Table 1

Major Sources of Federal Revenue

1970 Individual Income Taxes Dollars % of GDP Corporate Income Taxes Dollars % of GDP Social Insurance Taxes Dollars % of GDP Excise Taxes Dollars % of GDP Other Taxes Dollars % of GDP 1975 1980 1985 1990 1995 2000 2005

90.4 8.9

122.4 7.8

244.1 9.0

334.5 8.1

466.9 8.1

590.2 8.1

1,004.5 10.3

927.2 7.6

32.8 3.2

40.6 2.6

64.6 2.4

61.3 1.5

93.5 1.6

157.0 2.1

207.3 2.1

278.3 2.3

44.4 4.4

84.5 5.4

157.8 5.8

265.2 6.4

380.0 6.6

484.5 6.6

652.9 6.7

794.1 6.5

15.7 1.6

16.6 1.1

24.3 0.9

36.0 0.9

35.3 0.6

57.5 0.8

68.9 0.7

73.1 0.6

9.5 0.9

15.0 1.0

26.3 1.0

37.1 0.9

56.3 1.0

62.7 0.9

92.0 0.9

81.1 0.7

Totals Dollars % of GDP

192.8 19.0

279.1

17.9

517.1 19.0

734.1

17.7

1,032.1 18.0

1,351.9

18.5

2,025.5 20.9

2,153.9

17.6

Major Spending Categories of Federal Outlays

1970 Discretionary Spending Dollars % of GDP Mandatory Spending Programmatic Spending Dollars % of GDP Offsetting Receipts Dollars % of GDP Net Interest Dollars % of GDP 1975 1980 1985 1990 1995 2000 2005

120.3 11.9

158.0 10.1

276.3 10.1

415.8 10.0

500.6 8.7

544.9 7.4

614.8 6.3

968.5 7.9

72.5 7.2

169.4 10.9

291.2 10.7

448.2 10.8

626.9 10.9

818.6 11.2

1,030.0 10.6

1,445.6 11.8

-11.5 -1.1

-18.3 -1.2

-29.2 -1.1

-47.1 -1.1

-58.7 -1.0

-79.7 -1.1

-78.6 -0.8

-125.8 -1.0

14.4 1.4

23.2 1.5

52.5 1.9

129.5 3.1

184.3 3.2

232.1 3.2

222.9 2.3

184.0 1.5

Total Outlays Dollars % of GDP

195.6 19.3

332.3 21.3

590.9 21.7

946.4 22.8

1,253.1 21.8

1,515.9 20.7

1,789.2 18.4

2,472.2 20.2

Chart 1

Federal Budget
25.0 20.0 15.0 10.0 5.0 0.0 -5.0 -10.0
19 69 19 72 19 75 19 78 19 81 19 84 19 87 19 90 19 93 19 96 19 99 20 02 20 05 20 08

% of GDP

Revenues Outlays Deficit/Surplus

Years

Table 3

Totals
Revenues 1970 Dollars Percent 1975 Dollars Percent 1980 Dollars Percent 1985 Dollars Percent 1990 Dollars Percent 1995 Dollars Percent 2000 Dollars Percent 2005 Dollars Percent Outlays Deficit/Surplus

192.8 19.0

195.6 19.3

-2.8 -0.3

279.1 17.9

332.3 21.3

-53.2 -3.4

517.1 19.0

590.9 21.7

-73.8 -2.7

734.1 17.7

946.4 22.8

-212.3 -5.1

1,032.1 18.0

1,253.1 21.8

-221.0 -3.9

1,351.9 18.5

1,515.9 20.7

-164.0 -2.2

2,025.5 20.9

1,789.2 18.4

236.2 2.4

2,153.9 20.9

2,472.2 18.4

-318.3 2.4

Gil Puyat ECON 690 Prof. Potepan

A Different Perspective

Of the many things that have happened over the past years it is quite difficult to pinpoint a single incident that influences the projection and the actual outcome of the Federal budget. This report will attempt to narrow down those factors by examining some of the incidents that have occurred over the years to influence the budget and by taking a look at the data from years beginning 1970, examining its trends, and correlating it to significant events that transpired during the time. We will also take a look at certain factors such as the current Presidents policies, or programs, noteworthy economic activity, and the federal funds rate for that period. We hope to isolate certain events and make policy recommendations based on them.

Looking at table 1 we see that though the dollar amounts of revenues have been increasing over time, the average ratio to GDP is about 18.6, with a sudden spike around the year 2000. This may have been caused by the then emerging dot-com, and real estate bubbles. Looking at the extremes we can see that the revenue in dollars for 1985 is 36% of that in 2000, but the actual percentage difference as a ratio of GDP is only 3.2%. This would suggest a heavy inflationary period in between those years, probably due to monetary policies implemented during those years to help ease the burden of the deficit. In 1985 the federal funds rate was in the range of 7 % to 8% and staying at a pretty high level in 2000 from 5 % to 6 %.

At first glance the nominal values for discretionary spending in the 70s seem small in comparison to most other years, but if we were to look at the values on defense spending as a percent of GDP from 1969 to 1972, they averaged 7.7% of GDP, due

largely to the Vietnam War. Soon after, the amount of defense spending as a percentage of GDP began to taper off to a low of 3% of GDP in 2000. On the other hand outlays for mandatory spending on Medicare, and Medicaid slowly began to rise from a low of 0.7% to a high of 3.2% of GDP for the former, and a low of 0.2% to a high of 1.6% of GDP for the latter. This was probably due to the growing population and an increase in life expectancy over time, thus the number of people over 65 has constantly been growing. Meanwhile, the average Government revenue beginning in 1969 was 18.7%, and in 2008 17.7% for an average of 18.3% of GDP over the years. This would suggest that a very limited means on which to draw resources for allotment, since discretionary spending could be forgone in place of mandatory spending, it is possible that defense was shorted as Medicare and Medicaid were increased.

We know that our actions have consequences, and that these actions have costs that may not readily be apparent, and certain actions have to be taken in order to solve problems immediately. What about the long run? It is an assumption that this report makes that the periods of high interest rates before the year 2000, followed by the sudden drop due to the terrorist attacks of 9/11 are a large factor in determining our current state. In order to boost the economy the Fed had to lower its rates. This in turn spurred a frenzy of borrowing, which led to the current subprime crisis. It is also a contention of this report that it may have been possible to avert the disaster of 9/11 if the government had not decreased the amount of defense spending during the period of the attacks.