Drop in U.S. deficit going mostly unheralded

07/30/2013 11:14 PM

07/30/2013 11:14 PM

Don’t let the U.S. budget deficit smack you on the head on its way down.

With surprisingly little notice in the press or boasting by deficit doves, this fiscal year’s deficit is on track to come in at around $700 billion.

That’s a $500 billion drop

in just one year

.

A few more numbers, sliced by Daniel Gross, the economics writer for The Daily Beast:

This June the government ran a surplus of $116.5 billion compared with a nearly $60 billion deficit in June 2012. It took in revenues of $286.6 billion compared with $260.2 billion last year, and spent $170 billion compared with $320 billion last year.

June’s revenues were juiced by a nearly $60 billion dividend payment from the taxpayer-saved Fannie Mae, and some spending that usually occurs in June was moved forward to May.

But a look at how we’ve done for the first nine months of fiscal 2013 (the fiscal year begins in October) shows a definite trend. Revenues are up 14.5 percent compared with last year while spending has dropped almost 5 percent.

So for the first nine months of the fiscal year the deficit is down 43.4 percent compared with last year.

Deficits are what economists call pro-cyclical: Revenues shrink during recessions, and spending on benefits and bailouts rises. Deficits balloon.

When the economy improves, revenues rise, bailouts end, and benefits are pared back or no longer needed. Deficits shrivel.

This year various factors are supercharging the deficit downdraft. With two wars sputtering to a close and a bite from the sequestration, defense spending is off $33 billion, or nearly 7 percent.

The sequestration has also crimped discretionary domestic spending. And the Jan. 1 income tax increase and end of the Social Security payroll tax holiday have added billions to revenues.

One positive reason for the shrinking deficit is that the economy is improving. More people — about 2 million — are working now than a year ago. So they’re paying taxes. For the first nine months of the year, individual income taxes have amounted to $992 billion, up $152 billion.

What to make of all this?

On a practical matter, a declining deficit may drain some of the passion over the coming battle to raise the debt ceiling. Maybe we’ll be spared a debt ceiling death match and we’ll just have to endure the usual hypocrisy from both parties over the issue.

There’s even talk in Washington that the easing of the deficit will give both parties room to work on that elusive grand bargain to reform taxes and entitlement spending.

The falling deficit should also be proof positive to doubters that the economy is indeed improving.

So the problem with the economy is not that it’s not growing and creating jobs. It’s that the jobs being created so far don’t match the quality of most of the jobs destroyed in the Great Recession. They’re relatively lower paying or part time.

The improving economy does show, however, that you can raise taxes and cut spending without a disaster.

Critics of tax increases never tire in pointing out they can be a drag on growth, while they’re just fine with spending cuts. Critics of the sequestration and its impact on growth ignore the drag that can be caused by the tax increases.

In fact, the end of the Bush tax cuts for the wealthy, tax increases going into effect this year for Obamacare and the end of the payroll tax holiday are almost twice as large as this year’s sequestration cuts.

Lost on the critics of all persuasions is that compared with the $16 trillion annual GDP, the sequestration and tax increases amount to tweaks.

A $16 trillion GDP is 16,000 billion dollars, so $85 billion in sequestration cuts and about $160 billion in tax increases is a 1.5 percent impact on the economy.

But just those small nudges to spending and taxes, amplified by the improving economy, are having a big effect on the deficit. They show that despite stumbles and political warfare, the U.S., as it turns out, is actually making budgetary policy decisions that, well, are working.

As Gross says, they prove that despite the overheated fears and rhetoric from the deficit hawks, the U.S. is not on its way to becoming Greece.

But we’ll see. The test for the U.S. going forward will be to keep the deficit and debt under control as the baby boomers age and Social Security and health care costs skyrocket.

A declining deficit now will give us more debt capacity later when we’ll really need it.

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