Budget factors

The battles over the federal budget continue. When someone looks at trends in the federal budget and tries to evaluate changes, what kinds of considerations are important? N.C. State University economist Mike Walden responds.

“And … we’ve been having an ongoing debate, of course, about the federal budget, the national debt and deficits. And I’m not going to try to push people on one side or the other on this thing. I just want to give them some factors to consider.

“One big factor to consider when you’re looking at particularly spending and revenues is inflation. You need to adjust these budget numbers for inflation. So you just can’t look at the amount the federal government, for example, spends this year compared to what it spent in 2000. You need to make an adjustment for inflation.

“You also need to adjust for the number of people that are in the country. It makes sense as we are a growing country (with) more people … our government’s going to spend more money, particularly, for example, as our retiree population grows. You’re definitely going to see spending on programs like Social Security and Medicare go up, so you need to take that into account.

“(The) third factor you need to worry about is size of the economy. Now particularly that comes into play during the recession. I would argue the biggest reason why we had federal budget deficits over the last couple of years is because of the recession. Recessions mean that businesses fall. Tax revenues actually fall. Yet federal spending, particularly to support various groups and keep their heads above water, sometimes (goes) up. That results in a big deficit. I will guarantee you the deficit is going to go down just in and of itself as the economy begins to improve.

“And the last thing I mention is look at the federal budget in terms of two pieces: transfers, which is where the federal government is taking tax money and essentially providing it to other people in the form of like say Social Security, Medicare, Medicaid, food stamps; and then services. Services is where the federal government actually provides a service – for example, air traffic controllers, food inspectors, the military, the FBI. Trends in those … two kinds of spending have been very, very different.”