Friday, December 10, 2010

Budget update: continued improvement

Although the November federal deficit was larger than expected, these charts show that key measures of Washington's finances continue to show gradual improvement. The budget is still in terrible shape, of course, with a $1.3 trillion deficit over the past 12 months that comes to just under 9% of GDP. But the encouraging signs are that revenues are picking up, having increased 6% over the past year, and at a 10% rate over the past three months. This is resulting—finally—in a modest rise in revenues as a % of GDP. If the economy continues to grow and improves just a little, then revenues should continue to rise relative to GDP even if the Bush tax rates are extended indefinitely. Another encouraging sign is that spending growth has already slowed rather dramatically; spending in the past 12 months was actually 0.5% less than it was a year ago. Spending has increased at a 4.2% annualized rate in the past 3 months, but that is less than the likely increase in nominal GDP.

We don't need higher tax rates to balance the budget, we need an extended period of much slower growth in spending. If revenues were to continue growing at the rate of the past six months, and if spending were to be frozen at current levels, the budget would be balanced within 5 years, with revenues and spending likely to be about 19% of GDP. That would put us back to the levels that prevailed, on average, for most of the postwar period.

UPDATE: To clarify a very important point, higher tax rates are not necessary to raise substantial new revenue. Revenues are already rising at a decent clip, and they should continue to do so as the economy grows and adds new jobs. Thus, it is fallacious to argue that extending the Bush tax cuts represents a "cost" in the form of foregone revenue; or that extending the tax cuts will increase the deficit.


Benjamin Cole said...

Excellent commentary by Scott Grannis, IMHO.
Yes, federal outlays are the problem.
The solution is not what many think--a large fraction of the deficit is run up on spending in rural areas. Each rural state has two Senators--this is a tangle, believe me.
Many programs were launched back when rural areas were poor, and often Democratic. The LBJ days.
These regions have politically moved to the right--but the spending grows every year.
And defense spending, in real terms is at double 2000 levels--in a world where our enemies are armed with homemade bombs, and a few wayward, mentally ill youths.
To be sure, there is fat all around in the federakl government--I think holding federal outlays to 16 percent of GDP is doable. Do we even need a Dep't of Education anymore? Really, I should think a department with a budget of $10 million (not $90 billion) could set up a website with suggested curricula. The DoD needs to be sunsetted, a fresh start. Even Secy Gates complains they are still stuck in the Cold War. USDA? Still necessary? HUD?

Well, one can fantasize....

Public Library said...

Lets not forget the reason we are here. The Federal Reserve printed too much money for too long which created massive distortions in the allocation of capital in the public and private sectors...

Benjamin Cole said...

Public Library-

If the reason for economic performance is monetary, please give us an explanation of Japan.

The yen has appreciated against all currencies long term. Obviously money has been tight in Japan.

If you say other factors play in the picture--fine, But then you must concede other factors play in the picture in the USA too.

Have the results in Japan warranted mimicry?

John said...

"These regions have politically moved to the right--but the spending grows every year."

Yes, it's called fiscal hypocracy.

Anyone seen Paul Ryan this week? Is he bound and gagged and locked in a closet somewhere?