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January 28, 2005
By: ChartingTheEconomy.Com
Everywhere you look there is talk of the Federal budget deficit and Federal debt and the opinions vary from it doesn’t
matter, to it’s our biggest problem. The purpose of this article is not to debate the significance of this issue. The
purpose is to give readers a different perspective.
The traditional measure used to show the relative size of the Federal budget deficit and Federal debt is as a
percentage of gross domestic product (GDP). This measure is meant to reflect the nation’s ability to pay down the
deficit/debt. What this measure really does is reflect our Federal Government’s deficit/debt as a percentage of the
total size of our economy. If we want to understand our ability to balance our annual budget and to pay down the
debt, a better way to view the issue is as a percentage of Federal tax receipts (the Federal Government’s revenue).
Why is this measure better? Simple, deficits and debt are not a function of our GDP; they are a function of spending
and revenue. The only way to reduce them is by increasing revenues (tax receipts), reducing spending, or both. In
short, we don’t balance budgets and pay down debt with our gross domestic product we do it with tax receipts.
Please note that increasing tax receipts does not necessarily mean increasing tax rates. In some cases the way to
increase overall tax receipts could be by reducing tax rates which may produce new incomes sources. However, we
will save the issue of how best to increase tax receipts for another discussion.
Chart # 1 shows the Federal debt as a percentage of annual tax receipts. The numbers are based on the Federal
Government’s fiscal year which ends September 30 and include both debt held by the public and intragovernmental
holdings (Intragovernmental holdings primarily represent money the government has borrowed from Social Security).
The 2005 estimates are based on Congressional Budget Office (CBO) on-budget projections plus the additional $80
billion that the Bush Administration is seeking for military operations in Iraq and Afghanistan. The CBO’s 2005
projection for Federal tax receipts is also used.
Simply put, this chart shows that the Federal debt in recent years has grown to a level that is almost four times
annual tax receipts. The Federal budget deficit is running at just over 30% of annual tax receipts. When the Federal
debt is shown as a percentage of GDP it was 64% in 2004. When the budget deficit is shown as a percentage of
GDP it was 4.9% in 2004. Some analysts also show these numbers without including intragovernmental holdings
which makes them look even smaller (about 37.5% for the Federal debt and 3.6% for the budget deficit in 2004).
The problem with these numbers is they make the issue of paying off our debt and balancing our budget seems
much smaller than it is. Our true ability to pay off our Federal Government’s debt and balance its annual budget is
based on tax receipts and spending. To this end, it is more important to understand our Federal Government’s
financial imbalance relative to its revenue than to the size of the economy.
