The big story in Monday’s U.S. proposed budget for 2003 is the huge — $188.4 billion, or 10.2 percent — increase in government spending between fiscal year 2001 (which ended last September 30) and fiscal 2002.

This was well hidden — with the Office of Management and Budget as with Enron you need to look at the footnotes. The “Summary Tables” didn’t mention the figure at all, but simply pretended the final FY 2002 outcome was an agreed baseline from which increases should be calculated.

The comparison with Enron is deliberate. There is little point in pretending to have fiscal control if, after a year in which your original spending estimate (of $1,961 billion in the FY2002 budget presented by the Bush administration last April) has been exceeded by a whopping $91 billion, an increase which you then build into the base so you can claim fiscal responsibility for the current year. What’s more, the FY 2002 budget appears to have been deleted from the OMB archive (though still “out there” in Net cyberspace); if this is the case, presumably to prevent the spending overrun from being highlighted by lazy or time-pressed journalists, there is an exact analogy to what Enron did in failing to disclose the activities and control of its asset-holding side companies in the company’s SEC filings.

This increase in public spending is very worrying for friends of the U.S. economy, because as I demonstrated a few months ago, high public spending, or rapid increases in public spending, are strongly correlated with anemic economic performance; indeed, public spending and the rate of growth thereof appear to account for around half the variation in real growth in gross domestic product.

The slippage in FY 2002 is not something that happens every year, or under all administrations. To illustrate its importance, I did some analysis of the real spending and GDP figures, produced by OMB itself in its analytical appendices accompanying the budget.

The real increase in spending in FY 2002, $133.8 billion (the $188.4 billion highlighted above, less $54.6 billion represented by the rise in prices between the two years) is the largest in nominal terms since 1952, at the height of the Korean War. As a percentage of GDP, 1.45 percent, it is the largest such increase since 1985, and is significantly exceeded since Korea only by the Ford-era pump-priming exercise in the year to June 1975 and the Johnson-era guns-and-butter defense and Great Society buildup in the three years to June 1968.

Alternatively, you can look at how much of the FY 2002 increase in GDP was represented by an increase in public spending, in other words, how much of FY2002’s extra resources has the great maw of government absorbed. The answer, since GDP growth in FY 2002 was minuscule, is a staggering 4,102 percent. 41 times the amount of extra GDP generated by the economy was absorbed by government. Not only is that the highest figure for decades, it is in fact the first time since 1943 that the government’s absorption rate has been above 100 percent (though in a couple of years of deep recession, notably 1975, 1982 and 1991, real GDP growth was negative.) Let’s face it, 1943 was not exactly a normal year.

If this is a one-year trend, it should not be taken too far. The increase in public spending in FY 2002 took outlays up to 19.8 percent of GDP, which undoes the benefits of fiscal good behavior only back to 1996. If the budget presented Monday were realistic, and spending in FY 2003 was no higher than that projected, and GDP growth in fiscal 2003 was the optimistic 3.2 percent projected by the government, then spending as a percentage of GDP would already decline again in FY 2003, to 19.5 percent of GDP.

However, this is very unlikely. One statistic that is interesting, and that shows what has happened to the control of Congress in the last several years, is to look at the budgets as originally presented to Congress, and the final outturn in spending for that fiscal year.

In FY 1998, debated by Congress in the summer and autumn of 1997, while Newt Gingrich was still speaker of the House of Representatives, the budget presented to Congress estimated spending at $1,687 billion. Actual spending in that year was $1,653 billion; the Gingrich-dominated Congress cut a further $34 billion from the president’s proposal.

In FY 1999, debated by Congress in 1998, again under Gingrich, the original budget estimated spending at $1,733 billion, the actual outcome was $1,702 billion; the Gingrich dominated Congress cut out $31 billion.

In November 1998, Gingrich was politically defenestrated, and was succeeded as House speaker, after a brief interlude, by Dennis Hastert. The result has been chilling for lovers of budget restraint.

In FY 2000, debated by Congress in 1999, the original budget estimated spending at $1,766 billion, the actual outcome was $1,789 billion — Hastert and his minions (still, one must remember nominally a GOP Congress) added $23 billion.

In FY 2001, debated by Congress in 2000, the original budget estimated spending at $1,835 billion, while the actual outcome was $1,864 billion — an extra $29 billion added by Hastert and Congress.

Finally, in FY 2002, there was a new Republican administration, and a recession, and Sept. 11. The result was a budget proposal of $1,961 billion, inflated by Congress, and by the recession, and by new administration proposals, by $89 billion to $2,052 billion currently estimated and probably higher in the end — there are after all still 7-½ months of the fiscal year still to go. Alternatively, a really scary number, FY 2002 spending was projected in the FY 2000 budget at $1,820 billion, in the FY 2001 budget at $1,895 billion. Thus two years out, there has been spending inflation of $232 billion, or 12.8 percent. This suggests, that with Dennis Hastert or Dick Gephardt, D-Mo., in control of Congress for the next two years, and a recession likely for at least part of that period, that the current estimate of FY 2005 spending of $2,277 billion, is likely to be about $300 billion below the final outturn. If true, and if the GDP growth figures of 3.8 percent, 3.7 percent and 3.6 percent in the next three years are also a little optimistic (since long run GDP growth is assumed to be no more than 3.0 percent, and unemployment at 5.6 percent is still significantly below the long run average) then the FY 2005 budget might have receipts of $2,275 billion and outlays of $2,577 billion for a deficit of $302 billion. That is a CENTRAL case assumption, assuming NORMAL economic growth and not a recession.

Currently in the United States there appears to be no significant constituency for public spending restraint, nor, except for the 4-year period under the Gingrich speakership, has there been such a constituency for many years. If you look at the percentage of output growth absorbed by the increase in government, the Gingrich years, from FY 1996 to FY 1999, together with the three preceding years when President Clinton and the Democrat Congress were frightened by the deficit, were exceptional. During those seven years (but not afterwards, under Hastert), the rate of increase in the size of government was in each year less than 10 percent of the increase in real GDP. Such a run of fiscal prudence was not seen in the 1980s under President Reagan, nor in the 1970s under President Nixon; you need to go back to the middle 1950s and the fiscal conservatism of President Eisenhower, (as well as the “peace dividend” from ending the Korean war, to find a parallel).

Peak to trough, outlays declined from 22.3 percent of GDP in FY 1991 to 18.4 percent in FY 2000. That 3.9 percent drop was equaled by Eisenhower (1953-56) but exceeded only by the spending drops after World Wars I and II. It is most unlikely to be repeated.

The truth is, there hasn’t been a truly fiscally prudent administration since President Coolidge, who wrote that “Government economy is idealism in its most practical form” and who together with President Harding and Treasury Secretary Mellon cut public spending by half in eight fiscal years. But then, by the end of Coolidge’s term, Federal spending was only about 3 percent of GDP.

Fiscal imprudence, and the absence of any significant constituency fighting it, is yet another reason to be economically pessimistic about the next decade in the United States.

-0-

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.