Key Takeaways Donald Trump and his two immediate predecessors are the three presidents with the biggest budget deficits in history. In , the spending required for the nation to recover from the COVID epidemic will likely have an even greater effect on the deficit.
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A fiscal deficit is a shortfall in a government's income compared with its spending. A government that has a fiscal deficit is spending beyond its means. What Is the Federal Budget? The federal budget is an itemized plan for the annual public expenditures of the United States. Find out what the U.
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We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Congress also overhauled farm price supports in , but the projected savings will probably not materialize.
Whenever farmers run into trouble, politicians pour in billions of dollars of emergency money. All told, the s were a fiscally static period in entitlement policy.
Leaving aside deposit insurance, mandatory spending was a higher share of GDP in than in Means-tested entitlements grew the most, both because of new legislation such as increases in the earned income tax credit and because of built-in growth in old programs. If the economy and spending changes do not adequately account for the surplus, the only other place to look is on the revenue side of the budget.
During the s, tax policy largely reversed actions of the previous decade. During the s, the highest marginal tax rate 50 percent on earned income and 70 percent on unearned income? But in the s, the rate was boosted to The first tax increase was enacted in when George Bush was president; the second in when Bill Clinton was in the White House. The first deprived Bush of reelection; the second helped the Republicans take over Congress in but ultimately aided Clinton?
While politically risky, the tax increases pumped up federal revenues. Federal receipts rose from If the tax structure were still in place, there would be no surplus to discuss. The targets of the and rate hikes were upper-income taxpayers.
By contrast, during the s the income tax burden on low-income Americans was greatly eased. Because of the widened income gap between low and high earners, the government took in much more revenue than it would have if the tax increases had been spread evenly across income brackets. The government taxed the winners during the s, redistributing income while boosting its revenues. By design or accident, sound social policy coincided with responsible budget policy.
Anyone who has made or used budget projections during the s should be exceedingly guarded in forecasting the budget future. Although the medium-term five to ten years outlook is cloudy, the longer-term forecast is clear. Under current policy, the budget will incur large and growing deficits when the surge in the over population forces the Social Security fund to draw down the trillions of dollars of accumulated surpluses.
The sure prospect of resurgent deficits makes it urgent that policy mistakes not imperil the surpluses projected for the first decade of the new millennium. Although the projected surpluses are enormous, the economic and revenue assumptions on which they are based are modest. The CBO does not build a recession into its forecast, but it assumes that the economy will grow only 2.
The weakest part of the CBO projection is the assumption that discretionary spending capped through fiscal will remain tightly in check.
The recent actions of Congress in evading the caps for fiscal appropriations make it highly unlikely that this part of the budget scenario will play out according to the CBO script. Responding to real and imagined emergencies, boosting defense spending something Democrats and Republicans alike support, though they differ as to how much , raising discretionary domestic appropriations in line with price increases, and adding billions here and there for national priorities such as education would consume almost three-quarters of the projected non?
Social Security surpluses. If, as is likely, taxes are also cut, the remainder of the surplus would be at risk. These possibilities counsel two prudent steps on the part of Washington politicians: do not spend the surplus before it is earned and do not repeat the policy mistakes of the early s. Prudence in fiscal management cannot ensure that surpluses will persist, but it can guard against a return of runaway deficits. The election may have much to say about the future budget health of the nation.
Divided government has blocked Republican ambitions for large tax cuts and deterred Democrats from big increases in social spending. If either party were to win all the national political sweepstakes in , it would have a clear field to pursue its pent-up budgetary agenda. Perhaps the surprising lesson of the conversion of deficits into surpluses is that fiscal prudence can reign when neither party can achieve its budgetary vision.
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