In recent years, federal deficits have exploded and debt outstanding has grown rapidly.
Considering continued high interest rates and modest economic growth, as well as consensus projections that these conditions will continue and worsen absent policy change, Congress and the next president will have to turn to further fiscal reform. The debate will move to the appropriate relative shares of spending cuts and revenue increases in that package.
There are many different ways to approach fiscal reform — like analyzing the impact of past legislations that created new programs or cut taxes, or digging deeper into the relative effects of particular benefits and tax provisions.
A simpler and more intuitive approach is to look at past recent trends on both sides of the ledger, determine the historical norms and ask which side is now out of line.
Consider the chart below showing annual federal spending on all programs and revenues from all sources as a percentage of GDP over the period 1960 through 2023. The difference is the deficit. With few exceptions, we have run deficits in the post-war, Great Society era; deficits were particularly large in the early 1980s and have been large since 2009.
Taking into consideration recessions which increase spending and decrease revenues, as well as stock market booms which increased revenues in 1999 and 2022, the overall apparent trend is toward larger deficits.
What about its composition? Simply eye-balling the figure, there has been a small decline in revenues in recent years, but a much bigger increase in spending — even ignoring the pandemic-related blow-out.
Figure 1. Federal Spending and Revenue, 1960-2023
Using averages to cut through the business and stock market cycles gives a more precise look at the numbers. The table below shows average annual federal spending and revenue percentages of GDP through 2023 at different decade starting points (1960, 1970, etc.) and key starting years: 1966 after the passage of Medicare, 1983 after the Reagan tax cuts and Social Security reform, 1996 after the Clinton tax increases, welfare reform and the beginning of the stock market run-up, 2003 after the Bush tax cuts and Medicare drug program introduction and 2014 after the ACA introduction.
In all cases, revenues are generally steady, at around 17.25 percent of GDP, with a bit of weakness in the last two decades, at around 16.75 percent. Meanwhile, spending has been steadily ratcheting upwards, from the long average of about 20.5 percent to over 23 percent and even higher recently.
In other words, the blame for higher federal deficits lies mainly with spending.
Table 1. Average Spending and Revenue over Various Time Periods, 1960-2023 (% of GDP)
| Time Period | Revenue | Spending |
| 1960-2023 | 17.35 | 20.43 |
| 1970-2023 | 17.36 | 20.87 |
| 1980-2023 | 17.35 | 21.20 |
| 1990-2023 | 17.22 | 21.07 |
| 2000-2023 | 16.90 | 21.50 |
| 2010-2023 | 16.74 | 22.94 |
| 2020-2023 | 17.50 | 27.20 |
| 1966-2023 | 17.39 | 20.72 |
| 1983-2023 | 17.24 | 21.16 |
| 1996-2023 | 17.19 | 21.10 |
| 2003-2023 | 16.65 | 21.99 |
| 2014-2023 | 17.30 | 23.21 |
Another way to evaluate the issue is to pick a particular year and compare it to the most recent year’s revenues, spending and deficits. I choose 1996 for several reasons. It had a deficit of about 2 percent, which many experts would regard as sustainable in the long run if economic growth increased a bit and interest rates were relatively low, a possible scenario for the future. That year also represented a similar point in the business cycle as 2023 — low unemployment and decent economic conditions. In both years, a Democratic administration was in charge.
The deficit increased by 5.5 percentage points from 1996 to 2023 due to a 3.6 percentage point increase in spending and a 1.8 percentage point decline in revenues — mainly lower corporate income and other taxes. The spending was focused mainly on health care, but also Social Security and other mandatory spending like veterans’ benefits but a decline in defense. 2023 was a particularly poor revenue year because it followed 2022’s blowout of higher income and payroll taxes owing to wage inflation, and the stock market boom. This represents a 2:1 split on spending/revenue causation.
Table 2. FY 1996 and FY 2023 Fiscal Metrics (Percent of GDP)
| 1996 | 2023 | Change (% of GDP) | |
| Spending | 20.52 | 24.14 | +3.62 |
| Health Care | 3.56 | 5.84 | +2.28 |
| Social Security | 4.37 | 4.97 | +0.60 |
| Other Mandatorye | 2.86 | 4.24 | +1.39 |
| Nondefense Discretionary | 3.36 | 3.59 | +0.23 |
| Defense Discretionary | 3.35 | 2.87 | -0.48 |
| Net Interest | 3.03 | 2.63 | -0.40 |
| Revenue | 18.31 | 16.45 | -1.87 |
| Individual Income Taxes | 8.30 | 8.06 | -0.24 |
| Payroll Taxes | 6.40 | 5.97 | -0.43 |
| Corporate Income Taxes | 2.16 | 1.55 | -0.61 |
| Other Receipts | 1.45 | 0.86 | -0.59 |
| Surplus/Deficit | -2.21 | -7.70 | -5.49 |
| Debt | 46.96 | 98.21 | +51.24 |
These spending categories are estimated by the author based on aggregate spending reported in CBO October 2023 and detailed spending projections from CBO May 2023.
As the prospects for a fiscal commission heat up, policymakers will need to map out short- and long-range goals and frameworks — for deficits, debt and the allocation of necessary changes between spending cuts and revenue increases, even before drilling down to specific programs and provisions.
For reform to be effective, most of the action should come on the spending side.
Mark J. Warshawsky is a senior fellow at the American Enterprise Institute. He served as assistant secretary of Economic Policy at the Treasury Department from 2004 to 2006