Thursday, October 31, 2013

Federal budget outlook continues to improve

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.


Jeff said...

What about Obamacare? I've read it will be adding $500 Billion to the deficit in a few years!

Scott Grannis said...

That remains to be seen.

Benjamin Cole said...

Hard to believe...federal spending as a percent of GDP is less than...the Reagan Years?

And yet, I contend it would be easy to get federal outlays down to 15 percent of GDP....

too many people on disability...too many farmers milking the USDA...too many housing programs etc...a runaway defense-intelligence sector...

bt-commenter said...

And in 3 years, the budget will be balanced, again. As it was after 8 years of Bill Clinton.

Then the Republicans will push for tax cuts again, which will create deficits again, which will be met with the demand that we must cut the out of control government spending, again.

What bugs me about this story is that deficits only seem to be a big issue for Republicans when a Democrat is in the White House. As Dick Cheney memorably said "Ronald Reagan proved the deficits don't matter".

It's like Obamacare, or dare I call it RomneyBamaCare. When the Heritage Foundation proposed the basic idea for RomneyBamaCare it was a very good idea. When Romney did it in MA, it was still a very good idea. When a Democrat did it, it's Communism. The sight of Mitt Romney calling for Obamacare repeal while he was running for President was a magnificent act of deceit and cowardice. He truly deserved to lose that election.

mmanagedaccounts said...

bt-commenter completely missed the spending portion of this equation. He also completely missed who controlled the House after 1994 and who now controls the House, which is where spending begins.

Benjamin has the right idea about cutting even more spending.

The stupid Republicans had it all wrong when they controlled the three branches of government and spent, spent, spent.

The arrogant Democrats have it wrong now, thinking all they have to do is tax people more and more and more, and spend more and more and more.

Unknown said...

How many aging Americans are still working because they need the money just to cover Health Insurance (this goes double for anyone with pre-existing condition(s)) ? All the anecdotal evidence I have encountered is this large group of Health Care consumers are seeing significant savings with ACA (do I hear a great big political "DOH!" sound?). Unemployed/under-employed Young-Invincibles might give this some thought before they complain knee-jerk about premiums. Premiums which are going to be subsidized more likely than not, as most of them work at comparatively low wages. Sounds more like a new variation on Work-for-Welfare where the recipient has a better chance now to live long enough to contribute/payback. That beats Welfare-for-Nothing. Raising the Young in civilized society has always been an expensive undertaking and it is not going to get any less expensive if a society has high-tech aspirations.