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“Downright Distressing”: The Threat of Federal Spending to Our Economy

By at 15 April, 2023, 9:46 am

by Raymond J. Keating –

If you’re concerned about government spending and the size of the federal government – and you should be – then the data from the latest Monthly Budget Review report from the Congressional Budget Office ranks as downright distressing.

This report offers a look at the federal budget halfway through fiscal year 2023, that is, from October 2022 through March 2023.

First, through the first half of FY2023, federal receipts were down by 3 percent compared to the same period last year, including an 8 percent decline in individual income tax revenues. While tax refunds offset revenue growth, that growth was still fairly weak. It should be kept in mind that a growing economy will experience growing revenues for government.

Second, federal spending has skyrocketed. During these first six months, federal outlays (with timing adjustments) grew by 12 percent versus the same period last years. And this astounding increase came even as major reductions occurred in various pandemic-related spending. Among the areas seeing major increases were Social Security, Medicare, Medicaid, and with rising interest rates, net outlays for interest on the public debt.

Third, the combination of major increases in spending with a decline in revenues resulted in a larger federal budget deficit. The CBO reported, “The federal budget deficit was $1.1 trillion in the first half of fiscal year 2023,” which was “$430 billion more than the shortfall recorded during the same period last year.”

Economic Impact

This combination raises major questions about the economy now – again, the decline in federal revenues – and in coming months and years, as higher federal spending and debt drain resources from the private sector, including the threat of future tax increases.

Finally, it must be noted that President Biden’s FY2024 proposed budget would see federal outlays running between 24.6 percent to 25 percent of GDP for the foreseeable future. If that were to occur, it would mark the highest level of federal spending as a share of the economy during an extended peacetime period in U.S. history. (See the following chart.)

Source: Federal Reserve Bank of St. Louis, FRED

And that would serve as a major drag on the U.S. economy, with government, again, siphoning resources away from productive private sector enterprises.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.

 

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