Where Do Budget Deficits Come From?

This article by a Republican official in the Reagan Administration, provides an analysis of government spending and tax revenues during our recent history.  We get budget deficits when spending exceeds tax revenues, therefore, we need to understand spending growth, and revenue growth, in order to analyze their contributions to budget deficits.  The GOP has been blaming "out of control" federal spending for the increase in US budget deficits under Obama.  The data show that discretionary spending under Obama has not impacted the deficits very much. The biggest contribution to the budget deficits has been the decline in tax revenues.

Between 2008 and 2009 mandatory spending on social security, and healthcare increased from 12.4% of GDP to 16.4% of GDP.  This is called mandatory spending because it is determined by existing law. It is not budgeted by Congress.  Discretionary spending, which is budgeted by Congress, and which also includes defense spending, only increased by 1% of GDP.

On the other side of the ledger, tax revenues fell substantially.  They fell from 17.5% of GDP in 2008 to 14.9% of GDP in 2009  and  2010.  If tax revenues had remained at the 2008 level, combined federal deficit would be $1.3 trillion less than it is today.

Tax revenues as a percent of GDP have averaged 18.5% in the Post War Period.  They were 18.2% under Reagan; 19% under Clinton; 17.6% under Bush Sr., and 15.2% under Obama.  The drop in tax revenues under Obama are due to the Bush tax cuts and to the effects of slow growth on national income.  It is also clear that, despite GOP claims to the contrary, tax reductions do not contribute to GDP growth.