Surplus on the Surface, Trouble Underneath

Friday, April 30, 1999

For all the talk about shrinking the federal government, growth in federal tax receipts, inflation adjusted, has accelerated during the 1990s, from 2.1 percent annually 1970–91, to 4.3 percent annually 1991–99 (see chart below). A heavier tax burden, more than reduced government spending, has created the budget surplus. Growth in federal spending has slowed but hasn’t stopped, as the recent compromise budget shows: It was 3.2 percent annually 1970–91 and 0.8 percent annually 1991–99. The chart on page 38 showing1992 dollars is a ratio scale, on which constant percentage increases show as an upward-sloping straight line. (Both charts were developed by Gerald P. Dwyer Jr. and R.W. Hafer for the Atlanta Fed.)

The budget picture becomes even sharper when expressed as a share of GDP (see chart below). For a generation, federal spending—whether financed by taxes, borrowing, or printing money—has been the best measure of the Government Grab at the goods and services produced by the economy. But now tax receipts are projected to exceed spending. So Washington’s tax take becomes the best measure of its burden on the economy.

(Click on image for larger version.)
(Click on image for larger version.)

Key points:

  • Federal spending has fallen as a share of GDP, to 19.7 percent. But federal tax receipts have risen, to 20.6 percent—the highest since the war year 1944.
  • The Government Grab is projected to stabilize at a level that is high by historic standards, albeit below the peaks of the 1980s. The United States has not become Western Europe, with government grabs at 40 to 50 percent of GDP (and higher). But it hasn’t returned to the 1950s either. And note: In the 1990s there’s been no recession in which the share of GDP taken by federal spending would rise and federal tax receipts would fall automatically. One last not very cheerful thought:
  • After 2010 federal spending will surge again as the baby boomers retire. By 2030 federal spending is projected to be 29 percent of GDP. The federal deficit will be 9 percent of GDP. Balanced budget? Reduced Government Grab? Maybe so—but only for a while.