Two More Causes of Budget Deficits Faced by Many U.S. States

This article is a follow up to my earlier post titled 'Why Are So Many U.S. States Facing Budget Deficits?' which generated some interesting comments from Seeking Alpha readers. In addition to a fall in property, income, sales tax revenues and a rise in social benefits spending some readers pointed out that the main culprits are the compensation of government employees and the reckless spending of states without saving funds for rainy days during good times. In this post I shall analyze these two additional causes with charts.

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Data Source: Table 3.10.5. Government Consumption Expenditures and General Government Gross Output, BEA

By far, the main reason for budget deficits seems to be government expenditure on employees compensation. The chart above shows that state and local employees are getting compensated more than their federal peers.

The Federal Government spent 43.3% of its consumption expenditures on employees wages and benefits in 2008. After 1979 this ratio always stayed under 50%.

69.5% of State and Local government’s expenditure in 2008 went towards workers compensation. This ratio is very high. In 1999, this ratio was 73.7%. While it has reduced slightly in the past few years, it is still a major cause of concern.

In order to offer such high compensation to workers, state and local governments have raised taxes and other fees over the past few years. In addition, Michael Mandel of Business recently noted that 2.4 million jobs were created by the public sector in the past 10 years as of May 2009. This implies that more workers added in the public sector in the past decade and the government's expenditure on compensation stayed in the 70s range. Adding more workers to the already highly-paid workforce probably exacerbated the deficit problem. In 2008, compensation amounted to over $1 Trillion of the $1.4T consumption expenditure.

The following chart shows the Net Savings ratio as a factor of current receipts. This is the measure of how much funds the government saves after all the expenditures are subtracted from the current receipts (revenues) amount.

Data Source: Table 3.2. Federal Government Current Receipts and Expenditures,
Table 3.3. State and Local Government Current Receipts and Expenditures, BEA

Governments are supposed to save during good times by reining down on unnecessary expenses and saving for future rainy days. This ratio has always been worse at the federal level while at the state level it can be considered just marginally better. The chart shows that since 1970 the feds have been running deficits except for a four years in late 90s. From 1998 thruough 2001 during the Clinton Administration the federal government had a budget surplus. From 2001 through last year the federal government had been borrowing year after year. Last year the Net Savings amount for the federal government was -525B, the highest figure in recent years.

Comments

[Gregman2:]

The main reason why, in California, a Constitutional Conventional is needed is to decouple the trend you so aptly note. The fact is, all expenditures should be linked to revenues as a floating percentage, rather than as a fixed sum. This would eliminate the need for much state borrowing. Throught California's Voter Initiative Process over the years, caps have been placed on taxes, but not expenditures, especially not employee costs. So, this needs to radically change. Thank you for this enlightening tidbit.;-)

Jun 29 03:28 PM

[maryanne:]

The unions are the cause of all the government fiscal problems and alsocompany bankruptcies (ie, GM and Chrysler) - excessive pay (six figures), unreasonable demands, job bank, gold plated pensions, free health care for retirees (WHY??? That is what Medicare is for), etc. Their greed and selfishness is much, much greater than Wall Street bankers.

Jun 29 10:51 PM

[maryanne:]

ONE MORE... illegal immigrants! clog up our schools and colleges, deprive citizens and those who are legally here of jobs and benefits, bankrupt our hospitals by using emergency rooms as free health care at their pleasure, pop out anchor babies to legally get all benefits - all paid with our tax dollars. Everything including emergency care should be denied to them! I have seen so many hispanics driving shiny new cars to Welfare and Social Services. Got laid off in 2006, unemployment ran out already, have been surviving on investment income.

Jun 30 02:19 AM

[Northstar10000:]

Maryanne,
You sound cold hearted. Lets all just get along. But I am a little surprised you left out the illegals in our prison system. Sorry but they have taken over, it's not our country anymore, it's theirs.

Jun 30 07:39 PM