Saturday, July 08, 2006

American Government Expansion Continues

According to the July monthly budget review from the Congressional Budget Office, which reports the preliminary budget numbers for June and the final numbers for the previous 8 months of fiscal year 2006 (October 2005-September 2006), the rapid expansion of the size of the American government continued.

Federal spending adjusted for calendar effects rose 8.6%. well above even the accelerated 6.5% nominal GDP growth we have seen, something which if continued for the remaining 3 months would imply that the federal spending to GDP ratio, which under Bush have already risen from 18.5% in fiscal year 2001 to 20.1% in fiscal year 2005, would rise another 0.4%:points to 20.5%.

There are two main reasons why this have occurred. First, rising interest rates have partially reversed the effect I discussed here.This accounts for about 0.2% points. The other main reason is the new Medicare prescription drug benefit, which have made Medicare spending soar 15.5%.

Nevertheless, despite this the budget deficit looks set to shrink somewhat as tax revenues surges. That is in part a result of continued economic growth, in part a result of high inflation and in part a result of higher economic inequality (which given a "progressive" tax system will raise the tax revenues to GDP ratio).

At current levels, the budget deficit would appear not too worrisome. However, it must be remembered that America is currently at its cyclical peak, a time when budget deficits are always much lower than usual as a booming private sector always results in surging tax revenues and a decline (at least in relative terms) of the burden of government spending. When America in a likely not too distant future slips into a recession, the budget deficit will rise sharply again. But unlike the previous cyclical peak when America had a budget surplus , this time it starts with a significant deficit.

And most countries -even Sweden- sees the relative burden of government fall during cyclical upswings. For America however, the burden of government have continued to increase even during a cyclical upswing, despite the fact that both the Congress and the White House are controlled by the party that used to claim it was in favor of limited government.


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