JESSE POWELL writes:

There has been so much talk of the federal budget and the deficit due to the threatened government shutdown that I thought your readers might be interested in some historical background on these issues.

In fiscal year 1930, before the Great Depression gathered momentum, the federal government ran a budget surplus of 0.8 percent of GDP (Gross Domestic Product); it took in 4.2 percent of GDP in taxes and spent 3.4 percent of GDP. At the depth of the Great Depression, in fiscal year 1934, the government ran a deficit of 5.9 percent of GDP (4.8 percent of GDP in taxes and 10.7 percent of GDP in spending). The government ran huge budget deficits during World War II, peaking at 30.3 percent of GDP in 1943, but by 1947 the government’s budget was in surplus and the debt from World War II started to shrink in relation to the size of the economy.

The government’s budget in fiscal year 1947 was quite different from what it was in 1930; it had a surplus of 1.7 percent, but more importantly revenues and spending were much bigger than in 1930; in 1947 taxes were 16.5 percent of GDP and spending was 14.8 percent. The size of the federal government in relation to the overall economy quadrupled from 1930 to 1947 and since 1947 has stayed about the same size up to the current day (in terms of tax receipts). 

In recent years, due to economic difficulties in the wider economy, the deficit has grown and it ballooned in fiscal year 2009. In that year, federal taxes collected were 14.8 percent of GDP while spending (including supplemental expenditures not counted in the regular budget) was 27.1 percent, making for a huge budget deficit of 12.3 percent. The deficit has gone down somewhat since but not very quickly. Fiscal year 2009 extends from September 30, 2008 until September 30, 2009; September 15, 2008 was when Lehman Brothers filed for bankruptcy, marking the peak of the financial crisis. 

Looking at federal spending in detail from 1962 to 2009, defense spending, as a portion of the overall budget, has gone down radically while welfare spending that functions as income supports for individual citizens (Health and Medicare, Social Security, Income Security, and Veterans Benefits) has gone up dramatically. In 1962, 49.0 percent of the budget was spent on defense while 28.4 percent went to welfare. By 2009,  only 18.8 percent of spending was on defense while 59.0 percent went to welfare. Thus, the proportion on defense declined by 30.2 percentage points while welfare expenditures went up 30.6 percentage points. 

Proportion of Total Budgeted Federal Spending by Category from 1962 to 2009 and Total Budgeted Federal Spending as a Proportion of GDP  

 Not all federal government spending is included in the regular federal budget; “Supplemental Appropriations” are not a part of the regular budget of the federal government. They show up nowhere when looking at the taxes received or money spent by the government during a particular fiscal year. The above table detailing government spending by category does not include money spent in “Supplemental Appropriations.” Supplemental Appropriations are used to fund “unexpected” or “emergency” expenses such as rebuilding after Hurricane Katrina; in recent years Supplemental Appropriations have grown quite large and have been used for funding the Iraq and Afghanistan wars, stimulus spending to help the economy, and general earmark spending.

 Also, the federal government does have some resources in savings. Part of the spending since fiscal year 2005 has been funded by this government savings. From an accounting point of view this savings is a part of the government’s trust fund so the money that is spent from savings is “borrowed” and will later need to be “repaid” in order to fund future government liabilities such as Social Security benefits. 

The table below shows the cash flow of government income and expenditures for fiscal years 2005 to 2009. Money in must equal money out, by definition. Money in comes from taxes, borrowing from the public, and borrowing from savings. Money out goes to spending on budgeted items and on supplementary expenses (from “Supplementary Appropriations”). The labels in the table are: Taxes; Bor/Pub (Borrowed from the Public, this shows the money borrowed from the Public, this is the deficit counted as “Debt Held by the Public”); Bor/Sav (Borrowed from Savings, this shows the money “borrowed” from government trust funds that from an accounting point of view is added to “Intragovernmental Holdings”); Spen (Spending, this is the money spent on regularly budgeted items); Sup/S (Supplemental Spending, this is the money spent on “Supplemental Appropriations” that are not included within the regular budget); %GDP (Percent of GDP; the proportion of all government spending, on budget and supplementary combined, compared to the GDP). The numbers given in the table represent billions of dollars. Taxes + Bor/Pub + Bor/Sav = Spen + Sup/S by definition. 

Cash Flow of Federal Government Income and Expenses for Fiscal Years 2005 to 2009 and Total Government Spending as a Proportion of GDP          

The deficit has gone down somewhat since fiscal year 2009. During fiscal year 2009, debt to the public went up by $1,743 billion; during fiscal year 2010, it went up by $1,471 billion. Looking at how the debt has grown in more recent months, we see that from September 30, 2009 to April 8, 2010 the debt to the public grew by $796 billion; from September 30, 2010 to April 8, 2011, by $629 billion.

 Sources:

 Historical Tables; Budget of the US Government, Fiscal Year 2011

Debt to the Penny (Daily History Search Application)

                                                          — Comments —

Jeff W. writes:

Here is a thought that puts all this growth of government into perspective for me.

There are two kinds of animals: wild animals that fend for themselves and dependent animals who live on handouts from people. Many of those dependent animals are farm animals that live on farmers’ feedlots.

In the 1930’s, government began a serious program of enlarging its feedlot. Today it is huge; about 50% of Americans live on government’s feedlot in one way or another. Building that feedlot is considered to be modern society’s proudest achievement. People say, “Look at all the people that have government jobs and monthly Social Security checks. They no longer have to worry. Isn’t it wonderful that we have such a wise and caring government?”

Moving a wild animal to the feedlot is easy. If you give him handouts every day, he will probably be happy to live inside a fence. But the problem comes in when you attempt to move an animal from the feedlot back into the wild. That move often ends tragically, because dependent animals lose the ability to fend for themselves.

Though Americans deny it, the government feedlot is now in the process of shutting down. It is still operating only because the government is printing money to keep it going. But too much money printing always brings hyperinflation. If hyperinflation occurs, the feedlot will shut down because it cannot be supported with worthless paper dollars. The only way to prevent hyperinflation, though, is to shut down the feedlot.

So either way, the government feedlot, because it can no longer be supported by the private sector, will be shut down. It will probably happen very suddenly in a financial crisis. The results will be tragic.

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