Lesson 23
Macroeconomic Landscape

Federal tax revenues relative to the overall economy have reached their lowest level since Dwight Eisenhower was president, while government spending has climbed to the highest point since Bill Clinton declared the era of big government over.

The Congressional Budget Office closed the books on the fiscal year that ended September 30, 2003, by issuing a report that portrayed the federal government as being badly off even as the nation’s economy shows increasing signs of recovery. Bush administration claims that mounting deficits are the result of the economic downturn, and that a recovery would begin to remedy the government’s fiscal imbalance.

The federal budget deficit for fiscal 2003 soared to $374 billion, easily surpassing the previous record of $290 billion in 1992.

The actual 2003 deficit was, however, lower than the $401 billion forecast by CBO in August, and Bolten pointed to other factors that he called «modest good news». Tax receipts, especially corporate taxes, came in stronger than expected this fall, while spending on welfare payments and unemployment benefits were lower than forecast – all signs that the economic recovery is helping the government’s bottom line.

But CBO director Douglas Holtz-Eakin warned there are still far too many questions about the recent jump in tax receipts to conclude the government’s fiscal fortunes have turned.

«We still have the same outlook for the future,» he said, pointing to CBO’s August projections of deficits totaling $1.4 trillion from 2004 to 2013.

As a snapshot of government’s fiscal health, 2003 prompted historic comparisons. A sluggish economy and three successive tax cuts pushed budget receipts to $1.78 trillion, $70 billion below 2002 levels. Expressed as percentage of the economy, the federal tax take contracted to 16.6%, the lowest level since 1959.

Just last year, corporate tax receipts declined by 11.1%, to 1.2% of the nation’s GDP. That is the lowest level since 1983. Since they peaked in 2000, corporate tax payments have plunged nearly 29%.

Individual income taxes fell by 7.5% last year and are off 21% from their 2000 peak. Only Medicare and Social Security taxes have continued to climb since the boom years of the 1990s, and that money is now financing other parts of the government.

«It is revenue collection which dropped off a cliff,» Bolten said.

But federal spending – pumped up by war and rising health care costs – has been on the opposite trajectory. Spending rose by $146 billion over 2002, or 7.3%, to $2.16 trillion. In 2003, spending equaled 20.3% of the economy, the highest level since 1996, when Clinton hailed the end of big government.

And those numbers may actually understate the surge in spending since historically low interest rates have lowered the cost of interest payments on the $3.9 trillion federal debt held by the public, the CBO said. Excluding the fall in interest payments, federal spending rose 8.9% last year.

But the real driver on the spending side was the military, which consumed $389 billion in 2003, a 17.2% increase in a year. That was the fastest growth rate in 20 years, and more than double the average 7% growth in non-defense programs.

With Congress considering an $87 billion spending package for Iraq and Afghanistan, the spending figures are sure to rise. Bolten said he is still expecting the deficit to top $500 billion in 2003, even with a brightening economic picture. Strong economic growth anticipated by 2004 will not produce a surge in tax receipts until the following year, he said.

Critics of the president’s fiscal stewardship are not backing off. Bush’s $1.7 trillion in tax cuts will really begin taking a toll on government finances toward the end of the decade, when forecasters expect the economy to be rolling. By 2010, the vanguard of Baby Boom retirees will have begun driving up Social Security and Medicare expenses by nearly 7% a year.

The 2003 numbers are a «distraction compared to the big story of where this is all heading,» said Kent Conrad, the senior Democrat on the Senate Budget Committee, «a fiscal crisis unlike any we’ve ever seen.»

Source: Washington Post, 20 October 2003 (abridged)