Recently, the 114th United States Congress convened in Washington D.C, and for the first time since January 2007, the Republican party now controls both the House of Representatives and the Senate. That’s good news for a variety of reasons, but the biggest is the future of Federal fiscal policy.
Here is the full breakdown: our national debt has surpassed U.S. GDP, and is now over $18 trillion in total. The annual budget deficit (which is the amount we add to the debt in one year), as a percentage of GDP, has been shrinking recently, going from 4.1% in 2013 to 2.9% in 2014, according to the Congressional Budget Office. However, the CBO projects that after bottoming out in 2015, our deficit will slowly increase back to 3.8% of GDP by 2022 (along with the overall debt-to-GDP ratio increasing again from 2018 on). In other words, the good times of shrinking deficits aren’t necessarily going to last long.
So what is to blame for causing our poor fiscal situation up to this point, and going forward? You’ve probably heard many explanations from both political parties. Republicans have made it clear that the biggest and most consequential issue is the Federal government’s growing and entangled system of transfer payments. According to the statistical whiz Nate Silver, back when he was at the New York Times (no right wing rag here), in a post titled “What is Driving Growth in Government Spending”, he made clear: “What’s driving the growth in government spending?… it has a relatively straightforward answer: first and foremost, spending on health care through Medicare and Medicaid, and other major social insurance and entitlement programs.”
Referring to the charts and numbers that Silver provided in his fantastic post, what he calls “entitlement spending” went from being virtually nonexistent on a Federal level in 1930, to 5% of GDP in 1970, to 10% in the 1990s, to almost hitting 15% in 2010. Keep in mind, this is only entitlement spending on the Federal level. If you add in state and local transfer payments, the numbers go much higher.
Long term, growth in programs like Medicare and Social Security will continue to absorb larger percentages of GDP, as reported by the CBO. Medicare by itself will go from 5% to 8% in the coming decades. Social Security will grow further as well. Already, transfer payments make up a majority of the Federal budget. They’re becoming so bloated that they are starting to push other services out of the room.
‘But isn’t our poor fiscal situation the result of military spending and tax cuts?’
As the data Silver provided shows, military spending as a percentage of GDP has mostly been on the decline since the 1950s. In the early 1950s, it was over 10%. By the 1990s, it was slightly less than 5% of GDP. The Treasury Department estimated in September 2014 that the defense budget for the full fiscal year would end up being $583.842 billion. That comes out to roughly 3.48% of our $16.768 trillion GDP (est. 2013 World Bank).
In addition, as the Tax Policy Center states in their record of previous tax receipts, since WWII (post 1945) the lowest that Federal tax receipts have ever gone is 14.1% of GDP in 1950. The highest is 19.9% in 2000. From 1946 to the present, tax revenue has always been in that range, mostly going up and down with cyclical economic factors (higher with good economic times, lower with bad ones), not so much with changes in the tax rates themselves. In fact, when the tax rate was 39.6% on top income earners in 2000, the Federal government took in more revenue than at any year in the 1950s, when the top tax rate on incomes was 91%, and higher than today on lower brackets as well. Turns out, tax rates haven’t got much to do with federal revenue if you ignore loopholes, deductions, tax shelters, and economic growth. Americans still paid more in taxes overall with supposedly ‘lower tax rates.’
Total Federal tax receipts are estimated to be 19% in 2018, higher than the post-war average. The problem isn’t taxes. The problem isn’t the military either, which is being hammered by the sequester. The problem is the welfare state. It has gotten way too big for our nation to sustain for the long term. That is why we should all be thankful that the GOP has more power in Washington than before.