The Recession Spectator

The Receding Economy, Surging Spending

The federal government now consumes more than America produced just a generation ago.

By 7.8.09

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America's emerging policy issue is the federal budget deficit. According to the 7/2 released CNN/Opinion Research Corp. poll of 1,026 adults (conducted 6/26-28 with a 3.1% +/- margin of error), the federal budget deficit ranked second only to the economy as "the most important issue facing the U.S. today." That's ahead of health care, the wars in Iraq and Afghanistan, and energy policy. 

The public's concern is not surprising. While the U.S. economy has been shrinking, the U.S. government has been anything but. The recession's effect on the federal spending and the deficit can be painted in a few bold strokes. Even using the Congressional Budget Office's March estimates -- which do not include the effect of recent spending legislation -- it's not a pretty picture.

Federal outlays, the true measure of the government's size, are estimated by CBO to be $3.853 trillion this year. This is greater than the entire U.S. economy was in 1984. The federal government now consumes more than America produced just a generation ago.

Those federal outlays now account for 27.4 percent of all America produces today. Less than three-fourths -- 72.6 percent -- is left for all the nation's other uses. This ratio of spending to the total economy is higher than at any point since WWII.

As a result of this spending, the deficit is 11.9 percent of the economy. The deficit too is higher than at any time since WWII and would pay for two-thirds of all America's health care spending.

In nominal dollars, today's deficit measures $1.667 trillion. This is far and away the largest nominal deficit in our nation's history. That figure is 3.6 times greater than the previous record deficit of $459 billion, which was reached just last year. Total federal spending, did not reach the level of this year's deficit until 1999.

In fact, today's nominal deficit is greater than the previous five years' deficits ($1.599 trillion from 2004 through 2008) put together! The previous eight years' net deficit of $2.005 trillion is just a fifth greater than this year's alone. 

Looking at the deficit from the revenue angle: the federal government is estimated to collect $968 billion in federal income taxes this year. If income tax revenues were doubled -- everyone paying twice as much -- the 2009 deficit would be cut by just over a half. And the remaining $699 billion deficit would still be the biggest deficit in U.S. history.

The deficit is enormous because spending is even more so. The recession has fueled both and both have surged quickly: just two years ago, federal spending was $2.7 31 trillion and the deficit just $163 billion (a tenth of today's estimate). When the recession ends, it will be interesting to see if federal spending and deficits recede as quickly as they arose.

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About the Author

J.T. Young served in the Department of Treasury and the Office of Management and Budget from 2001 to 2004 and as a Congressional staff member from 1987 to 2000.