Federal Government Will Borrow 40 Percent of the Money It Spends Next Year, Says White House Report

According to the Obama administration’s mid-session budget update, the federal government will have to borrow nearly 40 percent of its total expenditures in 2010, a level not seen since World War II.

The report, “Mid-Session Review, Budget of the U.S. Government, Fiscal Year 2010,” shows that 39.9 percent of all federal income will be borrowed, making borrowing the single largest share of revenue in 2010. The next largest component of federal revenue is the personal income tax, which accounts for only 27.3 percent of federal funds.

This is only slightly lower than in 2009, when the federal government borrowed 43.3 percent of the money it has spent so far. The 2009 fiscal years ends Aug. 31, 2009.

The 2010 figures are estimates, based on current policy proposals which have not all been enacted yet. However, all new spending proposals, including spending from initiatives such as health care reform and a proposed cap-and-trade program, would be added to the 2010 deficit.

The revised budget estimates mean that the government will be borrowing the largest share of federal spending since World War II, when the federal government borrowed 62 percent of the budget in 1943, at the war’s apex. Borrowing, however, dropped off quickly after the war, falling to 28 percent in 1946 – with the government running at a surplus by 1947.

That does not seem to be the case this time, because Obama administration projections show the borrowed share of the budget staying at Cold War levels until 2019, when government will borrow 17.3 percent of its budget.

Overall, the Obama administration forecasts spending to be higher than tax revenues, with spending projected to total $43 trillion from 2010 to 2019, borrowing 20 percent of it – or $9.05 trillion.

Office of Management and Budget logo This level of borrowing is unprecedented even during recessions. During the long recession of the 1970’s, federal borrowing never rose above 20 percent of total expenditures despite nearly a decade of sluggish economic growth, high inflation and an international oil crisis.

Debt as a share of the budget reached 15 percent during the 1987recession. Borrowing was generally high during much of the early Reagan administration, reaching a peak of 25 percent in 1983.

However, Obama’s borrowing is 10 times greater than Reagan’s, which was fueled largely by defense spending as America battled the Soviet Union for dominance in the Cold War.

Obama’s 2010 spending is almost entirely domestic, by contrast, with mandatory spending programs, such as the bank bailout and stimulus spending programs nearly equaling defense expenditures despite two ongoing wars.

In fact, defense spending, including the wars in Iraq and Afghanistan, account for 19 percent of federal spending while mandatory programs such as the bailout and the stimulus spending programs account for 18.9 percent.

Entitlement programs, by contrast, including Social Security, Medicare, and Medicaid account for 38.2 percent of total government spending.

Non-defense discretionary spending, which includes the rest of the federal government, accounts for 18.5 percent and interest payments on the current federal debt, valued at $11.7 trillion, accounted for 5.2 percent of spending.

Brian Riedel, budget analyst at the conservative Heritage Foundation, said that the historic levels of borrowing proposed by Obama are not likely to abate, due to what he said were anti-growth policies pursued by the president.

“Two-thirds of the budget was eliminated after World War II ended,” Riedel told CNSNews.com. “But that’s not going to happen now. The White House thinks growth is going to rebound pretty quickly … which I find unrealistic, given some of the anti-growth policies that are a part of the president’s budget.

“Tax increases, cap-and-trade, health care, all of these are going to harm the economy, and they’re going to reduce the growth rate long-term,” he added.

“The lower economic growth is – the lower tax revenues come in, and that means higher borrowing is needed to compensate,” said Riedel.

As I watch the political system operate, if the Democrats still control congress and the White House after 2012 (God forbid), the most likely path they will take is to coerce the Fed into an easy monetary policy to keep the economy going as fast as possible and inflate away some of the federal debt and interest expense on the debt. If they’re still in power, they’ll probably choose the path of least resistance for them, which is excessively low interest rates, printing lots of money, and higher inflation to create an incentive for consumers to buy now and to effectively increase taxes on everyone without having to vote for an explicit tax increase. Their strategy, if they still control Washington after 2012, will probably be 1) inflate away debt, 2) cover up actual inflation with phony “official government” inflation statistics that understate real inflation, and 3) deflect blame for the inflation they cause by blaming business, oil companies, and “financial speculators” for higher inflation, especially much higher energy and food prices.

That’s the path of least resistance for the Rats, because democrat voters are addicted to federal entitlement programs and falsely believe these entitlements are “free” and “the government pays for it”, or at least they believe they’re getting more benefits from the federal colossus than they’re paying in federal taxes. So I think it’s a slam dunk certainty that oil prices will move back above $100 in a few years, and it the Rats still run Washington in 2013 it’s likely that crude oil prices will rise above $140 in 2013. If they react to prices above $100 with a “windfall profits tax”, then we’re looking at oil over 150, real physical shortages of gasoline, and gas lines around the block (or rationing) like we had back in 1979. So I’m buying oil production companies and MLPs that have a lot of crude oil reserves. Farm suppliers look like a good investment, and metals and mining companies look like something to buy on a correction here in September/October.

Inflation is low right now because people are afraid of losing their jobs and they’re saving more and not buying many non-essential products. But when demand for goods and services rebounds, and it will, we’ll start to see higher inflation especially in energy prices. If the Democrats still control Washington in 2012 and 2013, they will probably choose a tax increase through higher inflation instead of reductions in federal spending, because their supporters are addicted to federal entitlement programs, pork spending, and subsidized mortgages through Fannie Mae and Freddie Mac. So everyone who doesn’t want their wealth (especially investment-grade bonds) to be depreciated through inflation had better vote the democrats out of power and vote in some fiscal conservatives who will get federal spending under some control by 2013. Otherwise, physical assets like oil, metals, and agricultural commodities will be better investments than financial assets.

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