Federal Budge and Debt

The federal government, albeit in no way comparable to a for-profit business, is a largest and badly operated business if judged by its financials. The most recent number shows an annual deficit of $408 billion and an outstanding federal debt of $9.7 trillion. The state and local government (S&L) didn’t fare well either.

The federal budget has generally been in surplus in the recent 200 years except during war times and the Great Depression. Since 80’s it began to deteriorate due to swelling military expenditure. The turnaround started in Clinton years in 1998 with a moderate surplus of $69 billion, then a crescendo of $126 billion and $236 billion in the next two years.

Driven by the phenomenon unprecedented in almost 30 years, the Congressional Budget Office forecasted “the 10-year surplus projections outside of Social Security would range from $838 billion to more than $1.8 trillion.” Meanwhile, “Mr. Clinton said he would offer a plan to pay off by 2013 the entire $3.6 trillion owed by the federal government to the public in the form of Treasury bonds.”

Nonetheless, a streak of cataclysm together with the tax cut turned the budget balance again into a nose-dive. After a $128 billion surplus in the first year, the Bush administration produced an accumulative deficit of over $2 trillion, and the federal debt burgeoned, on a heritage of $5.6 trillion from the Clinton years, to $9.7 trillion today – that’s around 65% of GDP or $31,700 for everyone.

However, we see a completely different budget picture irrespective of Social Insurance programs (presumably Social Security, Medicare & Medicaid, SCHIP, etc.): a dollop of $82 billion since 2001. Solely based on numbers, it seems it is the entitlement programs that engendered the deep red.

Bernanke commented on this issue related to the tax policy in front of the House in Feb. 2007:

“Addressing the country's fiscal problems will take persistence and a willingness to make difficult choices. In the end, the fundamental decision that the Congress, the Administration, and the American people must confront is how large a share of the nation's economic resources to devote to federal government programs, including transfer programs such as Social Security, Medicare, and Medicaid. Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run. Thus, members of the Congress who put special emphasis on keeping tax rates low must accept that low tax rates can be sustained only if outlays, including those on entitlements, are kept low as well. Likewise, members who favor a more expansive role of the government, including relatively more-generous benefits payments, must recognize the burden imposed by the additional taxes needed to pay for the higher spending, a burden that includes not only the resources transferred from the private sector but also any adverse economic incentives associated with higher tax rates.”