>CBO Projects Deficits Even With Large Tax Increases


According to the latest numbers from the Congressional Budget Office, we’re going to be looking at deficits for at least until 2018, even if the War on Terrorism is reduced to 30,000 troops (about a fifth of the amount in Iraq during the “Surge”), all tax provisions that have sunset clauses are allowed to expire (for example, the income tax rate on dividends and capital gains would increase to the same rate as tax on “earned income”), and discretionary spending actually decreases from 7.6% of GDP while total outlays grow from 20% to 21% and revenues grow quickly from 18.5% of GDP to 20.5% of GDP.

Let me phrase that another way.  Even if we were to reverse the policies of the last 8 years, we would still not be able to restore fiscal balance.  That’s about as partisan as I like Infosnack to get. 

What happened?  Well, since 2001, we’re spending 1% more of GDP on defense, and 0.2% more on non-defense discretionary (Medicaid, Transportation, Health, Education, Farm Programs, etc.).  We also went from spending 12.1% of GDP on Mandatory and Net Interest to 12.5%.  So on the spending side we went up by 1.6% of GDP, but on the revenues side we went down from 19.8% of GDP to 17.6% of GDP.  A table below summarizes:

Fiscal Year

Receipts (% GDP)

Outlays (% GDP)

Deficit (%GDP)




1.3% Surplus

2008 (Projected)



2.9% Deficit

2018 (Projected – CBO Baseline)



0.6% Deficit

Even with a big tax increase, the budget is not balanced.  Hat tip to Economist Mom for pointing out the CBO report.  Her commentary on the CBO report is worth a read.


About perkinsms

I'm an engineer and father interested in transit, parking and economics.
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2 Responses to >CBO Projects Deficits Even With Large Tax Increases

  1. Mark says:

    >I would be very interested in your take on the overall ideal level of external debt.Because, you see, http://en.wikipedia.org/wiki/List_of_countries_by_external_debtsuggests that having lots of external debt is indicative of either being a developed country, or being the Congo.

  2. Michael says:

    >I’d be much more OK with national debt if we treated it like a mortgage (purchase a specific capital asset, have a fixed plan to pay it off over the life of the asset, etc.) rather than a credit card (buys “nothing in particular”, variable interest rate, pay only the “minimum payment” which is the interest). That’s why I’m not concerned as much when Virginia or Arlington borrows money, because it typically meets these criteria. We even borrow money before the old money gets paid off, but it’s not a problem because we have a budget item for “debt service” that includes paying off the bonds as they mature.I’m cool with us taking out 30-year bonds to buy an aircraft carrier or a submarine, because we’re going to have them for a long time. Same for transit systems, water treatment, railroads, highways, etc.If the country decides that we need to borrow 200% of GDP to buy these assets that might make sense, since the infrastructure is generally good for the economy (especially public goods that otherwise wouldn’t be built but people want anyway). 200% of GDP borrowed at 5% means that we would have to devote around 10-15% of GDP to debt service, which is about 75% of current federal taxation, so that’s probably at or above my limit.The problem is, we’re not borrowing to fix our infrastructure, we’re borrowing to pay for rising healthcare costs, foreign wars, agriculture subsidies, . I know, theoretically, we’re borrowing to pay for anything that is about 2% of GDP and federally funded, so I could point to anything in the budget of adequate size and make that my political target. I’m just pointing at the spending that I find objectionable. Stuff that doesn’t really help the economy, we just don’t have the political “balls” to cut back.

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