The Incredible Shrinking Deficit

According to an LA Times article in 2011: "Some 75% of respondents said they were following the [California] budget debate, yet only 16% were aware that state spending has shrunk by billions of dollars over the last three years."

There may be something similar happening now at the federal level. Poll after poll will confirm that Americans are worried about the budget deficit. But how many of them know it's shrinking fast?

The Treasury Department issues reports on monthly spending and tax receipts -- a version of the government's income statement. Tally up the last four years, and you get this:

Source: Treasury Department.

Many have pleaded with the government to cut spending. Far fewer, I think, know that the government spent less over the last 12 months than it did during the same period two years ago. Adjusted for inflation, the government spent the exact same amount over the past 12 months as it did during the same period five years ago, before the current administration came into office.

If you just look at the first three months of the year, which is guided by the most recent deficit-reduction policies, the numbers are even better for deficit hawks. Compared with the first three months last year, federal spending is down 9%, tax receipts are up 14%, and the deficit is down 32%.

Goldman Sachs analyst Alex Phillips recently wrote:

The federal deficit continues to shrink. Through the first six months of the fiscal year, revenues have come in higher than expected, while spending has come in lower than expected. As a result we are lowering our deficit forecast for the current and next two fiscal years.

Earlier this year we lowered our FY2013 deficit forecast from $900bn (5.6% of GDP) to $850bn (5.3%). In light of recent trends, we are lowering it again to $775bn (4.8%) ...

We expect the improvement to continue for the next few years. Although we had already expected additional cyclical improvement and residual fiscal policy tightening to reduce the deficit further in 2014 and 2015, we have reduced our estimates a bit further, to $600bn (3.5% of GDP) and $475bn (2.7%).

The most important figure here is the deficit as a share of GDP, because as long as a government's deficit is lower than annual economic growth, it can run in the red forever while actually lowering its debt burden (people overlook this because it doesn't apply to households). Since 1930, the government has run an average deficit equal to 3.2% of GDP each year.

Goldman now estimates the deficit as a share of GDP will total 4.8% this fiscal year, and 3.5% next year. Over the last year, GDP grew by 4%. If growth stays pat and Goldman's estimates are right, the nation's debt-to-GDP ratio will stop rising as soon as next fiscal year (which begins this October).

Long term, the largest budget issue is the cost of health care its impact on Medicare. It will be a mammoth problem if not addressed. But the short- and medium-term budget outlook is likely far tamer than most imagine. Just like California in 2011, there is a gulf between perception and progress. 


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  • Report this Comment On April 22, 2013, at 9:35 AM, OnTheContrary wrote:

    Most of the apparent improvement over the last six months is due to fiddling with tax policy. The anticipation of higher dividend and cap gains taxes produced a surge of fat special dividends in the last calendar quarter of 2012, and meanwhile the real tax increases this year, affecting all taxpayers, have yet to be reflected in tax receipts. Furthermore, Goldman's simplistic extrapolation of past data into the future fails to take account of the ongoing China and European slowdowns, not to mention the continued fragility of the world financial system. One year does not a trend make.

  • Report this Comment On April 22, 2013, at 10:12 AM, TMFMorgan wrote:

    <<Goldman's simplistic extrapolation of past data into the future fails to take account of the ongoing China and European slowdowns, not to mention the continued fragility of the world financial system>>

    How do you know they're not considering a slowdown?

  • Report this Comment On April 22, 2013, at 10:57 AM, mdk0611 wrote:

    What we do know is that there was a tremendous spate of special dividends, front loaded bonuses and recognition of long term capital gains in the 1st quarter of the current fiscal year. That will not be replicated in the last 3 quarters, although revenues might rise on a comparative basis to the prior due to tax increases.

    I also think your analysis would be better if you compared revenues, spending and deficits over a longer period of years. "Compared to what?" is my initial reaction to the fact that the 2012-13 deficit might be smaller than a few immediately preceding years.

  • Report this Comment On April 22, 2013, at 11:04 AM, TMFMorgan wrote:

    Although as a TPC pointed out: "About half of all corporate dividends are paid to investors that don't pay tax -- pensions, non-profits, foreign entities, and the like."

    The largest bump in tax revenues is the expiration of the payroll tax cut.

  • Report this Comment On April 22, 2013, at 11:12 AM, mdk0611 wrote:

    But little to none of the increase capital gains would be attributed to tax exempt shareholders. Outside of normal balancing of portfolios they had no reason to recognize gains. And none of the accelerated bonuses were tax free.

    And while the payroll tax might have produced the largest increase in revenues, a nearly 50% increase in the tax on capital gains and dividends and a 14% increase on wages certainly was enough to change behavior.

  • Report this Comment On April 22, 2013, at 11:30 AM, SkepikI wrote:

    Morgan- the deficits are bad enough that unexpected shrinkage is a good thing. But that's not the WORST of it...the worst of it is the fraud, waste, lack of frugality and outright theft/misappropriation of the borrowed money the Feds are spending. It is actually worse than bulldozing it all into a pile and lighting it afire because we are sending resources and support to the crooked and disastrous parts of our economy. Imagine if your neighbor were funding a large kitchen waste composting facility in your neighborhood... the smell alone would be dropping your property values and making your life worse. You would likely have the gendarmes after him or your shotgun out to get him to stop. Our government is doing this figuratively in many different ways and messing up our economy and lives and it has to stop. BTW, they are ACTUALLY doing this to a small town in Oregon, N. Plains where the kitchen scraps from all of Portland were messing up the air, courtesy of State, Federal and local government....

    But there are so many more examples people could give you it hurts ( I think I am getting nauseous...)

  • Report this Comment On April 22, 2013, at 11:39 AM, TMFMorgan wrote:

    <<And while the payroll tax might have produced the largest increase in revenues, a nearly 50% increase in the tax on capital gains and dividends and a 14% increase on wages certainly was enough to change behavior.>>

    The article chooses to give more weight to what actually happened than what theoretically could have happened.

    More than half of the bump in tax revenue is directly attributable to the payroll tax cut expiration.

    Tax revenue in December 2012 was $29 billion more than it was in December 2011. But revenue in July 2012 was $25 billion more than it was in July 2011, so the idea that December's gain was all -- or even mostly -- due to accelerated capital gains doesn't hold much water.

  • Report this Comment On April 22, 2013, at 11:46 AM, jimslag wrote:

    The deficit may be going down but the debt keeps going up. As long as we are running a deficit, will keep adding to the debt, which last I looked was around $17T and getting bigger. This is the amount that we have on the credit card and the balance keeps going up, so our interest keeps going up. Which, on a side note, is why "Helicopter" Ben Bernanke is keeping rates at 0%. If he didn't, we would definitely be in a hurt locker on our interest that we have to pay out.

  • Report this Comment On April 22, 2013, at 11:59 AM, USAisaRepublic wrote:

    shrink, shrank, shrunk. Write a good news story when you get to the end of the federal debt that is!

  • Report this Comment On April 22, 2013, at 12:00 PM, obamasafool wrote:

    Just a thought bring the blue line (spending) down to the green line (receipts) and there would be no red line. its only fair that all share in the reductions.

  • Report this Comment On April 22, 2013, at 12:01 PM, mprsox wrote:

    STOP the insanity! You are grossly misleading people! The DEFICIT is not the same as the DEBT!

    total debt plus UNFUNDED LIABILITIES are still growing! we are in NEGATIVE SPENDING mode, we need to get in POSITIVE mode to even make a dent in the long term DEBT. We can "run in the red forever"??? in what parallel universe?

    more financial foolery, Motley Fool should be ashamed of themselves.

    This article is misleading at best.

  • Report this Comment On April 22, 2013, at 12:03 PM, TMFMorgan wrote:

    <<The DEFICIT is not the same as the DEBT!>>

    Right. The article never conflates the two.

  • Report this Comment On April 22, 2013, at 12:05 PM, ETFsRule wrote:

    Good article. Deficits are cyclical, so it's not surpising that the deficit has continued to drop.

  • Report this Comment On April 22, 2013, at 12:06 PM, hattrix1111 wrote:

    WOW!!! Starting to think you all have an agenda. First you post the blatant lie about US made cars, now this garbage. Spending has dropped 3%, while INCOME has increased by 8%. The spending is largely attributable to Obama plans running out from his first term or people no longer being eligible, NOT from spending cuts. The INCREASED revenue is from TAX HIKES!!! WOW!!!

  • Report this Comment On April 22, 2013, at 12:10 PM, bonernsweatpants wrote:

    Read up on modern monetary theory and chill out everyone !

  • Report this Comment On April 22, 2013, at 12:15 PM, garyegray wrote:

    What a misleading article. The deficit has shrunk, yes, but is still over $1 trillion annually.

  • Report this Comment On April 22, 2013, at 12:29 PM, OhhReally wrote:

    Interesting time period. The 2009 Budget submitted by Bush had a $600 B deficit. Obama came into office in January 2009 and added $850 B as a one time "stimulus" raising outlays to your noted $3.7 Trillion. BUT he kept that stimulus in his outlays for the next 4 years. Thus, he FRONT LOADED his spending, on purpose, exactly so in the future you would get a silly analysis like this claiming the deficit and spending is shrinking. If you add in the 2008-2009 numbers you'd get a completely different picture.

  • Report this Comment On April 22, 2013, at 12:42 PM, OhhReally wrote:

    As an additional note: Take Bush's last budget, and grow the spending at the same rate as revenues. Now your spending is more the historical norm and would be on your graph: 2.85, 3.05, 3.1, 3.3. Deficits would then be: .6, .6, .6, and .6, for a total of $2.4 trillion instead of $5.5 trillion. I'd trade off your "incredible shrinking deficits" for the much lower debt.

  • Report this Comment On April 22, 2013, at 1:36 PM, notsoblind wrote:

    Again i don't know what they cut?

    did they cut police force but not politicians security?

    did they cut infrastructure and road projects and not government vehicles?

    this article is full of garbage,it means nothing without facts..

  • Report this Comment On April 22, 2013, at 2:16 PM, damilkman wrote:

    jimslag is right on. The deficit is lower because the bonds used to finance the deficit are very low. If interest rates ever approached the 30 year running average the cost to finance the debt would increase faster then the increase in revenue from a booming economy.

    This of course leads to the crazy question can the federal government afford a recovery? :(

    Also left out completely is the impact of health care reform on the budget. You cannot add millions of new people to the health care rolls and expect there to be no impact. It is as if the author believes everything is a zero sum gain.

  • Report this Comment On April 22, 2013, at 2:39 PM, luckyagain wrote:

    "Earlier this year we lowered our FY2013 deficit forecast from $900bn (5.6% of GDP) to $850bn (5.3%). In light of recent trends, we are lowering it again to $775bn (4.8%) ..."

    So President Obama has succeeded in recovering the economy from the Great Recession. I guess all of the Republicans will still rant about increasing the taxes on the richest 1%. Oh well, things are getting better if it is too slow for most Americans.

  • Report this Comment On April 22, 2013, at 2:43 PM, Ostrowsr wrote:

    A 2.7% deficit projection for 2015 is unacceptable. We need at least $4 Trillion in revenue / spending cuts now. Or we should vote out those in DC who are not doing their jobs. Let's start in 2014 elections. Vote out the ones refusing to compromise if they fail to do a good deal in the next 6 months.

  • Report this Comment On April 22, 2013, at 2:46 PM, gmb92 wrote:

    In March, 2009, the CBO estimated the baseline deficit to be $1.67 trillion, before any new initiatives were considered. That is the deficit President Obama inherited. We've come a long way.

  • Report this Comment On April 22, 2013, at 3:00 PM, cityperson wrote:

    The national debt clock does not show the shrinking, just growing and the unemployment and other things showing on the debt clock growing..

  • Report this Comment On April 22, 2013, at 3:04 PM, TMFMorgan wrote:

    Many of these comments can be summed up by Andy Rooney's observation that "People will generally accept facts as truth only if the facts agree with what they already believe."

  • Report this Comment On April 22, 2013, at 3:11 PM, TMFAimeeD wrote:

    ^ which brings us back to your opening paragraph.

  • Report this Comment On April 22, 2013, at 4:16 PM, toastedseeds wrote:

    Generally I don't mind running a deficit or a debt load as long as it's a reasonable number. Someone making $25k can not borrow as much as someone making $100k. If your incopme is growing at 4% a year ou can indeed run a deficit and a higher debt load. Problem will come when we can't grow fast enough. The earth is finite. There is a limit to the number of cutomers that businesses will be able to sell to. Growth is going to slow. When? No idea.

    You could compare PE to govt Debt. Fast growing compaines have a high PE. Slow growing compaines have a low PE. What do we do with all that debt when GDP growth stalls?

    ts

  • Report this Comment On April 22, 2013, at 9:38 PM, OhhReally wrote:

    gmb92 is a fool. March 2009 was 2 months into Obama's term where he already added $850 Billion thus getting the CBO's $1.67 trillion. If Obama had "inherited" that amount, per blind liberals believe, the total deficit would then be $2.52 trillion, not the $1.5 noted in the graph. Liberals never let facts get in the way of their delusions and their re-writing of history to cover their tracks.

  • Report this Comment On April 22, 2013, at 9:49 PM, Estrogen wrote:

    Morgan you are one of my favorite writers at Fool for your Macro economic articles. We all know that deficit and debt have 2 very different meanings. The national debt nonetheless stands at over 100% of GDP. The worst it has ever been in this country was 1944 era when it was at ~150%. For perspective, Japan is the worst in the world at ~190%.

    I have no idea how this one plays out. A good site for checking out other countries debt/GDP: http://www.nationaldebtclocks.org/debtclock/unitedstates

  • Report this Comment On April 22, 2013, at 11:23 PM, thetortoise487 wrote:

    I typically don't post, but Morgan, great article. Your Andy Rooney quote is spot on. I always enjoy and look for your articles.

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