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Monthly Budget Review November 2005

The federal government recorded a total budget deficit of $319 billion in fiscal year 2005, $94 billion less than the deficit incurred in 2004. The 2005 deficit was about $2 billion higher than CBO had projected last month, primarily because of adjustments made to a number of agencies’ August spending figures. As a share of the nation’s gross domestic product (GDP), the 2005 deficit was 2.6 percent—down from the 3.6 percent share recorded in 2004.

The federal budgetary situation improved in 2005 after worsening for four consecutive years. As a percentage of

GDP, the 2005 deficit was about equal to the average for the past 25 years.

WHERE DID THE MONEY COME FROM?

Receipts of individual income taxes, the largest tax source, grew at the same rate as total receipts, 14.6 percent, in 2005. As a share of GDP, they rose from 7.0 percent in 2004 to 7.5 percent in 2005, close to the percentages of the early 1990s and well below those experienced from the mid-1990s through 2001.

Most of the growth in those receipts in 2005 occurred in non-withheld receipts, which increased by 32 percent. That large increase probably reflects strong growth in non-wage incomes as well as changes in tax laws that caused a one-time reduction in receipts in fiscal year 2004.

RECEIPTS

2000 2004 2005 2004-2005 % change

Individual Income 1,004 809 927 14.6

Corporate Income 207 189 278 47.0

Social Insurance 653 733 795 8.4

Other 161 148 154 3.8

Total 2,025 1,880 2,154 14.6

Outlays grew by about 7.9 percent in 2005, or about 7.3 percent after adjusting for the effects of shifts in payment dates. Spending has grown at an average annual rate of about 7 percent over the 2001-2005 period, twice as fast as in the previous five years.

Defense spending rose by 7.7 percent in 2005 (on an adjusted basis), after averaging 14 percent growth in the preceding three years. The increase in 2005 was concentrated in the Army, which is heavily involved in the operations in Iraq and Afghanistan (up by 17 percent); spending by the Navy and Air Force each rose by about 5 percent. Military spending has risen by almost 70 percent since 2000, growing from 2.9 percent of GDP in that year to 3.9 percent in 2005.

Medicare outlays increased by 10.2 percent in 2005, the fastest rate of growth since 1995.

Outlays for other programs and activities grew by 6.4 percent in 2005, twice the 2004 pace but well below the

15 percent and 9 percent increases recorded in 2002 and 2003, respectively.

Disaster assistance totaled $12 billion in 2005, three times the average annual level of spending in the previous five years and mostly for events that occurred prior to Hurricane Katrina. Education spending remains one of the fastest growing areas, rising by 16 percent in 2005 and doubling since 2000. Outlays for unemployment benefits declined for the second year in a row (down by 18 percent in 2005), but they are still about 50 percent higher than in 2000 because of the higher unemployment rate and greater average benefit amounts.

Net interest on the public debt, which declined steadily from 1998 through 2003, grew by 14.2 percent in 2005.

Net interest accounted for almost 8 percent of federal spending in 2005, higher than in the past two years but

well below the peak of nearly 16 percent recorded in 1996.

OUTLAYS

Major Category 2000 2004 2005 Percentage Change, 2004-2005

Actual Adjusted

Defense—Military 281 437 474 8.5 7.7

Social Security

Benefits 402 487 514 5.5 5.5

Medicare 218 300 336 11.7 10.2

Medicaid 118 176 182 3.1 3.1

Other Programs

and Activities 537 724 776 7.2 6.4

Net Interest on the

Public Debt 233 168 191 14.2 14.2

Total 1,789 2,293 2,473 7.9 7.3

Percentage of GDP 18.4 19.8 20.1 n.a. n.a.