Why tax receipts are outpacing spending

If the unified budget moves into balance or surplus by December 2009, I’ll win an extra thousand dollars worth of the national debt (i.e., Treasury securities), which I will subsequently transfer to my granddaughter.  She’ll like that a lot, and she has a great smile; it will be worth every penny. 

The trend lines for receipts and outlays, as shown in this recent article, cross in June 2008.  Tax receipts are growing at a rate of 11.5%; outlays are growing at 5.5%.  Will those trends hold up or improve over the next sixteen months? 

I thought it might help to break receipts and outlays into their major components, to gain a little more insight.  Here are the major components of tax receipts. 

Click to enlarge.

Obviously, individual income taxes (13% growth) and corporate income taxes (26% growth) are the reasons total tax receipts are growing at such a high rate.  Can those trends hold for much longer?  We’ll see.  The U.S. Business Cycle Indicators are still signaling robust growth for at least the near future, so that’s a good sign.

Here are the major components of federal spending. 

Click to enlarge.

A lot of headlines make it sound like military spending is the our biggest category of outlays, but it’s not.  HHS and Social Security are each 20% higher, and growing at about the same pace, or more.  So why is total spending only growing at a 5.5% pace?  Partly because Katrina relief spending (in the “Homeland Security” category) is receding into the past; that’s largely why Homeland Security spending is shrinking at an annual pace of 16%. 

Can those trends hold?  I doubt it—and to be perfectly honest, I hope not.  I’d like to see more spending (effective spending, that is) in the broad category I call “national security”, a.k.a. "war prevention through strength": intelligence, plus diplomacy, plus military, plus homeland security.  If effective spending of that kind precluded reaching a balanced budget, I don’t care one whit.  Given a choice between a safer, more secure environment for our kids’ and grandkids’ generations, versus an extra $1000 T-note in my granddaughter’s safe deposit box, I’d pick the former in a heartbeat—as you already know if you’ve read about my lack of exuberance for the unfortunate, but politically popular late 1990s surpluses.  (An article from last October, Public Enemy #1, is one example.  I do understand that my opinion on this puts me in a tiny minority, but I won’t change it until I hear a compelling argument to the contrary.  And I confidently predict that won’t be happening any time soon.)

I’ll update these charts monthly, to help us peel back the onion (so to speak) on receipts and outlays.

Comments

[CoRev]

Steve, you've gained an exuberant member of the Tiny Minority (TM). Love the chart and expect it's impacts will be felt next year.

How funny will it be to see both parties claiming credit for balancing the budget in a presidential election year?

For political purposes, I think it is important we balance the budget just to show how easy it can be. I MIGHT slow some of the deceitful hand wringing for a while.

I think we should pay down the high priced/interest debt somewhat to lower annual federal interest payments for a few years. But, I'm a Pub. Admin./Poli. Sci. guy not an economist.

[Phil]

Keep up the great work, Steve. I've also only recently come "on board" with your thoughts, and, so far, they make a lot of sense.

Debt is not necessarily a bad thing if it is managed correctly. Would it be better to be completely debt-free? That really depends, doesn't it? I know that being personally debt-free can actually be somewhat detrimental to one's credit-worthiness.

To me, the only reason to be completely debt-free is to use any incoming revenues towards other types of investments.

It all depends on outlays.

-Phil

[CoRev]

Being completely debt free is not good. Too many retirement plans are based upon Fed Equities. To my mind getting the amount of interest paid yearly is good. But, where is that natural balance?