Federal deficit drops more than $1 trillion

Thanks to the U.S. economy's inherent ability to grow in spite of tremendous adversity, and thanks to a divided Congress that has kept spending from increasing, the federal budget deficit in the past five years has dropped by more than $1 trillion, from a high of almost $1.5 trillion to just $436 billion in the 12 months ended November, 2014. This is fantastic news.

As the chart above shows, federal spending has not increased at all since mid-2009. This is simply remarkable—we've never seen anything like this, and no one expected it to happen. Meanwhile, federal revenues have been increasing steadily—up over 8% in the past year—thanks to more jobs, rising incomes, strong corporate profits, and capital gains realizations.

Relative to GDP, the federal deficit for CY 2014 should be about 2.4%, based on my calculations. Five years ago it was over 10%! A 2.4% budget deficit is not a problem by any stretch of the imagination. Heck, at this rate we are going to be seeing surpluses starting by 2017.

Keynesians look at these numbers and tremble, because a decline in the deficit of this magnitude spells tremendous austerity. Supply-siders, in contrast, look at the decline in spending relative to GDP as a huge tax cut (federal spending is now about 20% of GDP, down from a high of 24.4% five years ago). A shrinking federal government and a rapidly shrinking deficit dramatically reduce the expected future burden of taxation. That, in turn, boosts confidence and should result in more investment, more jobs, and more growth in the years to come.

Another reason to cheer: there is absolutely no reason to consider any tax hikes. Indeed, Congress now has plenty of latitude to entertain beneficial tax cuts. If Obama wants to leave a positive legacy, he would be more than foolish to veto any bill that cut taxes.