by Calculated Risk on 2/27/2005 03:21:00 PM

Here is an overview of the National Debt and the Federal Budget deficit. For the purposes of this analysis:

Income to the Federal Government includes all Income taxes, Payroll Taxes, Corporate Taxes, etc, but does NOT include the surplus payments that are credited to the various Trust Funds (like Social Security and military retirement).

Outlays from the Federal Government includes all expenses (including certain off-budget items) but does NOT include payments to the same Trust Funds (as above).

The General Fund Deficit (or Surplus) then equals:
Deficit/Surplus = Income - Outlays.

This is not quite technically correct, but it is very close. Using this approach, the annual increase in the National Debt = General Fund Deficit (Surprise!). For you accountants: Balance!

NOTE: We could account for the Trust Funds the other way: add the surpluses to income and add the credit to the Trust Fund as an outlay. Of course, the Government adds the surpluses to income but doesn't add the Trust Fund credit to outlays. They call this the "unified budget". Under the Unified Budget, the annual deficit does not equal the increase in National Debt. Don't try that in a Public Company or plan on spending time in jail!

Main data sources: U.S. Treasury Historical Monthly Statements, CBO Historical Budget Data, SS Administration: Social Security Trust Funds

Here is a graph of Federal Income vs. Outlay as % of GDP since 1971:

Source: U.S. Treasury 

NOTE: Click on graphs for larger image.

In the '80s you can see the impact of the Reagan tax cuts as Federal Government tax receipts dropped significantly. Although Reagan slowed the rate of increase of Government spending, outlays as a % of GDP still were high and the annual deficits grew significantly. In the '90s, under President Clinton, with a combination of higher taxes, lower spending (as a % of GDP) and a healthy economy, the deficit was reduced to close to zero in 2000. It took almost 10 years of fiscal discipline to bring the budget into balance.

After 2000, spending increased and taxes were reduced substantially. Once again this has caused ever larger annual budget deficits. This second graph shows the main two reasons for the lower tax receipts:

Source: U.S. Treasury 

The lower Individual Income taxes are the primary reason for the lower tax receipts. Corporate Income taxes, and a few other sources (mostly other corporate tax breaks), account for most of the remaining fall in Federal income. Record low tax receipts (as a % of GDP) and increased spending has led to budget deficits approaching 6% of GDP.

But what is wrong with including the Trust Fund surplus as part of the Federal Government Income (without a corresponding debit)? First, take a look at just the SS portion of the Trust Fund. The following graph shows the SS payroll tax (income to the SS program) and the SS payments (Outlay).

Source: U.S. Treasury 

In the '70s and early '80s the SS outlays were increasing faster than SS income for demographic reasons. In fact the SS program ran a deficit for several years (the Purple line higher than the Green line). In 1983, Reagan appointed current Fed Chairman Alan Greenspan to head a commission on SS reform ("The Greenspan Commission"). To satisfy the needs of retirees from 1983 until now, the Greenspan Commission only had to make minor changes. As the graph shows, over the last 20 years outlays have decreased slightly as a % of GDP. However in the next few years outlays will start increasing again. Since the Greenspan Commission was concerned about the retirement of the Baby Boomer generation, they proposed having the Boomers pre-pay a portion of their retirement insurance. That is the increase in the "income" line. The difference between the "income" and "outlays" is the Social Security surplus that is credited to the SS Trust Fund.

If we include the SS overpayment as part of the income for the Federal Government (without including a corresponding debit), then we are using a regressive tax to replace the progressive individual income tax. That substitution doesn't make any economic sense.

The final graph shows the growth of the SS Trust Fund since 1983. As the program is today, the SS Trust Fund will peak around 2026 and then start declining. It is important to note that SS only accounts for a little over half of the Federal Government Trust Funds. The other portion includes Medicare, Civil Service retirement funds, Military Retirement Funds, Unemployment Insurance, and about 150 other programs.

Source: U.S. Treasury 

Hopefully this overview was informative.

Best Regards to All.