Federal Budget
The federal budget is the primary tool used by the US federal government for planning and controlling finances and it normally involves accounting for all receipts and spending plan proposed by the president. The concept of consolidated budget has been used by the Federal Government as the basis of its budgetary analysis and budget presentation from the 1969 Budget. As a financial tool, the consolidated budget places its focus on cash received , the payments the governments makes to the public and any deficit in the budget which includes an excess of cash outlays over cash receipts(Hyman, 2014). The revenues in the budget are the receipts and comprises of almost wholly of any taxes or compulsory payments made to the government , and other offsetting collections resulting from transactions with the public or a receipt from one account to another both belonging to the government.
The 1974 Congressional Budget and Impounding Control Act brought about modifications on the role to be played by Congress in the process of federal budget. With this enactment, there was creation of budget committees in Senate and Congress House, and this created Congressional Budget Office. The purpose of this Act was to bring about institutional changes that could help in giving the Congress power over this process (United States 2015). The enactment was stirred by the refusal of then President Richard Nixon to disburse almost $12 billion of funds appropriated by the Congress and the general fears regarding the budget deficit. A claim by Nixon that the deficit was leading to high inflation saw him shows the intention to control government spending as a result.
Two major goals that the Act aimed at implementing includes centralizing and strengthening authority of the Budgetary process and reduction of the impounding authority exercised by the president as head of executive. The Act gave the Congress the power to carry out its own economic analysis and at the same time bring to an end the monopoly of the Executive on the budgetary information that had been created by Budget and Accounting Act of 1921. The background of the 1974 Act provides a description of procedures and laws under which the Congress how much money should be spent every year, what the money should be spent on and how such money should be raised (United States 2015). . However, the envisioned contribution of the Act to the budgeting process has not been achieved.
Federal government revenue
During the pre World War II period, there was an increase in tax revenue especially on the account of Great Depression and after the recession, there was a clear trend where the power to tax was shifting from local governments to state governments and then to federal government. After the World War II, there was an initial fall in the government revenue which was then followed by a slow increment in the revenue. The various changes experienced in tax revenues can be attributed to changes in corporate taxes and individual income taxes. By 1960s, the revenue obtained from corporate income tax was essential but a shrinking and was the second highest revenue source after individual tax until about 1968. At this point the payroll taxes are indicated to have grown to be part of a bigger share of the revenue. What can be seen is virtually a total reversal of roles between the corporate taxes and payroll taxes in terms of how much they contributed to the federal revenue.
After reaching their percentage peak of 32 percent during the post war period, what followed was a steady decline so that the corporate tax revenue formed 21 % of overall federal revenues by 1960s, 15 % by 1970s and even less than 10 % by 1980s. There was a brief rebound during the 1990s as the GDP of the country was increasing and reached about 12 % at the mid of the decade . On the other hand, the revenue from payroll tax increased from about 10 % to 40 percent by 2003. In total, however, the government revenue has been increasing steadily since 1960s to 2007, and there was a strong increase year on year during the mid 2000s from about $ 2.1 trillion to about $2.6 trillion by 2007(White House, n.d). The revenues are then seen to crater during the 2007-2009 recessions and totaled to a low of about $2 trillion. While revenue from corporate taxes decreased in 1970, revenue obtained through taxes from individual income reached a high of around 47 % of overall federal government receipt the same year. This was a higher than average in comparison with receipts from previous years whose average was 45 % (White House, n.d).
Following the recovery , there was a slow increase in federal revenues from 2010 through 2012 , but the highest increase can be seen since 2003 , and then flattening of this growth to about $ 3.2 trillion for the years 2015 and 2016. When discussed using the GDP perspective, the revenue is seen to increase steadily as a proportion of GDP from 2005 and reached 18 % during 2007 fiscal year. During the recession there was a decline of the revenue to 14.6 % of GDP during 2009 fiscal year and stagnated at around 15 % of GDP during 2012 (White House, n.d). Later, there has been an increase of up to 18 percent during the 2015 and 2016 fiscal periods. One major observation is how revenues from corporate income tax have reduced both in terms of federal taxes share that they form part of and as a share of general economy. There are various factors in the economy that contribute to the decline in corporate tax as a share of overall federal government revenue. These taxes are normally sensitive to the prevailing conditions in the economy and a slowdown in the growth of economy has been a major reason in reducing corporate revenues. However, the economy represents just a fraction of reasons for this decline. There have been increased taxes that have been enacted over the years and this has had major impact on the decline of the corporate tax (Morgan et. al 2013).
In addition, there aggressive strategies for tax avoidance have lead o further decline of corporate tax revenue and this includes protection of overseas corporate taxes. The post war decline of corporate taxes as part of government revenue has been offset by growth in other sources which include payroll tax incomes and others. The offset has also comes in form of sources such as taxes on retirement benefits and social insurance since the percentage of workforce under social insurance cover and tax rates on payroll increased significantly. This part of the revenue has increased from just 8 percent during the post war periods to about 38 % by 1992 fiscal year. Hence, the trend shown by the data indicates that general, revenues have been increasing since 1960s but there has been major shift in percentage contribution of various source of revenue with corporate tax declining steady in most cases while other sources such as payroll taxes, social insurance and retirement benefits tax revenues increased over the same period ((Skolnik & Dales, n.d).
Federal government expenditures
Government spending has been on the increase from about 20 percent during the 1960s to over 24 % of the economy as per the fiscal year 2012. Defense spending has formed one of the major areas in which government revenues have been allocated especially during the various wars that the United States has been involved in. As aforementioned, the data on federal government spending shows an increase during the early 1960s as the country was involved in various wars but the spending remained relatively stable during these times (Skolnik & Dales, n.d). Since the 80’s, the federal government budgetary spending is seen to be an average of about 20 percent GDP annually. Another major area where a large allocation of the revenue I observed is the Medicaid or Medicare and social security which came into effect in mid 1900’s and currently they consume more than half of the federal government spending (Morgan, Green, Shinn & Robinson, 2013). General, the trend shows an increase in overall spending since 1960 and this increase is seen in periods where there were crises such as wars or economic downturn. The federal government expenditures surpassed the 30 percent of GDP in 1970s but later decline to around 30 percent during the late and early 1980s. The expenditures are seen to have again surpassed the 30 percent mark in the 1980s during the last half of President Clinton’s administration which also saw an increase in government revenue during the same period. A large jump can also be seen since 2006, where spending claimed more than 38 % of GDP during 2009-2010 fiscal year.
The 1960s saw a lot of changes that affected the economy of United States, as American presidents starting with John F. Kennedy adopted different approaches aimed at addressing the public needs. For example, Kennedy sought to deal with the New Frontier Challenges while Lyndon Johnson, his successor (1963-1969) sought to spread the successful economy of the country to a large population of the citizens. Hence, the 1960’s saw a dramatic increase in federal spending as programs such as Medicare, Food Stamps and many education initiatives were started by the government. Expenditures on social welfare strongly moved upward through such programs and the expenditures continued displaying annual increment of almost similar magnitude (Hyman, 2014). Each of these categories of social welfare led to the overall expansion but the Medicare and cash benefits programs of disability, survivors, old and even health contributed to the highest increase in government spending. Another issue that led to increased spending was the defense budget especially during the Vietnam War. Spending on veterans had declined to 0.7 % by 1966 but rose to 1 % of the country’s GDP by mid-1970s after the Vietnam War. The expenditure on Vietnam War rose to about $ 168 billion that also comprises of $11 billion that was spend on military operations and about $ 28.5 billion that was spent on military and economic aid in 1953-1975 (Morgan, Green, Shinn & Robinson, 2013). During the war, so as to meet the necessary efforts, various factories that were used to produce consumer goods were turned into military equipment production areas and this hurt the economy in a great way. The issue had begun as just a small action by the military but it later turned out to be a major initiative when Johnson assumed the presidency (Morgan et. al 2013). The spending on defense reached a high of about 42 % of the overall outlays in 1970 which was much higher than the average in comparison to budgets from the previous fiscal years. In the same year , around 7 percent of all the outlays was spend on net interest rates for the payment of accumulated debt by the federal government. However, this was lower as compared to previous fiscal years.
During the 1980s, the Reagan Administration proposed an economic program that was aimed at reducing the taxes and government spending in proportion to GNP of the economy. However, the proposals did not materialize, and in the first 3 years, government spending rose to a higher level than any other peacetime levels. The government spending was reduced in 1990s through the various budget cuts that were aimed at curtailing the rising rate of inflation. During the 1990 fiscal year, federal government expenditure including the federal debt interest declined to a low of 21.8 % of the country’s GDP. The spending had reduced to 18.4 % by 2000 and the drop was supported by various factors. These includes military spending cuts after the Cold War had ended and fell to $294.5 billion in 2000 from about $ 299.3 billion spend during 1990 (Morgan et. al 2013). There was also an improved economic growth and while program spending became increasingly restrained and a reduced federal debt. There was also a push by the Congress and the House of Representative for a more restraint on public spending which was done successfully and there a slight reduction in percentage of GDP. The spending was to increase again in 200-2002 period recession as a result of increased welfare cost to about 3.1 % of GDP which then reduced to 2.5 % by 2007 fiscal year. The 2009-10 Depression led to another explosion in welfare expenditure and this later stagnated to about $1,084 billion by FY 2016.
Federal budget deficit
The government deficit has also been an issue in the budgeting process. The deficits include the item that has been derived from the government revenues and the government expenditures. A decline in tax revenues especially for the corporate taxes in 1970s and 1980s, and which could not be matched by the decrease in expenditures growth, the deficit on federal budget started increasing. The reduction in tax rates was higher in 1980 than in 1979 and failure of the Reagan Administration proposals to succeed saw an increase in the level of deficit. By 1983 fiscal year, the percentage in deficit was almost 6 % in overall GNP. The big cuts in taxes lead to gaps in the budget and such gap can also be attributed to the 1981-1982 recession. In addition, a 30 percent increment in defense spending during the period also led to an increment in the budget deficit (Skolnik & Dales, n.d). While focusing on the recent over 32 years, the government budget has experienced deficits in about 28 times and budget surplus occurred for only 4 years, that is, 1998-2001. The surpluses could mostly be attributed to increased government revenue from a bubble stock market. The biggest deficit to be recorded happened in 2009 and was about $1.4 trillion, at the time the economy was experiencing a recession. In relation to GDP, the largest fluctuations could be attributed to wide shifts in government spending, and interestingly, the largest increases and deficits have occurred when the U.S was at war.
For the year 2009, the deficit can be attributed to a deficit spending in combating the financial crises experienced in 2008 and a reduction in tax collections. The above discussion indicates the since 1987, the deficit has remained quite lower than increment in the debt and this is due to borrowing by Congress from an excess in Social Security Trust Fund. The excess in this Fund is attributable to the generation of baby boomers whereby during their 20a-30s, the proportion of working people in population was higher than the retirees (Hyman, 2014). In essence, contributions in form of payroll tax were higher that expenditures on Social Security. During Reagan administration, a total of $ 1.412 trillion in form of deficit was added and this almost doubled the national debt. To fight the 1982 recession, he reduced the top rate of tax income to 28 % from 70 % and corporate rate to 34 % from 48 %. In addition, the deficit rose as a result of more government spending by over 2.5 % during the same fiscal year, which comprised of Medicare expansion and defense budget increment. The budget deficit was later reduced to $ 1.03 trillion in a single term of George H.W. Bush presidency while responding to the Invasion of Kuwait by Iraq. A bailout of $125 billion ended the Savings and Loan crisis of 1989 (Hyman, 2014).
Since the increase in 2009 budget deficit, the trend has been a falling national deficit over the recent years. However, on average the deficit in Obama’s administration was quite larger in comparison with previous administration at -5.8 percent of GDP. In 2016 fiscal year, the federal deficit was about $ 558 billion when adjusted for inflation. For the year 2015, the deficit had decline to about 3 %, and a recent trend in deficit reduction can be attributed to the boost of increased spending and increased tax rise especially in 2013. Even the smallest yearly deficits add to national debt as indicated in Gross debt that increased to around 103 percent of GDP. Almost two thirds of this debt is being held by non-governmental agencies and other agencies such as Social Security Administration. Federal Budget deficits influence the economy and are also influenced by the economy. A weakness in the economy makes the government to increase the some specific spending programs automatically and an intake of tax revenue reduces. The increase in the deficit acts as stimulus to the economy and in an economy that is growing stronger the opposites tends to occur, where tax revenues increases faster while reduction in spending programs reduces.
Federal Government Budget trend in Dollars
|
|
Revenues |
Expenditures |
Surplus deficit |
|
1960 |
92.5 |
92.2 |
0.3 |
|
1970 |
192.8 |
195.6 |
-2.8 |
|
1980 |
517.1 |
590.9 |
-73.8 |
|
1990 |
1032 |
1253 |
-221 |
|
2000 |
2025.2 |
1789 |
236.2 |
|
2010 |
2162.7 |
3457.1 |
-1294.4 |
|
2016 |
2990 |
3540 |
-552 |
|
|
|
|
|
References
White House, (n.d).Historical Tables. Retrieved from: https://www.whitehouse.gov/omb/budget/Historicals Balakrishnan, R., & Elson, D. (2011). Economic policy and human rights: Holding governments to account. London: Zed. Hyman, D. N. (2014). Public finance: A contemporary application of theory to policy. 557-562Skolnik , A., & Dales, S.,(n.d). Social Welfare Expenditures,1968-69 . Retrieved from: https://www.ssa.gov/policy/docs/ssb/v32n12/v32n12p3.pdf
Morgan, D. F., Green, R. T., Shinn, C. W., & Robinson, K. S. (2013). Foundations of public service. ME Sharpe. 109-112
United States. (2015). Analytical perspectives: Budget of the united states government, fiscal year 2016. Washington, D.C: U.S. Government Printing Office.111
