However, we are now facing two problems. First, spending has increased dramatically because of the Bush bailout program and the Obama stimulus bills. Those increases are spread across two years ending late this year. They incorporate both short-term tax cuts (revenue decreases) and short term expenditures for a total deficit contribution of about $1.5 trillion or $750 billion per year.
Second, we have experienced a massive decline in Federal receipts. The combination of tax cuts and recession reduced Federal receipts by $400-500 billion per year in 2008, 2009 and 2010 as compared with prior years. Some of this will come back because of economic turnaround. However, as a result of tax cuts, Federal receipts as a percentage of GDP are declining by almost 15%. In fact, Federal receipts now are running at about the same levels as during the last year of the Clinton administration in absolute dollars or less than that in real dollars.
If you separate those changes between non-budget programs such as Medicare and social security, vs. on-budget programs such as defense and Federal agencies, the results are much more dramatic. General on-budget receipts from things like personal and corporate incomes taxes have declined in absolute dollars while receipts from off-budget sources (primarily payroll taxes) have increased by almost 30%. Off budget activities are still operating at a surplus.
To eliminate deficits for on-budget items would require a cut of about 50% in these activities th achieve balance without deliberate efforts to increase revenues (i.e. taxes). Unfortunately, Americans have gotten used to having a not just a free lunch, but also a free dinner. It will be very unpleasant as we relearn how to either pay for all our meals or go hungry.