Chart Explainer: The Permanent Deficit

Blog Post
Thursday, July 16, 2020

The Concord Coalition routinely leads grassroots education events assisted by a number of educational tools that enhance public engagement. Whether we are conducting in-depth “Principles & Priorities” budget exercises that let users act as members of Congress tasked with reducing the deficit, leading issue-specific discussion forums on topics like healthcare, entitlement reform and tax policy or hosting “Chart Talks” that introduce new users to the federal budget, Concord has a wealth of educational tools optimized for both in-person and socially-distant online learning.

The chart below is a staple in Concord’s Chart Talk. It shows both historic and projected levels of federal revenue and outlays (expenditures) as a percentage of U.S. gross domestic product (GDP). When outlays exceed revenues, the federal government runs a deficit. When outlays are less than revenues, the government records a surplus. 

While the outlays and revenues as a percent of GDP have fluctuated over the years, this chart shows that annual budget deficits historically averaged 3.3 percent over the past 40 years. The U.S. did experience a brief period of budget surpluses in 1998-2001 and ran historically large deficits in response to the Great Recession.

Most significant about this chart is how the trend lines diverge permanently in the future -- and by increasing amounts -- which is caused in part by decades of irresponsible tax and spending decisions that lawmakers must eventually confront. 

If this was an actual Concord Coalition presentation, it is at this point I might remark, “our country tends to spend like it wants a big government but tax like it wants a small one.” At Concord, we would prefer that the nation simply pay for whatever size government it desires.

Two important caveats to this chart. First, it does not account for the budgetary effects of higher spending and lower revenues caused by the government’s response to the COVID-19 pandemic. It shows the underlying structural deficit that pre-existed the pandemic; a problem that will still exist after COVID-19 is brought under control.

Second, the CBO projection of revenue and outlays is a function of current law, not current policy. As such, it assumes all the temporary tax cuts enacted as part of the 2017 tax reform legislation will expire on schedule in 2025. Given past practice, these tax cuts are more likely to be extended, further exacerbating the permanent deficit. 

Pre-pandemic, the nation was already on an unsustainable path, but because of the novel coronavirus, the next few years are expected to bring with them astronomical budget deficits.

In January 2020, before the virus took hold in the U.S., the Congressional Budget Office was projecting trillion-dollar deficits for the next decade and beyond. That, combined with projections of relatively low economic growth, led CBO to conclude that deficits would rise from 4.6 percent of GDP in 2020 to 5.4 percent in 2030, significantly higher than the 40-year average. 

Today, our nation is grappling with a deadly health crisis. We must spend whatever is necessary to defeat the virus, but when the dust settles, our nation will be forced to reckon with decades of irresponsible tax and spending decisions that helped create a now permanent, structural budget deficit. When that happens, lawmakers will have to have an honest discussion with the public about how to pay for the government services we demand. 

Therein lies the challenge and the point this particular chart underscores.