by Calculated Risk on 3/28/2006 10:42:00 PM

UPDATE: Kash has a great post today: The True Fiscal Nightmare

The following graph shows the US Government General Fund Revenues and Outlays since 1992 in real terms (2000 dollars).


Click on graph for larger image.

The CBO is the source for all budget data. Revenues in 2005 have almost reached 1998 levels in real terms.

The upturn in 2005 was mostly related to significantly higher corporate taxes. Corporate taxes increased from $189 Billion in 2004 to $278 Billion in 2005 (nominal). It is doubtful that corporate taxes will continue to rise at such a rapid rate.

As Bruce Bartlett wrote today: Bush Tax Cuts Don't Pay For Themselves

It seems to me that the normal cyclical expansion after the end of the recession in 2001 has done far more to raise revenue than any Laffer curve effect. Revenues are simply returning to trend, nothing more.

In short, there is very little likelihood that revenues are rising because the 2003 tax cuts or would fall if they are not extended.

For outlays there has been a surge in spending since 2000. Most of the increase in real spending has been related to Defense and Medical expenditures (Medicare and Medicaid). And these spending increase don't include the impact of Bush's prescription drug benefit - so medical spending will even be worse going forward.

Part of the reason real outlays were flat in the '90s was because declining defense spending offset increases for medical spending (see graph for 1992 to 2000). From a demographics perspective this period was also very favorable (see The Best of Times).

This should offer some guidelines for fiscal policy: 1) reverse some or all of the Bush tax cuts (or at least let them expire), 2) reduce spending on defense, and 3) meaningful healthcare reform.