Obama FY2011 US Government Budget -- First look

President Obama submitted his US FY 2011 Budget last week.  This post is a first quick look at the numbers and their import.  The assumptions and numbers in this annual budget exercise are the most important determinants of world growth and world peace.  Why do I say that?

Because:....

(For those who have a few minutes please read the discussion below the charts.  For those who do not, here are the key points illustrated in the two charts below:

• The current US Federal Government expenditures (outlay) of about 25% of GDP are well within the "crisis" outlays during the crisis of WW2 (45%), and close to the outlay during the 1980s Reagan era of about 22%.
• The current deficit of about 10% of GDP is well within the WW2 deficit of 30% of GDP but higher than the Reagan years (5%).
• The growth of GDP of about 3%-4%/year during the period 2010-2015 is the continuation of the same growth seen during the previous two decades, and forecast out for the next two decades in all the official projections.   Therefore, the reduction of outlays and deficit as a % of GDP estimated thru 2015 is  reasonable, ASSUMING GDP GROWTH in the region of 3ish-4ish percent.  We will then be back to "normal" and thru the crisis period assuming no "exogenous" events)

 Because:

•  We Americans consume more than a quarter of the entire world's consumption.  The rest of the world depends on the American consumer.  The world cannot grow consistently without us growing our consumption consistently, and our future consumption growth rate depends on the assumptions laid out in the Federal Budget.
• We spend more than the entire rest of the world spends on troops and armaments.  We are powerful enough  to prohibit growth in areas we choose to prohibit growth.   We can enforce exports from countries considered vital to our welfare, and prohibit exports from countries we judge detrimental to our welfare.   The funding to carry out these actions are buried in the budget, some of them available for public scrutiny. 
• We own the printing press which prints the world's money.   The value of that money is determined by the confidence of the rest of the world regarding our ability to maintain growth and repay their loans to us for past growth.  These are judgment calls, and are made from a variety of inputs including our future spending plans in the annual budget.
• Our annual budget enumerates our dreams and, when done honestly,  measures the costs of implementing them. 

My first look at the Obama FY2011 budget document tells me his staff have tried to do an honest job.

The first chart shows the percent of US GDP represented by the outlay, receipts and deficits (outlay-receipts) of the US Federal government from 1941 thru 2009, with estimates for the years from 2010 through 2015.   For reference, the 2009 GDP is approximately $14+ Trillion, assumed in the budget to grow to to approximately $19 Trillion in 2015

During the WW2 years the outlay rose to nearly 50% of GDP, and the deficit grew to 30% of GDP.    These huge percentages were decreased to about 18% and 0% respectively by increasing taxes and the rapid consumption (GDP) growth of the decades of the 50s and 60s.

During the financial crisis of the Bush-Obama years the outlay is projected to be 25% of GDP in 2009, 2010 and 2011, gradually falling to about 23% of GDP in 2015.  The deficit is projected to fall from a peak of about 10% in 2009, and 2010 to about 4% in 2015.

Clearly, in the light of previous history these 2015 numbers are not particularly scary.  BUT they do depend on GDP growth.  Given a 3%-4% or so real GDP growth rate, an outlay of about 20% of GDP and a deficit of about 3%-5% of GDP seems to be sustainable forever.

Based on the previous history of the last half century, it seems quite reasonable to expect to return to an annual  US GDP growth rate of about 3%/year --UNLESS some unusual monetary or natural resource changes are occurring.


The second chart shows the same time period (1941 to 2015), this time in $2005.

Our Federal government is spending about $3+ Trillion a year, and collecting just under $2 Trillion in receipts.  Receipts dropped in 2009 and 2010 due to unemployment and lower economic activity, and outlays rose sharply due to a variety of stimulus payments intended to counter the effects of the credit crisis.   The annual deficit now stands at approximately $1.5 Trillion.

Between 2009 and 2015, the budget projects a GDP increase of about $4+ Trillion (ca 20%), an increase in receipts of about $1 Trillion (ca50%) and an increase in outlays of about $200 Billion (ca7%) This, according to the budget planners will reduce the deficit of approximately $1.5 trillion to approximately $600 Billion by 2015.  All these numbers seem reasonable in the light of past history given the underlying assumption of consistent consumption growth.


   To be continued