It’s the world’s worst kept secret that the US is
running a huge budget deficit. The question is: How
can this situation be resolved? Obviously, there are
two ways to close a budget gap – raise tax revenue,
cut services, or a combination of both. I believe, no
matter what your politicians may be telling you, that
both cuts and tax increases are necessary and
inevitable. There may be some disagreement about
what level of deficits are sustainable, but the US is
reaching a point where the world financial markets,
and our desire to maintain our future economic well
being, will dictate our action to close the budget gap.
Once we take a cold hard look at the numbers, we’ll
know that both higher taxes and lower relative
government spending are coming.  

Let’s take a look at the growth in spending over the
last few years.

In 2011, the US is expected to run a $1.5 trillion dollar
deficit. The government will spend $3.7 trillion but take
in only $2.2 trillion. We will be 65% over budget. The
numbers are similar for both 2009 and 2010. While
the budget deficit has gotten much worse over the
these three years than previous, we have been
running significant deficits for the last 40 years. For
just the ten years prior to 2009 the deficit averaged
over $400 billion per year and 22% over tax revenues.

The primary drivers of the budget gap explosion over
the past three years are: shortfall in tax revenue. In
2009, tax revenues decreased by 17%, or $419
billion, from the previous year.  In 2009, spending
increased by 18%, or $535 billion. TARP was paid
out, the Stimulus plan began, and entitlements (Social
Security, Medical / Health, others), continued their
significant growth.  We created an almost $1 trillion
gap in 2009.

The TARP and Stimulus program payouts were
largely in 2009, so we should have seen significant
relative savings in 2010. However, rises across most
other categories of the counterbalanced this, resulting
in a decrease in spending of only 2% in 2010. The
only category of expense which one might normally
expect to decline in the next few years is Income
Security, more specifically Unemployment Insurance
payments.  Meanwhile tax revenues increased by only
2% in 2010. Essentially, we have a structural $1 trillion
annual deficit imbalance from this point forward,
although official estimates are slightly less than this

Given the growth of expenditures over the past few
years, it would be nice if tax revenue were able to
keep pace. We know that it isn’t, but just how much
would the economy have to grow to balance the
budget, and how long would it take? If we assume that
for every 1% of GDP growth, tax receipts increase by
1%, we would need five years of 5% GDP growth just
to generate enough tax revenue to get up to the 2008
level of federal spending. 2008 was the last year of
“normal” federal spending. So the 5% level of GDP
growth for 5 years would get us to a balanced budget
if we could cut expenditures back to that level in that
time. But those would be drastic cuts, especially if we
adjust for inflation.

However, the 5% growth figure is not realistic anyway.
The average GDP growth over the last thirty years
was 3.4%. It was 2.9% in 2010.  The first quarter 2011
has slowed again to 1.8%.  So we would need to
enter an extended above average growth period just
to get tax receipts up to just this minimal level. We
actually need to grow GDP by 12% a year to produce
enough tax revenue to balance the budget in five
years, based on the level of actual expenditures as
estimated by the CBO*.  Of course, that is impossible.
The highest the ten-year moving average of GDP has
ever been over the past 65 years is just over 5%.  It’s
not that we have to balance in the near future, but
these figures show that we are a world away and have
no prospects of doing so given our current path.

* Congressional Budget Office   

Click here for Part Two of Why Your Taxes Will Go Up

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Why Your Taxes Will Go Up. Here are
the facts. The US must close its budget
gap or risk losing its way of life. Part One.
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