Tuesday, February 12, 2013

Federal budget continues to improve

One of the great, largely-untold stories of the past three years is the ongoing and substantial improvement in the federal budget. Thanks to very slow growth in spending and a decent rise in revenues, the budget deficit has declined from a high of $1.47 trillion in late 2009 to $1.03 trillion in the 12 months ended January 2013. Relative to GDP, the deficit has dropped from a high of 10.5% to 6.7%. This was achieved despite no increase in tax rates (and in spite of a 2-year payroll tax holiday), despite no announced budget cuts, and despite the Senate not having once passed a budget. Three cheers for Congressional gridlock, and a hearty "well done" to an economy that has managed to grow despite all the headwinds it has faced!

Looked at another way, the burden of the federal deficit has dropped by a very impressive 36% in the past three years. More important, perhaps, is that the burden of government spending has dropped by 10% over the same period. These rank as significant improvements in the underlying economic fundamentals of the economy, since they allow the private sector to keep more of its earnings. The private sector is much better at spending money than the government, so getting government out of the way and out of our pockets is a good thing.

Over the past year, federal revenues have grown by over 9%, mainly because the economy has been adding jobs. Even taking into account the surge in revenues in December, which was driven in large part by accelerated income and dividend payouts designed to avoid the threat of higher taxes in 2013, revenues had been rising at a 7-8% pace for most of last year, while spending in the 12 months ended January 2013 was up only 0.4%.

If current trends were to continue, the budget would be balanced within 7 years or so, without the need for budget cuts or higher taxes.

The problem, of course, is that these trends are not likely to continue, unless we get real healthcare and entitlement reform. Healthcare costs are going to rise enormously if and when Obamacare is implemented, and social security benefit payments are going to outstrip receipts unless the retirement age is increased, benefit increases are limited to the increase in inflation, and payouts are means-tested.

But for the time being, things are getting better, and that's good news that is not widely understood.


steve said...

great! so we're only increasing our debt by $1T/yr. yahoo! that means we'll only have what, $20T in debt by the time O leaves office? quite the accomplishment.

Scott Grannis said...

Not exactly. If current trends continue, the deficit could fall to $550 billion, or about 3% of GDP, by the time Obama's second term finishes. Total debt would still be very large relative to GDP, of course, but it would no longer be increasing. The important point is that we are not doomed.

Chris McFarland said...

Isn't this a bit of an illusion considering the massive effort by the Fed to suppress interest rates on governmental borrowing?

Paul said...

What Chris said. What happens when/if interest rates move towards their historical norm?

Gloeschi said...

Don't tell that to the guys who wrote the "2012 Financial Report of the US Government", page 47:

"Total present value of future expenditures in excess of future revenue

2011: $33.83 trillion
2012: $38.55 trillion"

Oops. A $4.7 trillion increase in unfunded liabilities. That's the cherry on top of the $1.1 trillion fiscal deficit.

The good news is that this news is not widely know.

Benjamin said...

Don;t hold your breath for any increase in interest rates.

Check out long-term charts of sovereign debt yields, major nations. For the last 30 years the long-term secular trend is down. Then down some more. Then down.

Japan did first, went into the zero lower bound realm, called ZLB.

If you are thinking, "Well, rates are low so they have to go up," you may be off track.

The right thing may be, "Rates are hitting bottom, getting close to ZLB, and they cannot go lower, so this is the new normal."

Side note: I sometimes wonder---Clinton balanced the federal budget, and now look at federal outlays under Obama vs. Bush.

Based on the last two D-Party presidents, and the last three R-Party presidents, one would have to vote D-Party for fiscal responsibility.

Life is strange. BTW, I regard Obama as a totally mediocre President. Just calling it as I see it.

Benjamin said...

14k on the Dow!

Gotta love it!

steve said...

BTW, based on O's speech last night, I think he's seen this chart too and wants to "correct" it.

Chris McFarland said...

"Don;t hold your breath for any increase in interest rates."

Benjamin, you don't have to worry about that as very few actions would be a more reliable road to death! I can't see how the Fed can safely unwind so I expect them to sit on rates for as long as possible. I only brought it up because the graphs reminded me of Scott's GDP gap image. My guess is that the suppressed interest rates would have a similar gap because of Fed's actions, although that is just speculation.

Frozen in the North said...

courageous post Scott!

First, and this is not widely reported under Obama the direction of the deficit has been positive, after all the misdeeds under Bush. Courageous for talking about health care, although no commentator pick up on this part, America cannot afford for health care to be more than 1/5th of the GDP (its around 17/18% now), and cost continue to rise far faster than inflation

The problem is that the Republicans don't want to do anything that would "help" the president, so they will continue their policy of blocking, and the democrats don't have the vote (or maybe not the will) to move the ball along.

Obama care's biggest fault (and yes there are many) is that there are no provisions for cost controls! The desire of the GOP to undermine the discussion goes as far as trying to reduce the availability of data and analysis on the cost effectiveness of procedures (and we are not only talking dollars here but also quality of life issues).

The GOP's assumption here is that patient have to decide, and yet they have no real information -- very sad

Scott Grannis said...

Frozen: "cost controls" can not be created by government edict or by government bureaucrats. The only way to control costs is to give consumers the responsibility for paying for their own health care. We've got to reestablish market incentives. Today, almost no one pays for their own healthcare costs. So there is no demand for pricing information, and no effective competition. The free market could transform healthcare miraculously if allowed to operate. We've got to get government and insurance companies out of the business of paying for health care. Many Republicans understand this, but Democrats seem clueless.