US Federal Budget Deficit Reveals a Spending Problem; Not a Revenue Problem

Is it really necessary for the US federal government to increase revenues by raising tax rates to balance its budget?

That seems to be the conclusion drawn from information provided in the proposed budget of the Obama administration.

Consider that average federal revenue collections over the 10 years before Obama assumed office was 18.1% of GDP. Under the Obama budget proposal, revenue collections from FY2013 to FY2017 would increase to 18.8% of GDP.

By contrast, federal spending averaged 19.4% of GDP in the 10 years prior to Obama entering office but this ratio rose sharply to an average of 24.4% of GDP.

The Obama budget would purportedly reduce that average to 22.6% over the next 5 years if the accompanying economic growth assumptions hold true. But this is unlikely. Consider that the projection for FY2012 growth was 3.0% real GDP growth & 3.2% for FY2013. It turns out that FY2012 data shows growth of only 2.3%, far below that expected in the Obama budget.

The latest report on the annualized growth rate for US real GDP growth rate put the figure at 2% or about half of the average for economic recoveries after WWII. As it is, this feeble number depended on federal spending growing by 9.6%.

Without a higher rate of economic growth, higher tax rates will not solve the problem of large budget deficits. As long the rate of growth in the size of the public sector exceeds the rate of growth of the private sector, there will be a growing budgetary gap.

Instead of increased tax rates, there must be much greater restraint on government spending combined with policies that create the sort of certainty that will allow higher economic growth rates. For their part, higher tax rate increases will increase the burden on the private and lead to slower economic growth.

Examples of how to control or curb spending might start with some of the entitlement programs. For example, in fiscal year 2010, the Centers for Medicare & Medicaid Services (CMS)–the agency that administers Medicare and Medicaid–estimated that these programs made a total of over $70 billion in improper payments.

How can government officials in good conscience ask for more money from taxpayers when there is such rampant abuse & misuse of funds already in their hands?

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About christopher

Content of "Natural Order" attempts to reflect the commitment of Universidad Francisco Marroquin to support the development of a society of free individuals. The principal commentator for this blog is Christopher Lingle.

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