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Continued from here:

OK, we’ve looked at US GDP and US government revenues (taxes) so far. The general observation to make is that US taxes have broadly declined as a % of GDP in the past 60 years. This is particularly true of corporate income taxes, despite high headline tax rates. The corporate tax take (as a % of GDP) has declined almost 75% in the same period due to powerful lobbying, more aggressive domestic tax strategies and the booking of v significant profits in low tax overseas subsidiaries. In a global context, the total tax take in the US is among the lowest in the developed world.

So what about government spending..?! Put your gloves on, let’s dig into the guts:

– Government spending was at $3.5 trillion, or 23.7% of GDP, in 2010

– The government response to the financial crisis, and subsequent recession, are the main reason for 2009-10 spending to be at the highest % of GDP since 1946

– Over the last decade, total federal, state and local spending has averaged around 37% of GDP. Like total taxes, this is among the lowest levels in the developed world

– In the medium term, pre-2007, federally spending did actually decline from 22% of GDP in the 1980s to 19% in the early 2000s

– It’s difficult to isolate one cause, but this decline in spending was likely due to the end of the cold war/collapse of the Soviet Union at the end of the 80s. This accelerated a multi-year decline in defense spending to a low some years ago of 3% of GDP (vs. 10% of GDP in the 1950s)

– Most Americans polled think federal budget deficits can be reduced by cutting unnecessary/wasteful spending. The majority oppose cuts to entitlement programs like Social Security & Medicare, and also cuts in national defense, homeland security, anti-poverty programs, education etc.

– The only significant spending the majority wanted to cut when polled was foreign aid. The average estimate of foreign aid as a % of the federal budget was 25%. Unfortunately, the actual figure is only just over 1%…

– There are three components of spending. The first is discretionary spending, which must be specifically allocated and passed by Congress each year. It includes spending on defense/homeland security, federal agencies, infrastructure, education, housing etc. and generally pays for public services/the ‘common good’

– The second is mandatory spending, which requires no Congressional action, and is based on federal laws requiring government expenditure primarily on Social Security, Medicare & Medicaid. Spending mostly consists of direct payments to individuals, and requires specific amendment/repeal to be changed

– Mandatory & discretionary spending are classed together as primary spending, for a $3.3 trillion total in 2010

– Last, we have interest on the national debt, which is classed as non-primary spending. No good reason for this, except perhaps to suggest the current generation of politicians isn’t responsible for the deficits/debts of their forefathers. Yes, and I’m sure the next generation will say the same of the current crop… It also appears to imply, rather bizarrely, that interest is not actually a real expense?!

– The breakdown of 2010 spending looks like this:

Spending Amount ($B) % of Spending
Interest 196 6%
Mandatory Spending
Social Security 701 20%
Medicare 446 13%
Medicaid 273 8%
Other Mandatory 493 14%
Discretionary Spending
Defense 689 20%
Other Discretionary 658 19%

– Again, some people like to refer to these in terms of GDP instead:

Spending Amount ($B) % of Spending
Interest 196 1.3%
Mandatory Spending
Social Security 701 4.8%
Medicare 446 3.1%
Medicaid 273 1.9%
Other Mandatory 493 3.4%
Discretionary Spending
Defense 689 4.7%
Other Discretionary 658 4.5%

– Finally, all politicians like to avoid uncomfortably close comparisons of spending with revenues, so I’m sure it will be the most important chart we can review:

Spending Amount ($B) % of REVENUES
Interest 196 9%
Mandatory Spending
Social Security 701 32%
Medicare 446 21%
Medicaid 273 13%
Other Mandatory 493 23%
Discretionary Spending
Defense 689 32%
Other Discretionary 658 30%
Total Spending 160%

– Discretionary spending’s actually been in long term decline, from 12% of GDP in the 1960s to just 7% in the early 2000s. It’s now back up to 9.2%, but this is due to recent stimulus spending so the ratio should begin to contract again

– Much of the decline is due to cuts in defense spending, as previously highlighted. But non-defense spending’s also contracted, as evidenced by the government civilian workforce which was 0.7% of total population in 2010, vs. an average 1.0% from the early 1950s to 90s

– We can expect new post-Iraq/Afghanistan defense reductions, but otherwise potential cuts in perceived & actual unnecessary/wasteful spending are basically now confined to a (continually shrinking) 19% share of spending

– The perception of ‘big government‘, and the expectation of potentially large budget savings from non-defense discretionary spending cuts, is therefore mostly an illusion…

– On the other hand, the ever-increasing scale/share of total mandatory spending (which obviously includes interest) is no illusion..! This share is now at 61% of spending, vs. approx. 28% in 1962, and rising

– Like any normal household, if we consider mandatory/interest spending as a % of revenues, it now consumes 98% of revenues

– All other things being equal, mandatory/interest spending will exceed 100% of revenues shortly, and then continue to increase relentlessly due to the aging of the population and the ever-escalating cost of healthcare

– This aging impact is actually due more to a population bulge (the ‘baby boomers‘ are now starting to retire) rather than a dramatic increase in longevity. This highlights the poor returns provided by healthcare, for which the US pays almost twice as much per capita as the typical industrialized country

– Despite this, since 1990, life expectancy at birth has only increased about 2.5 years, among the lowest in 34 OECD countries. Expectancy at age 65 has increased by 3 years since 1970. Based on international comparisons, and US income levels, US life expectancy is 3 years lower than might be expected

– Public & private healthcare spending have increased from 1/10 of the economy in the mid-80s to 1/6 of the economy in 2009, with a forecast expansion to 1/4 of the economy by the 2030s

To be continued…

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