I was reminded of the classic line from “Dr. Strangelove”: “Gentlemen, you can’t fight in here! This is the war room.”
It’s a high bar, but I’d call this debate — the one over deficits, debt, taxes and spending — one of our most substance-free. So in this post, my modest goal is to dispassionately address one question in our fiscal policy debate: whether our fiscal imbalances are because of too much spending or too little revenue.
The Solomonic thing to do here is, of course, to split the baby and say both sides of the ledger are equally implicated. But they’re not. Our historically large budget deficits are due more to inadequate revenue than to excessive spending.
Let’s begin by asking why the budget deficit of about -4 percent of GDP is unusually large. Historically, late in an expansion such as the current one, with unemployment this low, the budget deficit has been close to zero. This expansion, however, has seen both tax cuts and spending increases financed by borrowing. So, relative to what we’d expect, what’s driving the deficit: less revenue or more spending?
Congressional Budget Office data suggests it’s a revenue shortfall. In the summer of 2017, before the tax cuts and spending deal, the budget office predicted that we’d spend 20.5 percent of GDP in 2018, which turned out to be about right, as the actual spending-to-GDP rate last year was 20.3 percent. But CBO also thought — and remember, this was before the tax cut — that we’d collect 17.7 percent of GDP in revenue. The actual share came in well below that, at just 16.4 percent. By the way, that 20.3 percent spending share: It’s precisely equal to the 50-year average, i.e., it’s no outlier. What’s unusual is the low revenue number.
A look at longer-term CBO projections further underscores the revenue shortfall. The figure below shows CBO’s forecasts for spending other than interest payments and revenue from two different vintages of its long-term budget outlook, one from 2010 and its most recent, from last year. Spending net of interest is appropriate because our alleged spending problem refers to spending on government programs, not on servicing the debt (note, however, that the general finding is the same if I use total spending).
If spending were behind our imbalances, we’d expect to see a significantly higher spending line in the later 2018 projection than in the earlier forecast from 2010, with revenue largely unchanged. That is, the spending-problem scenario should show our fiscal gaps being driven by more spending, not less revenue.
In fact, the opposite is the case. Not only is noninterest spending lower in the 2018 than the 2010 forecast — by 2 percentage points of GDP, on average, over the forecast period — but revenue in the 2018 budget outlook is much lower than in 2010’s outlook — by 4.5 points, on average.
CBO bases these predictions on the laws in place when the forecasts are constructed, meaning that the law in 2010 called for both higher spending and higher revenue than today’s law. To be clear, not all of those policies were ultimately followed. Most of the tax cuts enacted under President George W. Bush did not sunset, much as President Trump’s tax cuts scheduled to expire by 2026 may not do so, implying an even worse revenue outlook. But the broader point is clear: Both revenue and spending declined between these two forecasts, with the revenue decline twice that of spending, making the “spending problem” framework indefensible.
These are forecasts, but an analysis of the actual path of revenue and outlays by Robert Kogan of the Senate Budget Committee staff makes a similar point. Had we kept the President Bill Clinton-era tax code in place — meaning no George W. Bush or Trump tax cuts — but let all the spending that occurred since then proceed apace, including the military actions, the Affordable Care Act, and so on, the result would be a debt-to-GDP ratio that is 27 percentage points, or about a third, below where it stands today, about 51 percent instead of 78 percent.
Finally, a new analysis by Jason Furman and Larry Summers comes to the same conclusion: “Without the Bush and Trump tax cuts (and the interest payments on the debt that went with them), last year’s federal budget would have come close to balancing.” They also bring an important international comparison to this table, concluding “that the United States has more of a revenue problem than an entitlement problem. U.S. spending on social programs ranks among the lowest in 35 advanced economies, yet the country has the highest deficit relative to its GDP in the group. That is because the United States brings in the fifth-lowest total revenue as a share of GDP among those 35 countries.”
None of this is to argue that our spending levels are optimal or that savings couldn’t be found with health care, which accounts for 25 percent of federal spending, as a prime target (the key strategy here must be to protect benefits while going after inflated provider/insurer prices). After all, every other advanced economy provides some form of universal health coverage to its citizens for about half of what we spend (as a share of GDP).
But that said, the conclusion is simple: We can have good arguments about the best ways to raise them, but there is no realistic, sustainable budget path that does not include increased tax revenue.