Fiscal Review

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Fiscal Policy 1977 - 2007

Guy Lion

April 2008

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Topics covered

1. Observations of fiscal condition indicators covering the 1977 – 2007 period;

2. Benchmarking fiscal policy over same period.

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Fiscal Condition 1977 - 2007

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Fed. Revenue Growth since 01

The combination of tax cuts and economic malaise (dot.com bust, 9/11, etc..) resulted in Fed revenue contractions from 2001 to 2003.

Source: CBO Table F-1

But, since 2004 Fed revenue growth has been for the most part in line with the average yearly growth since 1977 (7.36%).

Current Administration Federal revenue growth

-10.0%

-7.5%

-5.0%

-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

2001 2002 2003 2004 2005 2006 2007

Avg. since 77

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Budget Deficits since 81


Budget Deficit/GDP in % pts since 77

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Per

cen

tag

e P

oin

ts o

f G

DP

Budget Surplus

Update. The Deficit jumped to $455 billion in fiscal 2008. But, that represents a sustainable 3% of GDP which would meet the EU Zone stringent fiscal requirement that few of its members ever meet. The Media goes crazy about record size deficits. But, it forgets it

about similarly record size GDP of above $14 trillion. The Deficit has a lot more meaning when scaled relative to the size of the economy. The Media readily understates this aspect.

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Budget Deficits since 01

The Budget Deficit reduction from -5.0% of GDP in 2004 to half that level (-2.5%) in 2007 has to be the most significant under-reported fiscal event by the Media.


Budget Deficit/GDP in % pts since 01

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

2001 2002 2003 2004 2005 2006 2007

Per

cen

tag

e P

oin

ts o

f G

DP

Avg. since 77 3.28% Update. As indicated

on previous slide, Deficit increased back up to around 3% of GDP.

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Budget Deficit by Administration


Budget Deficit/GDP in percentage pts.

Carter Reagan Bush Sr. Clinton Bush Jr. Combined1st yr. -2.5 -2.4 -3.8 -4.6 -0.32nd yr. -2.5 -3.7 -4.8 -3.7 -3.13rd yr. -1.6 -6.0 -5.4 -3.1 -5.04th yr. -2.7 -4.8 -5.5 -2.3 -4.95th yr. -5.3 -1.3 -4.06th yr. -5.4 -0.3 -3.37th yr. -3.6 0.0 -2.58th yr. -3.8 0.9

Avg. -2.3 -4.5 -4.9 -2.2 -3.3 -3.3Median -2.5 -4.3 -5.1 -1.8 -3.3 -3.6

Update. Bush Jr. most recent Deficit was – 3.2% in his 8th year which would not materially affect his average Deficit level during his term.

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Public Debt/GDP since 77


Public Debt/GDP in % pts since 77

25.0

30.0

35.0

40.0

45.0

50.0

Per

cen

tag

e P

oin

ts o

f G

DP

Public Debt = Federal Debt – Federal Debt held by the Fed Government.

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Public Debt/GDP since 01


Another piece of interesting unreported news: The current Administration has kept the Public Debt level as % of GDP significantly below its average since 77. And, it has steadily decreased this debt ratio for the past three fiscal years.

Public Debt/GDP in % pts since 01

32.0

33.0

34.0

35.0

36.0

37.0

38.0

39.0

40.0

2001 2002 2003 2004 2005 2006 2007

Per

cen

tag

e P

oin

ts o

f G

DP

Avg. since 77: 37.9%

Update. The Public Debt/GDP % will have risen in 2008 and will continue to do so in 2009. But, it is unlikely to rise much above 40% of GDP that still represents a sustainable debt level. To prevent a depression, a moderate increase in debt level is the appropriate policy anyway.

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Public Debt/GDP by Administration

Public Debt/GDP in percentage pts.

Carter Reagan Bush Sr. Clinton Bush Jr. Combined1st yr. 27.8 25.8 40.6 49.4 33.02nd yr. 27.4 28.7 42.0 49.3 34.13rd yr. 25.6 33.0 45.3 49.2 36.24th yr. 26.1 34.0 48.1 48.5 37.35th yr. 36.3 46.1 37.56th yr. 39.5 43.1 37.17th yr. 40.6 39.8 36.88th yr. 40.9 35.1

Avg. 26.7 34.0 44.0 46.5 36.0 37.9Median 26.7 35.2 43.7 47.3 36.8 37.3


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Debt ratio – international comparisonPublic debt/GDP

1 Japan 182.4%2 Italy 104.0%3 Belgium 86.1%4 France 66.6%5 Germany 65.3%6 Canada 64.0%7 India 58.8%8 Switzerland 50.2%9 Netherlands 47.7%

10 Brazil 43.9%11 U.K. 43.3%12 Sweden 41.9%13 Norway 39.1%14 U.S. 36.8%15 Spain 35.7%16 Finland 32.9%17 Venezuela 27.5%18 Denmark 26.1%19 South Korea 23.8%20 Mexico 23.1%21 Saudi Arabia 22.6%22 Ireland 21.1%23 China 18.9%24 New Zealand 18.3%25 Australia 15.2%26 Russia 7.0%

Source: Wikipedia. CIA – The World Factbook. 2007 estimates.

Compared to other developed countries, the U.S. has a relatively low Public debt/GDP ratio (36.8%).

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Debt ratio – international comparison map

Source: Wikipedia. CIA – The World Factbook. 2007 estimates.

Public Debt/GDP in %

Surprisingly, Russia and satellite States, China, Australia, and a few African countries have among the lowest Debt ratios. Among Western economies, the U.S. has a relatively lower ratio at 36.8%.

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Is current tax level too low?


Tax receipts as % of GDP dropped rapidly during the first term of current Administration because of economic slowdown and tax cuts.

But, this ratio bounced right back up during the second term. That’s another non-reported fiscal story in the Media.

Tax receipts/GDP in % pts

16.0

17.0

18.0

19.0

20.0

2001 2002 2003 2004 2005 2006 2007

Per

cen

tag

e P

oin

ts o

f G

DP


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Tax level by Administration

Tax receipts/GDP in percentage pts.


Avg. 18.4 18.1 17.9 18.9 17.9 18.3Median 18.3 17.9 17.9 19.1 17.9 18.1


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Are large corporations paying their fair share?


Same trend observed before where the first term sees low tax receipts (tax cuts, slow economic growth, low corporate earnings). But, the second term sees the trend reversing.

Corporate tax receipts as % of GDP for the past two fiscal years are at their highest levels since 1978 under Jimmy Carter.

Corporate income tax/GDP in % pts

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2001 2002 2003 2004 2005 2006 2007

Per

cen

tag

e P

oin

ts o

f G

DP Avg. since 77: 1.94%

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Corp. inc. tax receipt/GDP by Administration

Corp. tax receipts/GDP in percentage pts.


Avg. 2.62 1.54 1.70 2.09 1.93 1.94Median 2.66 1.50 1.64 2.14 1.65 1.91


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Are the rich bypassing estate taxes more than ever?


… Not really. As the data shows, estate taxes have never raised a material proportion of tax receipts.

The phased in reduction in Estate tax rates brought related receipts in line with historical average (avg. since 77: 0.22%).

Estate tax/GDP in % pts

0.00

0.05

0.10

0.15

0.20

0.25

0.30

2001 2002 2003 2004 2005 2006 2007

Per

cen

tag

e P

oin

ts o

f G

DP


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Is Interest payment on the Debt at crippling levels? No…


Net Interest/GDP in % pts since 77

1.0

1.5

2.0

2.5

3.0

3.5

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Per

cen

tag

e P

ts o

f G

DP

Net Interest paid by the Gov. = Interest Expense – Interest earned

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How about since 2001?


Debt service (interest payment) has remained at a very low level during the current Administration relative to the average since 1977 at 2.47% of GDP.

Net Interest/GDP in % pts since 81

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2001 2002 2003 2004 2005 2006 2007

Per

cen

tag

e P

ts o

f G

DP


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Net interest/GDP by Administration

Net Interest/GDP in percentage pts.


Avg. 1.69 2.80 3.20 2.93 1.64 2.47Median 1.65 2.93 3.20 2.95 1.65 2.64


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Benchmarking Fiscal Policy

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Sustainable Budget Deficit Model

AssumptionsGDP growth 3.25%Inflation 3.25%Public debt/GDP 50.0%

OutputBudget deficit/GDP -3.05%

In this example, using GDP growth and inflation rates that are representative of the averages over the past 30 years, and picking a reasonable debt ratio of 50% (by international standards) you get a sustainable Budget Deficit of about -3.0%. This means you could run Deficits of -3% of GDP forever and your Debt ratio would remain unchanged at 50%.

Accidentally, this -3% corresponds to the fiscal target for countries belonging to the Euro Zone.

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Keynesian - Lite

• Keynes suggested running Deficits during recessions, and running Surpluses the remainder of the time to smooth out the business cycle;

• Based on the sustainable Deficit and Debt ratio concept, we may suggest to run Deficits larger than the sustainable Deficit level (-3.0%) during recessions, and run Deficits either smaller or equal to the sustainable Deficit level otherwise.

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Fiscal Policy benchmarking

real GDP growth in percentage pts.

Carter Reagan Bush Sr. Clinton Bush Jr.1st yr. 4.6 2.5 3.5 2.7 0.82nd yr. 5.6 -1.9 1.9 4.0 1.63rd yr. 3.2 4.5 -0.2 2.5 2.54th yr. -0.2 7.2 3.3 3.7 3.65th yr. 4.1 4.5 3.16th yr. 3.5 4.2 2.97th yr. 3.4 4.5 2.28th yr. 4.1 3.7

Budget Deficit/GDP in percentage pts.

Carter Reagan Bush Sr. Clinton Bush Jr.1st yr. -2.5 -2.4 -3.8 -4.6 -0.32nd yr. -2.5 -3.7 -4.8 -3.7 -3.13rd yr. -1.6 -6.0 -5.4 -3.1 -5.04th yr. -2.7 -4.8 -5.5 -2.3 -4.95th yr. -5.3 -1.3 -4.06th yr. -5.4 -0.3 -3.37th yr. -3.6 0.0 -2.58th yr. -3.8 0.9

The matching between Deficits and GDP growth is deemed good if the Deficit cell is not colored. If it is red, it means the Deficit was too large relative to GDP growth. If the cell is blue, the Deficit was potentially too small. Reminder sustainable Deficit level is about – 3% as defined on previous slide.

Fiscal Review

Economy & Finance

Transcript of Fiscal Review