FY 2008 U.S. Federal Budget and Spending

Person cutting up stacks of money using a sharp knife indicating a fiscal year budget
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The FY 2008 budget covers federal government revenue and spending for Oct. 1, 2007 through Sept. 30, 2008. The budget was submitted Feb. 5, 2007.

It was based on assumptions outlined in the Economic Report of the President. It discussed key economic trends but neglected the growing U.S. debt.

It ignored the inverted yield curve, a clear signal of the impending recession. As a result, revenue came in lower than budgeted, and spending was higher.

Revenue

The federal government received $2.524 trillion in revenue, lower than the $2.662 trillion projected in the FY 2008 budget. Revenue projections did not address the impact of the Alternative Minimum Tax.

The budget correctly assumed the continuation of the EGTRRA and JGTRRA tax relief acts. These were, in fact, extended by Congress in 2010.

Three questions must be answered to determine whether the revenue projections were realistic:

Were the GDP Forecasts Realistic?

The Office of Management and the Budget forecast the economy, as measured by annual growth in gross domestic product, would increase at about 3% per year from 2007-2012. This was only slightly more optimistic than the Congressional Budget Office (2.8%), or the Blue Chip Consensus (2.9%). 

But the OMB started with a higher base. It forecast FY 2007 GDP growth at 2.7%, a little higher than the estimates of the CBO (2.3%) and the Blue Chip Consensus (2.4%).

Even so, the OMB projection was not unreasonable, given that the Bureau of Economic Analysis estimated 2006 GDP growth at 3.4%, and 2005 GDP growth at 3.2% in its Jan. 2007 advance estimate.

Were Revenue Projections Accurate? 

Although keeping revenue projections at a steady 18.3% of GDP seemed reasonable, the composition of that revenue base shifted more of the tax burden onto individuals over the next five years. In FY 2006, 43% of revenue was from individual taxpayers, while 22% was from corporate taxes, excise taxes, and the like.

By FY 2012, OMB predicted that the individual taxpayer burden had grown to 49% of revenue, with 16% from corporate and excise taxes. 

This shift occurred even though the budget forecast assumed that the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs Growth and Tax Relief Reconciliation Act of 2003 (JGTRRA) would remain in place.

When passed, the Administration promised that these tax relief bills would “sunset”, or end, in 2010. However, it's difficult for politicians to reinstate higher taxes after cuts have been in place for 10 years, even knowing that estimated revenue loss would be nearly $1.7 trillion.

As it turned out, it was impossible to do in an election year, as the Bush tax cuts became the Obama tax cuts

The OMB didn't factor in a change in the Alternative Minimum Tax. The AMT was created in 1969 to make sure the wealthiest taxpayers did not avoid taxes through loopholes. Unfortunately, there was no inflation adjustment built-in, so each year the AMT applies to more families who are now wealthy by 1969 standards.

Instead of rewriting the law, legislators provide an exemption for that year only. As a result, tax revenue was overstated for FY 2009-2012 by about $60 billion each year.

Did the Budget Postpone a Revenue Crisis?

Although the budget forecasts a balanced budget by 2012, this did not mean a restoration to fiscal health.

First, it counted tax receipts from the AMT, when in fact each year a temporary exemption is enacted. Therefore, the budget overstated revenue by $60 billion per year, which was about the amount of the so-called surplus in 2012.

Second, it borrowed funds from Social Security. Combined, individual and corporate taxes only contribute 65% of revenue.

The remaining 35% is from Social Security and Medicare payroll taxes. This amount increased from $837 billion in FY 2006 to a projected $1,138 billion in FY 2012. Of that, only one-fourth was used to pay benefits to current retirees.

Much of the rest of it was "borrowed" to pay for FY 2008 spending. That year, $674 billion was borrowed. Who will pay it back? The next several generations of taxpayers.

Through FY 2017, Social Security was projected to collect more in tax revenues than it pays out in benefits. That's because there were 3.3 workers for every beneficiary and the tax rate was 12.4%.

Although the excess revenue is deposited into a trust fund, it is immediately borrowed by the U.S. Treasury to use for other programs. That's how, in FY 2008, $674 billion in receipts was “borrowed” from the Social Security trust fund

Payroll taxes were projected to total $835 billion in 2012. This is money that will not be available to pay retirement benefits to Baby Boomers, who began to become eligible in 2007.

Therefore, this budget reached a “balanced budget” by postponing two important revenue crises: fixing the AMT, and providing for Social Security benefits. 

Spending

The federal government spent $2.983 trillion in FY 2008, more than its budget of $2.902 trillion. 

Most of the budget debate in Congress was about discretionary spending, which is that part of the budget that is negotiated between the President and Congress each year as part of the budget process.

The Mandatory Budget is the estimates to fund the Acts dictating Social Security, Medicare, and other social programs.

Discretionary Spending

Total discretionary spending in FY 2008 was $1.12 trillion, which was 38% of total Federal budget spending. 

Defense spending was the category with the largest budget authority, at $685.9 billion. It included: 

  • The Department of Defense base budget of $479.0 billion.
  • Supplemental funding for the War on Terror of $186.9 billion. That included $142 billion for the War in Iraq.
  • Other selected agencies that support the military spent over $131 billion. These include Homeland Security ($50.0 billion), Veterans Administration ($43.6 billion), State Department ($22.1 billion), FBI ($6.8 billion), and National Nuclear Security Administration ($8.8 billion).

This level of military spending raises the following questions:

  • Was $500-$700 billion enough to achieve the nation's goals in the War on Terror?
  • Could the U.S. really afford the cost, given a projected budget deficit?
  • Was this really our nation’s highest priority for scarce discretionary funds? The non-military portion of discretionary spending was projected to decline in relation to defense spending over the next five years, which would significantly impact certain segments of the U.S. population.

The rest was non-security spending. The largest departments were Health and Human Services ($72.2 billion) and Education ($57.2 billion).

Mandatory Spending

Mandatory spending, at $1.84 trillion in FY 2008, was over half of the U.S. Federal Budget. The largest mandatory spending programs were Social Security and Medicare, as follows:

  • Social Security - $612 billion
  • Medicare - $386 billion
  • Medicaid - $201 billion

Other mandatory programs include Food Stamps, Unemployment Compensation, Child Nutrition, Child Tax Credits, Supplemental Security for the Disabled, Student Loans, and Retirement/Disability programs.

How Would the FY 2008 Mandatory Budget Impact the Economy?

In the FY 2008 budget, mandatory spending was projected to increase to $1.9 trillion, or 10.5% of GDP. Payroll tax revenue was projected to come in at 6.4% of GDP.

The result is that these unfunded obligations add to the general budget deficit. For example, in FY 2006 Social Security brought in $608 billion in “off-budget," extra funds from payroll taxes.

But other mandatory programs had expenses that far outweighed this “extra” revenue.

Short-Term Impacts

Through 2012, the impact of the Budget’s savings proposals was negligible, since it only proposed to cut mandatory spending by 1%. Although a lot of press and debate was devoted to these plans, and a lot of lives were affected by the outcome, the proposals did not affect the economy one way or the other in the short-term.

Long-Term Impacts

Long-term, however, the impact of doing nothing about these burgeoning unfunded mandates will be huge. The first Baby Boomer turned 62 in 2007 and became eligible to retire on Social Security benefits. 

FY 2008 Deficit

The FY 2008 federal deficit was $459 billion. The Budget forecast a balanced budget by 2012. The recession made sure this would not happen.