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posted on 12 June 2016

The Great Recession's Effect On The Federal Budget

from the St Louis Fed

The components of the federal budget changed significantly around the Great Recession. However, the federal budget itself hasn't seen as dramatic of a change, according to a recent Economic Synopses essay.

Senior Economist Fernando Martin first looked at four key variables of the federal budget: revenues, outlays, deficit and debt held by the public. All four were examined in terms of gross domestic product (GDP). He also discussed projections by the Congressional Budget Office (CBO) over the next 10 years. (For figures showing trends in each of these areas, see the Economic Synopses essay "U.S. Fiscal Policy: Reality and Outlook.")

Revenues

Martin noted that tax provisions in the wake of the two most recent recessions reduced tax revenues, which averaged 17.5 percent of GDP in the years leading up to the Great Recession. For the period 2008-13, revenues totaled 15.6 percent of GDP. However, tax rate cuts made permanent in 2013 helped revenues return to normal levels. They're expected to average about 18.1 percent over the next decade.

Outlays

Martin noted that outlays as a percentage of GDP declined during the 1990s, but reversed course in the 2000s. They also surged due to fiscal policy responses to the Great Recession, reaching 24.4 percent of GDP in 2009. While they've declined since, Martin wrote, "outlays remain elevated relative to pre-recession levels and are projected to continue rising over the next decade." Outlays are expected to average 20.7 percent of GDP for the period 2014-16 and rise to an average of 22.0 percent for the period 2017-26.

Deficit

Regarding deficits, Martin wrote: "The drop in revenues and the increase in outlays around the time of the Great Recession created unprecedented deficits (for the postwar period)." For the period 2008-13, the deficit averaged 6.8 percent, after averaging 1.8 percent in the seven years prior. He noted that, like outlays, the deficit peaked in 2009, remains high today and is projected to continue growing.

Debt Held by the Public

Martin explained that government debt as a share of GDP declined in the second half of the 1990s and stayed relatively constant until the Great Recession. However, the large deficits of 2009-13 more than doubled the debt held by the public. The CBO estimates that debt will reach 75.4 percent of GDP by the end of this year and 85.6 percent of GDP by 2026. Martin wrote: "These figures are very high for peacetime in the United States but are not necessarily alarming compared with debt levels in other developed countries."

The Federal Budget

Martin also examined the major components of the federal budget as percentages of GDP. (Like figures of the variables, a table showing these components for selected time periods is available in theEconomic Synopses essay "U.S. Fiscal Policy: Reality and Outlook.")

Regarding revenues, Martin noted that individual income taxes as a percentage of GDP declined due to tax provisions enacted during the Great Recession. They fell from an average of 8.3 percent for the period 1991-2000 to an average of 7.1 percent for the period 2008-13. However, this percentage is expected to increase over the next decade, averaging 9.3 percent of GDP for the period 2017-26, according to the CBO.

About this increase, Martin wrote: "Note, however, that the increase in tax revenues from individual income taxes in terms of GDP is mainly due to 'bracket creep': The CBO estimates that individual income will grow faster than inflation, pushing more taxpayers into higher tax brackets."

Martin also noted that outlays as a percentage of GDP are expected to be higher than in previous periods, with much of this increase attributed to mandatory outlays, in particular Social Security and health care. For the period 2001-07, Social Security and major health care averaged 7.7 percent of GDP. However, as Martin wrote: "Over the next decade, expenditures for Social Security and health care will average 11.3 percent of GDP."

Additional Resources

Disclaimer

Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

Source

https://www.stlouisfed.org/on-the-economy/2016/may/great-recession-effect-federal-budget

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