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United States Government's Budget & Debt (Obama Edition)

The United States Federal Government operates on a budget. The Government earns money through taxation & it spends money on various governmental programs - some of which are long standing obligations like Social Security, and others like Defense, are at the President's discretion. Since the Government earns money by taxing the economic activity of the nation, when the nation does well, the government typically does well and vice versa.

When the government doesn't have enough money to cover its expenses (such as during times of war, or in order to kick-start a sluggish economy), it borrows money. It can borrow money from any number of sources, but primarily it does so by issuing bonds, which can be bought by individuals, corporations, or other governments. The government can begin to pay down its debt by buying bonds back, or by simply not issuing new bonds when the old ones mature.

So let's take a look at the source of the government's income the GDP.

The Gross Domestic Product

The Gross Domestic Product (GDP) is a measure of the value of all good & services sold within the United States. In general, it increases year on year. If the GDP decreases for more than a few months, it's considered a recession. The current recession began in December of 2007 and shows up in the graph as a plateau from 2008 through 2009 (note that 2009-2014 is estimated).

The GDP and Government Income

Anyone that knows how power curves work will recognize that instantly. It tells us a lot, but not enough - for that we need to look at it in relation to something else, such as how much money the government brings in. Let's take a look at how much money the government is bringing in (and spending) in relation to the GDP.

US Federal Government Receipts vs. Outlays

Here are just the income vs. outlays graphs (without comparison to the GDP).

receipts vs outlays

Vertical lines indicate presidencies, going back to Carter. Any time the red line rises above the green line, the government is spending in a deficit. Any time the red line dips below the green line, the budget is balanced.

Yet another way to look at this data is the percent change in GDP and receipts year over year. Receipts & outlays are separated because otherwise the chart gets too hectic.

Income vs. Expenses

Now that we know where income comes from and have a good idea of how much money the government brings in relative to the GDP, let's take a look about how well the government manages its money.

This chart shows in how much money the government brought in & how much it spent, adjusted for inflation using FY 2000 constant dollars.

As you can see, we're "in the red" quite a bit, especially since the early 70's, which is coincidentally when we went off the Gold Standard (which said that for every dollar in circulation, the government had to have enough gold to cover that dollar).

The same graph, log scale, which allows us to zoom in on each era a bit more, though it de-emphasizes change.

receipts vs. outlays log

US Federal Government Deficit (outlays/receipts as a %)

Here's another look at the same data - outlays vs. receipts, this time as a percent. If the government spends exactly as much as it brings in, it shows up as 100%, if it spends less, it shows up as less. Lines & colors indicate presidency & party affiliation. This chart compares directly how much the government spends vs. how much it takes in, calculated as a percent. Numbers over 100 are where the government spent more than it brought in.


With all those numbers over 100% it looks like we have very little fiscal control. The big peaks in the early half of the century were due to war, and we did manage to pay most of that debt off. As an example, Great Britain paid off the last of it's debt to the United States for rebuilding after WWII in December of 2006. [ref]

The Debt

People throw a lot of numbers around when they talk about the debt, but unless you talk about them in relation to another number - most importantly, the ability of the Federal Government to raise funds - the numbers are meaningless. The most common way to do this is to measure the debt against the GDP.

As you can see, the us federal debt flatlined under Clinton and has started growing and is predicted to grow quite a bit over the next few years. In fact, that bit where the red & green lines meet in the next few years is the Debt reaching the same level as the GDP. That's sort of like the irresponsible teenager ringing up as much in debt a his parents make in a year, but we paid it off after the 1940's...

Debt as a % of GDP

A common way to measure the White House's budget is to measure it "as a percentage of the GDP."

During WWII, the debt peaked at about 120% of GDP, and we spent quite a bit of time paying that down. According to the President's Budget for Fiscal Year 2010, the debt will pass 100% of the GDP in 2011. Something that hasn't happened since the end of WWII.

debt percent gdp

% Change in Debt


Budgetary Spending by Function

So how did we build up all this debt?

The President's budget is divided into two major categories - Mandatory and Discretionary. Mandatory includes things like social security, unemployment insurance, deposit insurance (the FDIC that's been bailing out all these banks), and so forth. Discretionary spending is divided into Defense and non-Defense.

The huge 2009 spike you see in the graph, especially in the "other" category is things like unemployment insurance ($103 billion), deposit insurance insurance ($120 billion), "other commerce and housing credit" ($623 billion) and so forth combined with a stagnating GDP. What is not shown is that deposit insurance is expected to start producing surpluses in income of $36 billion starting in 2012.

Here's the same graph, but not stacked so you can more easily see the changes in individual items. There are some things to note - defense spending has consistently gone down, whereas non-defense spending has remained roughly the same. Entitlement spending (unemployment, welfare etc.) varies considerably according to the economy. The interest on the debt & social security consistently increase, as does the oddly named "Mandatory (Other)" - it would be nice if they were more specific about this. The FDIC (Deposit Insurance) actually dips below zero from time to time because after a bailout, it produces an income as banks buy themselves back from the government, the banking equivalent of their insurance premiums going up.

As a percentage of the total budget, discretionary spending is decreasing.

Current Trends are Not Sustainable

While the 2008-2009 recession wasn't something that could have been predicted, the worrying trend of increased mandatory expenses, especially in the form of entitlement programs (such as welfare and medicare) were issues that were known back in 2006/2007. I quote from the 2007 "Nation's Fiscal Outlook"

While the near-term outlook for shrinking deficits is encouraging, the long-term picture presents a major challenge due to the expected growth in spending for major entitlement programs. In only two years, the leading edge of the baby boom generation will become eligible for early retirement under Social Security. In five years, these retirees will be eligible for Medicare. The budgetary effects of these milestones will be muted at first. But if we do not take action soon to reform both Social Security and Medicare, the coming demographic bulge will drive Federal spending to unprecedented levels and threaten the Nation’s future prosperity.

No plausible amount of cuts to discretionary programs or tax increases can help us avert this major fiscal challenge. As the accompanying chart shows, assuming mandatory spending continues on its current trajectory and the tax burden is held at historical levels, by 2040 Federal spending will accelerate to a level at which mandatory outlays and debt service would consume all Federal revenue. By 2070, if we do not reform entitlement programs to slow their growth, the rate of taxation on the overall economy would need to be more than doubled, placing a crushing burden on the economy that is required to produce the revenues to support the Government programs in the first place.

This graph has haunted me ever since I first saw it 3 or 4 years ago, and I now think I'm in a better position to understand it.

A Global Perspective

To put things in a global perspective, let's take a look at the top 30 countries based on debt (as a percent of GDP). The United States comes in at #26 in a list of roughly 200 countries for which there is data.

The UK, Switzerland, The Netherlands, Belgium, Zimbabwe (unsurprisingly given the state of their economy), Denmark, Austria, Germany and even Australia are in worse shape than we are when it come to debt. Our external debt, estimated at $12.2 trillion in June of 2007 puts us at an estimated 86% of GDP - even if the debt surpasses the GDP (as it's predicted to do in 2011), we'll only move up a couple of slots. The UK, whose debt is 468% of GDP is in far worse shape than we are. Ireland's debt is at 959% of GDP and Monaco's is the worst of all at 1844% of GDP (based on estimates from 2000).


Page created: June 1, 2009

© Mark Wieczorek