Decomposition of the U.S. Federal Deficit: Receipt Shortfall & Expenditure Excess

 Below, Corrections decomposes the reasons behind the U.S. Federal deficit as a percent of GDP.  We attribute a deficit to two reasons:  a shortfall in revenue, or an excess of expenditure.  Because the U.S. Federal Government has run a historical deficit (receipts average 17% and expenditures have averaged 19.9%) we close the historical gap by blaming both receipts and expenditures equally:  the "baseline" for both is therefore 18.7%.  

Our method of decomposition is to take the deviation of each from its historical norm and attribute that portion of the deficit to its deviation, as the two deviations will always sum to the deficit that year.  For instance, if revenues ran at 18.6% while expenditures ran at 19%, then we would have a deficit of 0.4% per year:  0.1% of it would be attributed to revenues, and 0.3% would be attributed to expenditures.

Finally, we graph both the levels and the combined contribution of both (click to enlarge).  The blue and red lines represent the simple contributions of each to the deficit, and add up to the black line, which denotes the deficit.  The blue and red areas depict the stacked expenditure and receipts, and also sum up to the black line.

Our takeaway is that from 2008:Q4 to present, expenditures have been 4.62% above historical norms as a fraction of GDP, while receipts have been 2.32% below, giving the "reason" for deficits to be 33.4% receipt shortfall, and 66.5% expenditure excess.

There are, of course, other decompositions one can offer:  perhaps a more promising one would be to attribute a constant growth rate to the level of GDP, expenditures, and revenues, and decompose the shortfall into three parts:  a fall in the trend growth of GDP, a rise above trend in growth of expenditures, and a fall in the trend growth of receipts.