The Entrepreneurial View #475                                                                        

The Latest on Federal Spending

by Raymond J. Keating

Entrepreneurs, small business owners and investors obviously are concerned about the economy right now.  Part of those worries tie in to questions regarding taxation.

In fact, taxes are a major economic question mark as we head towards the November presidential and congressional elections this year, with a major tax increase threatening to sock the economy at the end of 2010.  That's when the 2001/2003 tax relief measures are scheduled to expire.

But of course, there are two sides to the federal government's budget equation.  And what happens in the spending column will affect the political decisions regarding the tax column.

Late last week, the Congressional Budget Office released its latest "Monthly Budget Review."

The CBO noted that through the first five months of fiscal year 2008 (from October through February), the federal government was running a budget deficit estimated at $262 billion, which was $100 billion more than last year's deficit over the same period. The CBO projected a total 2008 deficit of $396 billion, compared to $162 billion for all of 2007.

Is such a budget deficit economically significant? No. Given the trillions upon trillions of dollars sloshing around the global marketplace, it's hard to seriously argue that the U.S. federal budget deficit has some kind of significant impact on interest rates.

But the budget deficit does have a political impact, which in turn, can have an economic effect.  For example, if projected budget deficits of about $400 billion this year and next lead to elected officials raising taxes, then the economy would be affected, and negatively so.

The key point for policymakers is to take note of what's causing the deficit. Through February, total federal receipts inched up by a mere 1.7 percent compared to the same period last year. Given the woes in the economy, a dramatic slowdown in revenue growth compared to recent years is not surprising.

On the expenditure side, however, the spending steamroller just keeps chugging along. In fact, again compared to the same period last year, federal outlays through the first five months of 2008 have skyrocketed. Consider the increases for each major expenditure category (adjusted for shifts in timing):

Defense - Military              +9.9%

Social Security Benefits       +5.6%

Medicare                             +2.3%

Medicaid                             +7.9%

Other Programs                 +10.0%

Net Interest                       +12.2%

Total                                       +8.1 %

And keep in mind that the Medicare numbers do not reflect gross outlays, as they are net of proprietary receipts. In addition, the CBO noted that Medicare spending is due to accelerate during the remainder of this year, eventually increasing by an estimated 5.5%.

In the end, fiscal year 2008 will be another example of Congress and the White House being unable to restrict the growth of government to at least some reasonable level.

Keep in mind that as government spending increases, more resources must be drained away - whether through taxes or borrowing - from the private sector. That's bad for the economy.

It's clear that the budget deficit is the result of too much government spending. The answer, therefore, is not to raise taxes, but to rein in the size and scope of government. That, in turn, would be an economic plus.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.