Federal spending puts U.S. on path to economic oblivion

Raymond Keating

The federal government closed its books on the 2012 budget year at the end of September. The bottom line results provided another powerful reminder of just how out of control the federal budget remains — more specifically, how out of control spending is.

In its latest monthly budget review, the Congressional Budget Office reported that the 2012 budget deficit came in at $1.1 trillion, The Treasurer Department confirmed that amount a few days later in its final monthly statement for FY 2012. Amazingly, the latest deficit constitutes a minor improvement compared to last year. As the CBO reported: “The federal budget deficit was about $1.1 trillion in fiscal year 2012, CBO estimates, approximately $200 billion less than the shortfall recorded in 2011.

At 7 percent of gross domestic product, the 2012 deficit was down from 8.7 percent in 2011 and 9 percent in 2010 …”

However, the CBO added that these budget deficits as shares of GDP were “greater than in any year between 1947 and 2008.”

Compared to 2011, the massive budget shortfall closed ever so slightly as federal revenues grew a bit due to some sluggish economic growth and outlays fell by 1.6 percent.

In the grand scheme of things, though, these tiny changes amounted to nothing of substance.

It’s important to understand what’s at work here.

First, federal spending remains at previously unfathomable levels. Compared to $2.73 trillion in 2007, outlays jumped to $2.98 trillion in 2008 and $3.52 trillion in 2009. It has remained at or around those levels ever since: $3.46 trillion in 2010, $3.6 trillion in 2011 and $3.54 trillion in 2012. As a share of GDP, federal outlays are at unprecedented levels — at 25 percent in 2009, 24 percent in both 2010 and 2011 and 23 percent in 2012. The U.S. has never had spending levels this high except during World War II.

Consider that under the “current policies” scenario reported in its “2012 Long-Term Budget Outlook,” the CBO projects federal spending as a share of GDP to top 24 percent in 2022 and rise to 35.7 percent of GDP in 2037.

The federal government has a massive spending problem that’s putting us on the path to fiscal and economic oblivion — that is, the path to becoming the next Europe — if nothing is done to alter these policies.

Second, federal tax receipts are down. That’s not because of any kind of large tax cuts. Rather, it’s due to the grim economy.

Quite simply, government revenues rise and fall with economic growth. In 2012, revenues came in at 15.7 percent of GDP. That compares to 15.1 percent of GDP in both 2009 and 2010, and 15.4 percent in 2011. Keep in mind that during the period of 2004-2007, a time of better economic growth (though hardly robust), revenues averaged 17.2 percent of GDP.

It’s also worth noting that whenever federal revenues approach or top the 19 percent of GDP mark, the economy eventually slows or moves into recession. Unfortunately, President Barack Obama’s budget projects revenues hitting

19 percent in 2015, and moving above that level afterwards.

On the revenue side, therefore, the key is to get growth reignited, which will bring more revenue into federal coffers. At the same time, tax increases — such as the large ones scheduled under ObamaCare and additional hikes advocated by President Obama — work to stifle risk taking and economic growth.

In the end, the U.S. cannot tax and spend its way to economic and fiscal health. Yet, that’s where policymaking is pointed right now. Instead, what we need is a pro-growth tax system and serious work at reining in spending in the near term and over the long haul.

How do budget deficits fit into this mix? At these astronomical levels, they are sending clear signals that we’re spending far too much, draining resources from the private sector through both borrowing and taxes now and threatening much higher taxes in the not-too-distant future.

It’s no mystery what must be done. The real question is this: Will our elected officials get the job done?