Rising Spending Driving Budget Deficit Increase

Rising spending pushed the US Federal Deficit in $1.02 billion in 2019, or 4.7 percent of GDP, according to data released last week by the US Treasury. Rising health care and defense spending were the main drivers pushing total federal outlays by 7.5 percent to $4.5 trillion last year, outpacing the 5 percent increase in federal revenues. The analysis in this report will focus the trend of federal receipts and outlays as a share of GDP, as this gives a better measure of their burden on the economy than does annual dollar amounts.

Federal spending has been increasing relentlessly for the last 20 years, rising from about 18 percent of GDP at the end of the Clinton administration to 21 percent today. The trend is for it to continue to rise in the future. According to the Congressional Budget Office projections, federal outlays will reach 23 percent of GDP in 2030 and 26 percent of GDP in 2040. Most this increase is due to rising Social Security and Medicare payments. Increased defense spending related to the global war on terrorism has played a secondary role since 2011, but this burden is unlikely to increase in the future as a share of GDP.

Federal revenues are now at 16.2 percent of GDP and have averaged 17.3 percent of GDP over the past 40 years. With the exception of unexpected windfall in tax revenues during the dot.com boom of late 1990s, they have never risen above 18 percent of GDP, which appears to be a practical ceiling minus an unforeseen economic boom.

This mismatch between spending and revenues has created a structural deficit that neither party, so far, has any coherent plan to address. Federal spending, as a share of GDP, would need to be slashed by 14 percent to bring it down to the apparent revenue ceiling of 18 percent of GDP. The Trump administration has promised new health care reforms to curb the growth in federal health care spending, but so far has not released any detailed plans. Congressional leadership of both parties also have shown little willingness to reverse the growth in spending.

Conversely, federal revenues would need to rise by a draconian 31 percent to fully fund just the current level of spending. To fully meet 2040 federal spending obligations, revenues would need to increase by 63 percent. If history is any indicator, any attempts to raise tax rates to meet these goals would almost certainly fail. Increasing revenues above 18 percent of GDP would cause an economic slowdown, and possibly a recession, which would more likely increase the deficit over the long run rather than shrink it.

Of the two potential solutions to the rising deficit, cutting spending appears to be more doable than does raising taxes, but this will only succeed if lawmakers develop the courage to address the problem. With enough foresight, a plan could be implemented that would minimize the impact of spending cuts. More likely, economic realities will force a more painful solution through a fiscal crisis.

Low Unemployment, Rising Wages Benefiting Underprivileged

Historically low unemployment and rising wages indicate that the benefits of the current economic expansion are widespread, which likely will increase President Trump’s reelection chances. Data released by the Bureau of Labor Statistics on Friday shows the labor force remains tight, with the unemployment rate at historic lows and an increase in the labor force participation rate.

  • The headline unemployment rate in December remained at 3.5 percent, matching the lowest rate since May 1969. Broader measures of unemployment are all at the series low.
  • 74.2 percent of workers entering employment in the fourth quarter came from out of the labor force rather than from unemployment, which is the highest share since the series began in 1990. 
  • The labor force participation rate for prime-age adults (ages 25-54) up to 82.9 percent in December—1.6 percentage points above the rate in November 2016.

Historically disadvantaged workers–who are increasingly becoming swing voters–are seeing the most benefits as employers raise wages to attract and retain workers. December marks the 17th consecutive month that average hourly earnings growth for production non-supervisory workers has been at or above 3 percent. 

  • Wages for workers are growing faster than for managers
  • Wages for those without a bachelor’s degree are growing faster than for those with a bachelor’s degree or higher.
  • Wages for individuals at the bottom of the income scale are growing faster than for those at the top.
  • Wages for African Americans are growing faster than for white Americans.