Monday, March 12, 2012

Federal budget update

February budget numbers released today were mixed. Revenue growth has slowed meaningfully over the past year, with the rolling 12-month revenue total rising at only a 1.7% annualized rate in the past six months. That partly reflects the payroll tax cut that began last year, but it also reflects the economy's huge output gap and only modest growth in jobs. On the other hand, there has been very little increase in spending since the end of the recession (a mere $60 billion), and that's good because otherwise the budget deficit would be truly frightening. Here's a little-known and under-appreciated fact: virtually all of the reduction in the budget deficit has come from increased tax revenues. Revenues have increased in spite of the payroll tax cut, and without any increase in tax rates; revenues are up because the economy has grown.

About a year ago I began noting that if spending could be frozen, the budget could be balanced within 7 years or so without any tax hikes. Amazingly, we seem to be following that virtuous path, thanks to a growing economy and Congressional gridlock. As a % of GDP, the federal budget has declined from a high of of 10.4% at the end of 2009 to 8% today. In nominal terms, the deficit has fallen from a high of $1.47 trillion to $1.24 trillion. Imagine if the next Congress actually figures out how to cut spending in nominal terms! Fiscal reform is not a pipe dream, and it is slowly happening without any apparent help from Washington.

Things could be a lot worse.


William said...

The simple truth is that both major political parties love to spend other peoples money. They have been dong it for decades. The only difference between them is the "clients" that they are beholden to.

In spite of the Tea Party's agitation, I predicted after the 2010 elections that Federal Government spending would not be reduced. It is not in the DNA of politicians of both parties not to please their "clients".

More than controlling the budget deficit, they desperately want to be re-elected. That's the name of the game until they have built a reputation sufficient that they can become a highly paid lobbyist.

Bill said...

On a related note:

"Obama Stumbles On Jobs Secret: Do Nothing"

Ed R said...

" - - - -if spending could be frozen, the budget could be balanced within 7 years or so without any tax hikes."

Which is pretty much what Clinton did in '97, '98 & '99; with some major surpluses.

And how did GWB do?

Dr William J McKibbin said...

I predict that US Federal Reserve Notes will become a kind of "funny money" used domestically -- purchases of the best goods and services will require use of "hard" currencies -- the Federal Reserve can then dry the dollars out of the US economy at will leaving Main Street to seek alternative trade terms...