Data 6 – government, taxes and debt
Charts and maps all about the government’s finances: tax, spending and debt. Each of the visualisations below are interactive – hover over them to reveal more detail and dig deeper.
US government spending has changed as the nation has evolved. As the nation’s population has aged in recent decades, spending on Social Security and health, as a proportion of GDP, has increased and is likely to rise further. While the US is still expected to spend substantial amounts on defence, this now forms a smaller part of the overall budget.
Periods where outlays are greater than tax revenues mean that governments are in “deficit”. This most often means they rely on borrowing to finance spending. The growing gap between the revenue the government receives in tax, and the amount it spends has sharply increased the US government’s debt burden and has become a hot political issue, even contributing to government shutdowns.
It was not until the First World War that the US Federal Government imposed a direct income tax on its citizens. The increase in the tax base, and shift towards taxing individuals accelerated further during the Second World War as the government rapidly increased spending for the war effort. Since then, direct taxes have taken over from indirect taxes as the primary source of federal government revenue.
However, looking at just federal taxation does not tell the whole story. States, counties and cities levy additional taxes to fund local government programs, pay local government officials and engage in local public works projects. These taxes can be on anything from home sales to taxes on alcohol and tobacco, and rates vary significantly.
Most countries also charge a Sales tax or Value Added Tax (VAT) to capture revenues from transactions rather than incomes. Over the last few decades, governments have relied more on these forms of indirect taxes to make up for budgetary shortfalls. VAT and sales tax differ as VAT is paid at every point in the supply chain, whereas sales taxes are only paid by the end consumer.
The accumlated cost of annual US deficits has been the surge in government debt. The debt-to-GDP ratio is now at levels not seen since the post-war period. However, as in many countries much of this debt is held by state-backed or state-supported entities: for example, health and social care programs, as well as public retirement funds, hold government bonds as they are attractive and safe assets.
Increasing debt burdens are not limited to the US Federal Government but also local and state governments. Many local governments have had to issue their own bonds to fund growing expenditures.
The US benefits, however, from the fact that its debt is perceived as low-risk. This means that purchasers of US securities require a smaller yield to compensate them for risk. At the other end of the spectrum, Russian, Turkish, and Brazilian bonds all offer yields of over 10%, reflecting both greater credit risk and inflation.
Countries offer bonds and bills that pay out after anywhere from just a few days to decades: debt runs for up to 30 years in the US but others go further, with some Austrian bonds maturing after 100 years. The relationship between the returns on bonds of different lengths can provide us with an important indication of the economy’s health.
Bond issuers must take risks when choosing how far in the future they intend for their Bonds to mature, as choosing maturity dates further in the future comes with the risk that the ability for that economy to pay back those Bonds may be drastically different. On the other hand, choosing a longer maturity allows for the benefits of that borrowed money to compound for longer. When shorter maturity bonds provide a higher yield than longer maturity bonds, the yield curve is said to have inverted.
A yield spread that is positive is considered normal, and a good sign for the near future of the economy. However, a yield spread that is negative is often considered a sign that markets anticipate a recession as investors are moving towards longer term government debt and away from riskier assets.