An Overview of Recent Changes in Federal Finances

Everyone who pays any attention to public affairs knows that after the onset of the current recession, the federal government’s finances took a very bad turn for the worse. As taxable income fell, federal tax receipts also fell, especially between 2008 and 2009 (here as elsewhere in this post, unless otherwise noted, references to years are to federal fiscal years, which end on September 30).

Even if nothing else had changed, this precipitous drop in revenues would have created a huge increase in the budget deficit, which was already very large—$459 billion in 2008. However, as the government’s receipts were falling sharply, fiscal decision makers took a number of measures ostensibly to “stimulate” the economy and thereby cushion its contraction by increasing federal spending. This action made the increase in the budget deficit even greater than it otherwise would have been.

Between 2008 and 2009, the deficit increased by nearly $1 trillion, an amount equivalent to roughly 7 percent of GDP at the time. Although the economy’s decline hit bottom in mid-2009 (calendar year) and began a slow recovery, the deficit did not decline much during the past three years. After reaching the astonishing amount of $1.4 trillion in 2009, it was $1.3 trillion in 2010 and 2011, and $1.1 trillion in 2012.

The deficit did not decline faster because federal outlays, which had leaped up by an amazing 11 percent in 2009, have remained lodged at their elevated level of about $3.5–3.6 trillion during the recovery. What was represented as an emergency level of spending in late 2008 and 2009 has subsequently turned into the normal level of spending, even though four years have passed since the perceived crisis occurred in the final third of 2008 (calendar year).

After a gigantic jump in 2009, however, federal net outlays did not increase further. One upshot of this stability was that the rate of increase in federal outlays between 2007 and 2012 (5.3 percent per year on average) was actually less than it had been between 1998 and 2007 (5.7 percent per year on average). Thus, whereas the George W. Bush administration had increased its spending rapidly year after year, the Barack Obama administration crammed its spending increase into one huge jump in 2009. Unless the government resumes substantial increases in its spending fairly soon, the apparent ratchet in spending created in 2008 and 2009 will disappear as the trend line converges with the current outlays.

Meanwhile, the state of the federal finances is sufficiently desperate, especially if we view it in the perspective of the increases in entitlement payments the government has promised to recipients of benefits under the Social Security, Medicare, and Medicaid programs, among others, for decades to come. These prospective long-run fiscal difficulties were crying out for rectification even before the recession began. However, the government’s fiscal management since 2008, which has been dominated by short-run concerns, has made these long-run difficulties even greater and the need for a serious response to them more pressing than ever before. The day is coming—and coming quite soon—when the federal fiscal authorities will no longer be able to employ their traditional subterfuge of kicking the can a little farther down the road.