CRFB has talked a lot about deficit and debt projections over the coming decade, and beyond. CBO's analysis of the President's FY 2011 budget shows us where these future deficits are coming from. As the effects of the recession slowly subside, federal outlays and revenues are scheduled to rise above historical norms. What is troubling about this is that the growth in outlays will exceed the growth in revenues, piling more onto our nation's debt.
Over the last 30 years, federal revenues have averaged about 18 percent of GDP while federal spending has averaged about 21 percent of GDP. The graph below shows a notable hiccup in actual revenues and outlays due to the fiscal impacts of the recession: outlays spiked to 24.7 percent in 2009 while revenues dropped to 14.8 percent. What is disconcerting is that after the recession abates, revenues and outlays don't return to their historical norms. In fact, outlays will begin to rise again in 2013 to reach 25.2 percent by 2020. While the CBO expects revenues to also rise to levels above the historical average, this rise is not enough to compensate for the growth in spending.
The sharp rise in spending during the recession is due to both automatic stabilizers (such as unemployment benefits and food stamps) and direct actions taken to mitigate the effects of the recession, including the stimulus and TARP. Revenues dropped precipitously due to high unemployment, which translates into lower payroll tax receipts, and the hundreds of billions in corporate and individual tax cuts in the stimulus bills
. After the recession however, rising spending on entitlement programs as the baby boomers retire will cause outlays to rise once again.
On the revenue side, stronger economic growth, expiration of 2001/2003 tax cuts for high earners, other revenue raising proposals in the President's budget (including health care reform), and income tax bracket creep will all cause federal receipts to rise to 19.6 percent by 2020, well below the 25.2 percent projected for outlays. Because of the varying growth in outlays and revenues, the deficit is expected to rise from 4.1 percent in 2014 to 5.6 percent by 2020.
People may disagree over whether rising federal revenues and outlays over the next ten years are good or bad, given the resulting size of government. But one issue is clear: the gap between outlays and revenues is set to grow, and that has serious implications for our country's fiscal health.