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Fun With Trillion-Dollar Deficits! New Infographics From the CBO

by Brett on April 24, 2012

Hats off to the talented (and brave) soul at the Congressional Budget Office who put together three illustrative infographics on the US Federal Budget (or Deficit, depending on your level of skepticism).  This may be the first time a picture has been worth a trillion dollar shortfall!

When $2.3 Trillion Doesn’t Quite Get It Done

First, the good news – revenue.  The United States Treasury is a money printing (or collecting) machine, which took in $2.3 trillion in 2011.  Here’s the link to the revenue infographic.

US Federal Budget Graph of Revenues 2012

Source: Congressional Budget Office

Revenue as a percentage of GDP, while increasing in absolute terms, has actually decreased as a percentage of GDP over the past 20 years – from 17.8% to 15.4%.  As you can see in the Trends in Revenues section below, individual income taxes make up nearly half of revenues.  This source increased throughout the 1990s thanks to an eight year bull market for stocks, which led to higher capital gains and general wealth effects.

Perhaps the most disturbing trend here is that post-2000, individual income tax revenue, again as a share of GDP, has trended decisively lower.  Traders would immediately point to a series of lower lows and lower highs, a hallmark of an ongoing bear market.  And even with the S&P 500’s gangbuster rally since 2009, we have still not eclipsed the most recent “local” high in 2007 (though we are closing in on 2007 levels on the S&P when adjusted for dividends).

Another bad trend is social insurance (payroll) taxes trending down and heading lower in recent years.  I presume this is because the US economy remains mired in a bit of a non-hiring malaise.  Any Shadow Stats reader knows that the reported employment numbers are misleading to say the least, and probably closer to outright lies.

Let me do a little “back of the envelope” math here (and pardon me while I slip on my rose colored glasses).  If the next President (Obama and Romney) and Congress are able to pull a major sleight of hand and boost revenues as a percentage of GDP back up to their 1991 levels, revenue levels would rise to around $2.66 trillion.

Hey, look, we just pulled $366 billion out of our hat!

Which would be fantastic progress towards closing that budget gap – if only it wasn’t for those darn expenses…

Let Me Spend $3.6 Trillion and I’ll Show You a Good Time, Too

To paraphrase our investing hero Jim Rogers, you would think that $3.6 trillion being spent on 300+ million people yearly would be enough to show us all a good time.  Unfortunately, you’d be wrong!

We’ve already boosted our fantasy revenue to $2.66 trillion with some simple algebra (which, sadly and admittedly, took me longer than it should have), and some optimistic assumptions.

Can the same formula also work its magic on Federal spending.  First, let’s check out the “mandatory” portion of it.

Don’t Touch That Entitlement

They don’t call it mandatory for nothing!  Take a look at this spending infographic, and let me know which of these entitlement programs are politically acceptable to cut, or even scale back:

US Federal Budget Graph of Mandatory Entitlement Spending 2012

Source: Congressional Budget Office

Medicare, Medicaid, and Social Security combine to account for over $1.5 trillion of the $2 trillion spent on mandatory spending in 2011.  It’s tough to imagine a universe in which a US politician can suggest cutting spending on these programs back, at least anytime soon.

While this already takes up $2 trillion of the $2.3 trillion actually collected, the real problem here is the trend.  Mandatory spending as a percentage of GDP has trended higher – from 10.1% in 1991 to 13.6% in 2011 – and we know that this is almost guaranteed to head even higher in the years and decades to come, given the demographic situation in the US (as in, the baby boomers are winding down their pay in, and starting to actually collect this stuff).

So if we assume that mandatory spending is really mandatory, we need to look at discretionary spending as our last best hope of making ends meet.

How Much of This is Really Discretionary

Let’s grab our ax from the shed and see how much of this discretionary spending we can possibly cut – without the masses calling for our collective heads.

US Federal Budget Graph of Discretionary Spending 2012

Source: Congressional Budget Office

At a high level, we see that as a percentage of GDP has quietly held the line since 1991 – and it would likely have declined if it weren’t for a pesky decade-long war or two!

Again, let’s take the most optimistic assumption and assume that defense spending can pull back to pre-September 11 levels (again as a percentage of GDP).  That could take us from 2011 levels of $699 billion down to approximately $448 billion, so we’d save $250 billion.  Not bad, but we still have a gap of over $700 billion.

The non-defense side of the ledger is quite a bit more convoluted, and would really require broad based cuts across the board.  Unfortunately to almost balance the budget, it would all need to go!

A Balancing Act Much Harder Than It Looks

These infographics really illustrate the cold hard math of the current budget situation – closing a $1.3 trillion shortfall is not as easy as it sounds on TV.  When potential discretionary cuts are tossed around Congress like cold cans of Natty Ice at a college party, the seriousness imparted to each situation by respective participants is not that far off.  It’s going to take more than light defense and nondefense cuts to get this math to pencil out.

Nobody wants to talk about the elephant room, but it won’t be enough to merely stem the growth of mandatory spending to balance this gap – it’s going to take actual cuts in Medicare, Medicaid, and Social Security – and that’s not a pretty picture!


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