Federal budget progress continues

In today's WSJ, Steve Moore echoes my thoughts from last month on the incredible shrinking federal budget deficit. Yes, "The biggest underreported story out of Washington this year is ... the federal budget ... shrinking ... much more than anyone in either party expected." And with the July numbers released today, the story hasn't changed, although the 12-month deficit inched up from $694 to $722 billion. The progress is mostly due to a pronounced slowdown (and even a recent shrinking) of federal spending. At the same time, a growing economy, rising incomes and corporate profits have boosted revenues to new highs. 

Spending has dropped almost 4% over the past year, while revenues are up almost 13%. As the second chart above shows, revenues have been higher than their year-ago level every month for the past several years; this is not just the front-loading of incomes that happened last December in order to beat higher expected tax rates—this is ongoing and likely to continue. It's the sort of thing that happens in every recovery. But we've never seen a slowdown in spending since WW II. That is big news.

The budget deficit is now down to only 4.2% of GDP. Just a few years ago we were all worried that the runaway budget deficit would be the ruin of us all. Now the deficit is back down to levels that are easily manageable. To be sure, entitlement spending promises to reverse this in coming years, but for now things are under control and entitlements are not cast in stone.

This is very good news because it all but eliminates the rationale for higher tax rates, and it has resulted in a serious shrinkage of the relative size of the federal government, from a high of 24.4% of GDP in 2009 to only 20.7% today. That's a whopping 15% reduction in the size and burden of government in just under four years. This gives the private sector some badly-needed breathing room, and that's a good reason to expect somewhat stronger economic growth in the years to come.