodge@taxfoundation.org. John Skorburg is managing editor of Budget & Tax News. His email address is skorburg@heartland.org.