Wednesday, August 12, 2009

Federal budget deficit reaches $1.5 trillion, but some hopeful signs

With July figures now in, we see that the federal budget deficit over the past 12 months has surged to $1.5 trillion, representing about 10.6% of GDP. That's another post-WW II record. If there is any good news in the numbers, it is that the decline in revenues over the past two months appears to have slowed. In fact, the 3-month annualized rate of growth in revenues (seasonally adjusted) was -28% in June and -10% in July. It's quite possible that this relative improvement reflects the bottoming in the economy that seems to have occurred over the past 3-4 months. If the economy moves forward on a rising growth path, revenues could stop declining and begin to increase. Unfortunately the pace of spending growth appears robust and likely to continue at a high rate. Spending is up at a 26% annual rate over the past six months, and represents over 25% of GDP, another post-war record.

If the economy continues to recover, revenues could stabilize around 16-17% of GDP, but spending looks set to exceed 26% of GDP for most of the next year. Thus, the federal budget deficit is likely to be 10% of GDP or more (GDP will likely reach $14.5 trillion by the end of this year). That, in turn, means Treasury will need to sell at least $120 billion of bills and bonds each month on average over the next year, in addition to refinancing existing debt as it matures. That works out to new borrowing of around $4 billion per day. That's something to remember the next time Obama, Pelosi and Reid talk about their quest for fiscal responsibility.

If a healthcare bill passes in anything like its current form, it will almost certainly add significantly to this deficit picture, at a time when it is already much bigger than anyone could have imagined just a year ago. I'm having real trouble seeing how Congress is going to do something so utterly irresponsible, and that makes me feel good. I think there's a silver lining to this deficit cloud.


Dead Cat Bounce said...

I've always taken refuge in the saying that sometimes things have to get worse before they get better. Indeed, in my experience, some of the greatest errors and injustices have been committed in times of feast, and times of famine have realigned focus and commitment to things of true import. My father has been integral in teaching me these lessons, although I would not consider him an optimist (as opposed to myself).

I read this quote recently, and thought I would share:

"Hope doesn't come from calculating whether the good news is winning out over the bad. It's simply a choice to take action." Anna Lappe

Of course we have to have policies that reward action and reinforce responsibility. I am encouraged by what I interpret to be a philosophical trend away from populism and unsustainable redistribution in people I speak with; I wonder whether that can continue as the economy recovers and amidst the revisionist history of "progressivism."

Scott Grannis said...

Very insightful comments, thanks. If ever the mood of the country can shift away from populism and redistributionism, this is it. Obama might be the best thing that ever happened to conservatives and libertarians. I'm hopeful, at least.