Thursday, October 31, 2013
Thanks to four years of zero growth in federal spending (the single best achievement of our currently divided government), strong tax receipts (mostly due to economic growth, with an assist from higher tax rates), the U.S. federal budget deficit has declined from a high of just over 10% of GDP in 2009 to just over 4% of GDP today. This calls for a huge sigh of relief.
The first chart showed spending and revenues as a % of GDP, while the chart above shows nominal spending and revenues. Federal spending has surprised nearly everyone by failing to grow over the past four years, while tax revenues have risen by 37%.
Accelerated realizations of capital gains and income were clearly a factor boosting revenues in the latter part of last year and last April, but as the chart above shows, the increase in tax revenues has been ongoing for the past three years: nearly every month has seen higher revenues on a year over year basis. The fundamental driver of revenue growth is economic growth: more people are working every month, and incomes are rising; a growing tax base is predictably generating higher revenues. This has happened in every recovery.
The budget deficit is still very high from an historical perspective, but it is also well within the range of what is manageable and sustainable. If current trends were to continue, the budget would be balanced within the next 3 years! (Interesting note: in a January 2011 post, I suggested that the improvement already evident in the budget outlook at that time could result in a balanced budget by 2016. Things have evolved accordingly.)
There's lots of good news to be found here. On the one hand, Congress has managed, for whatever reason, to rein in the growth of federal spending. Four years ago it was out of control, but now spending is back within historical ranges relative to GDP. On the other hand, we've seen a significant amount of fiscal retrenchment in the past four years, yet the economy has managed to grow. Keynesians four years ago would have been apoplectic at the thought of reducing the deficit from 10% of GDP to 4% of GDP in four short years, but it turns out the sky has not fallen. Looking ahead, Congress now has more freedom of action because the budget is in much better shape. If done right, fiscal policy could become genuinely stimulative (e.g., simplifying the tax code and reducing marginal rates) in coming years.
Posted by Scott Grannis at 12:08 PM