Monday, April 09, 2007

U.S. Government Spending Growth Decelerating?

According to preliminary numbers from the Congressional Budget Office, the budget deficit continued to decline during the first half of fiscal 2007 (October 2006-March 2007). This happened despite the fact that tax revenue growth decelerated significantly. After rising 14.6% in fiscal 2005 and 11.8% in fiscal 2006, revenue growth fell to 8% during the first half of fiscal 2007. This is still faster than nominal GDP growth, presumably reflecting rising inequality (If the tax system is progressive, higher inequality will mean a higher tax revenue to GDP ratio). Revenue growth in March decelerated even more dramatically, to just 1.2%. This is probably to some extent a calendar effect, but it likely also reflects a slowing economy.

What is particularly noteworthy was that spending growth fell to a mere 2.8% (or 2.0% in calendar adjusted terms). This could mean that despite slower growth, fiscal 2007 could be the second fiscal year (the previous being 2004, where it fell from 20.0% to 19.9%) during Bush's term where spending to GDP actually fell. However if you look at the fine print, you can see that something fishy is going on. Military spending increases fairly rapidly, 7%, and Medicare increases a full 20.2%, and Medicaid and Social Security also increases fairly rapidly, more than 5%. With nominal GDP growth running at just 4-4.5%, this would seemingly indicate that the burden of spending is rising.

So how come aggregate spending increases just 2.8%? Well, because of a 9.8% decline in "Other Programs And Activities", which fell from $435 billion to $392 billion. Excluding this, aggregate spending rose 8.8%, from $906 billion to $986 billion.

Part of the decline in "Other Programs And Activities" was due to the fact that last year, the Federal government spent a lot of money on hurricane relief in wake of the devastation caused by Hurricane Katrina. The fact that this is absent this year certainly should count as a spending cut, albeit only a one-time one. However, the second explanation for the decline was that the government received higher revenues from auctions of licenses for the use of electromagnetic spectrums and Medicare premiums. In other words, this "reduction in spending" is really revenues counted as some form of negative spending.

So, this apparent slow increase in government spending is just an aberation caused by a temporary factor and dishonest accounting from the government.


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