Falling Expenditures, Rising Receipts

Fiscal Slope Negotiations in the Context of Current Expenditures and Current Receipts

by Menzie Chinn, Econbrowser

The latter (receipts) are stabilizing at extremely low levels.
To place matters in perspective, note that even before 2008, tax revenues were low by historical standards. That was due to tax reductions passed in 2001 and 2003 (EGTRRA and JGTRRA), which helped overheat the economy in 2006-07.

In the wake of the second Bush recession, low tax receipts and high expenditures (i.e., a deficit) is an outcome of the attempt to stimulate the economy particularly in the depth of the great recession, either through direct discretionary measures (e.g., ARRA) and automatic stabilizers. Interestingly, while receipts are rising, spending is falling even faster. This point is highlighted in this detail, in Figure 2.

Note that today, the Republican leadership came up with a proposal of $800 billion additional revenue, all to be achieved by unspecified reductions in tax expenditures, to wit:

“… new revenue would be generated through pro-growth tax reform that closes special-interest loopholes and deductions while lowering rates.”

While lowering rates? Doesn’t that make it harder to hit the $800 billion target? I am pervaded by a sense of déjà vu. It is of import to note that $800 billion over ten years works out to only $80 billion per year, or 0.47 percent of nominal potential GDP. (For more on the Republican proposal, see here.)

While Republican arguments that entitlement reform is eventually necessary is correct, it is not clear to me voucherizing Medicare (for instance) and shoving costs onto patients will “solve” the problem — unless we as a society are happy to see a return of senior poverty and unloading onto hospital emergency rooms. As Jeffry Frieden and I argued in Lost Decades regarding the health entitlements issue,

“The only way to deal with this problem is to “bend the curve, that is, reduce the growth rate of national health expenditures and its resultant drain on the federal budget.”

That is, a solution requires a comprehensive approach to reducing health care costs imbedded into the entire system.

In any case, drastic changes to major entitlement programs should not be made in a rush, during the next few weeks. To meet the deadline, tax revenues, by necessity, will have to constitute the bulk of the solution to the fiscal slope.

For more on the fiscal slope, see [1], [2], [3] and here.

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