February 27, 2002
WASHINGTON–With a spurt of federal spending inspired by the war on terrorism, the President’s Budget for Fiscal Year 2003 requests $2.1 trillion in total spending and anticipates $2.0 trillion in total receipts, resulting in a modest deficit, according to "The President’s Fiscal Year 2003 Budget," a Tax Foundation Special Report by Foundation chief economist John S. Barry.
With its top priority the war on terrorism, President Bush’s budget defines national security broadly as having three primary parts: winning the war abroad, protecting America’s "homeland," and reviving the economy through increased economic security.
As a result, the Budget includes a large spending increase on defense, a near doubling of funding for homeland security activities, and a host of new initiatives aimed at creating jobs and providing Americans with economic security.
Guns Versus Butter
Non-defense spending dropped precipitously during World War II and the Korean War, but it actually rose during the Vietnam war, giving rise to the "guns versus butter" debate, with people questioning the will of the nation to win a war if it is unwilling to make financial sacrifices at home.
This debate promises to be reargued in the nation’s newspapers for the duration of the war on terrorism, because President Bush’s budget proposes dedicating a relatively flat share of total federal spending to non-defense programs, ranging from 73.4 percent to 74.6 percent over the period 2003 through 2007 (see Figure 1).
Present day budgeting is not exactly comparable with Vietnam-era budgets, however, because so much more of the social service spending in today’s federal budget is mandatory. "Mandatory" in this context refers mostly to entitlement programs whose spending levels are not decided each year but legislated into law as automatically increasing. In order to keep a flat line on non-defense spending, therefore, the President’s Budget has to reduce the relatively small portion of social spending that is "discretionary," i.e., part of each year’s appropriations process. There is simply less butter today than in the past for lawmakers to spread over their favorite discretionary programs, or to sacrifice for national defense in time of war.
Neither Large Deficits Nor Surpluses Predicted in Near Term
For the first time in four years, the administration’s budget shows a current year deficit: $80 billion in FY 2003 and $14 billion in FY 2004. The budget predicts a return to annual surpluses starting in 2005 and continuing through at least 2007.
The deficit will increase outstanding debt held by the public from an estimated $3.5 trillion at the end of fiscal year 2002 to an estimated $3.6 trillion in 2003, but measured as a percentage of GDP, debt will actually decline from 33.6 percent of GDP to 32.7 percent of GDP. Gross debt, on the other hand, whether measured in absolute terms or as a percentage of GDP, will be increasing this year and beyond.
Specifically, due to increased intragovernmental debt, the President’s budget calls for an increase in gross debt from an estimated $6.1 trillion at the end of fiscal year 2002 to $6.5 trillion at the end of fiscal year 2003.
A Half-Century of Spending on National Security
The President’s proposal to spend $379 billion on defense programs during fiscal year 2003 represents 17.8 percent of total spending and is an 8.9 percent increase over estimated national defense spending in fiscal year 2002. The $379 billion represents 3.4 percent of GDP.
In fiscal year 1940, which ended before the United States entered World War II, defense expenditures accounted for just 17.5 percent of total federal government spending, or 1.7 percent of GDP. Defense-related spending skyrocketed to a peak of 89.5 percent of federal spending in fiscal year 1945, 37.9 percent of GDP, before dropping back to 30.6 percent of total spending in 1948.
Defense spending spiked again in 1952 through 1954, reaching a high of 69.5 percent of total federal expenditures in 1954, to fund the Korean War. Defense spending as a percentage of total federal expenditures decreased over the following 45 years to its fiscal year 1999 level of 16.2 percent, or 3.0 percent of GDP. The majority of this decline in defense spending came during the cold war.
Between 1954 and 1991, defense spending dropped from 69.5 percent of total expenditures to 20.6 percent, only three times rising as a percentage of total expenditures and even then the increases were not large. The first was between 1965 and 1968, coinciding with our troop commitments in Vietnam. The second was between 1981 and 1987, during the last years of the cold war. The final period began in fiscal year 2000 and continues through the present.
Homeland Security
The President’s budget calls for $38.0 billion to be spent during fiscal year 2003 on homeland security, defined as, "those activities that are focused on combating and protecting against terrorism and occur within the United States and its territories. Such activities include efforts to detect, deter, protect against and, if needed, respond to terrorist attacks."
The President’s budget lists five categories of homeland security activities:
While the phrase "homeland security" and the Office of Homeland Security are both new, many of the programs and initiatives covered under this title are not. In fact, the Office of Homeland Security is a coordinating office managed by detailees from other agencies.
Economic Security
The President’s budget calls for the passage of an economic security bill similar to that passed by the House of Representatives in December 2001 and considered in the Senate. If passed, as assumed in the President’s budget and economic forecasts, such a plan would include tax cuts totaling roughly $65 billion in fiscal year 2003 and a total of $87 billion over the period 2003 to 2007. The primary components of such a tax cut, as outlined by the administration, include the following elements:
The spending provisions of the President’s economic security plan include $8.0 billion in increased mandatory expenditures in fiscal year 2003. This is on top of the estimated $27 billion in increased mandatory spending that would occur during fiscal year 2002 with passage of the economic security bill outlined in the President’s budget. The spending initiatives are focused on helping the unemployed and include the following elements:
The net total "cost" of this component of the budget is estimated to be $77 billion in fiscal year 2003, $57 billion in fiscal year 2004, and $141 billion over the five-year period from fiscal year 2003 through 2007.
The Tax Foundation has monitored tax policy at the federal, state and local levels since 1937. Best known for its annual calculation of Tax Freedom Day®, the Tax Foundation is a nonprofit, nonpartisan 501(c)(3) organization.
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