The Budget Deficit Is Collapsing

Raise your hand if you saw this coming: The federal budget deficit is collapsing. I mean really, it's in freefall.

None of you?

Let this be a lesson of how fast things change.

The Congressional Budget Office lowered its estimate of this year's budget deficit to $642 billion, $200 billion lower than it estimated in February, and down from $1.1 trillion last year. As a share of GDP, the deficit has declined more than 60% since 2009. 

Three things are happening:

  • Tax revenue is coming in much higher than expected, thanks to a stronger economy.
  • Spending is coming in lower than expected.
  • Fannie Mae and Freddie Mac are repaying tens of billions of dollars in bailout funds.

Add it all up, and here's the CBO's new forecast:

More important than the raw number is the deficit in proportion to the size of the economy. As long as an economy runs a deficit smaller than nominal GDP growth, its debt-to-GDP ratio declines. With CBO's updated forecast, we're already about there. Nominal GDP has increased by an average of 3.9% over the last few years. This year's budget deficit is on track to be about 4% of GDP, which would keep the national debt relative to the size of the economy flat. 

Here's another way to think about it: Since 1980, the budget deficit has averaged 3.5% of GDP. This year, we'll be at 4%. 

 In short, CBO expects national debt to GDP to be lower ten years from now than it is today:

Over the long haul, the biggest budget threat is runaway health care costs. But here, too, things are getting better. Health care cost growth is slowing to levels few thought possible, recently hitting a 50-year low. As Annie Lowrey of The New York Times wrote last week:

Major new studies from researchers at Harvard University, the Henry J. Kaiser Family Foundation and elsewhere have concurred that at least some of the slowdown is unrelated to the recession, and might persist as the economy recovers. David M. Cutler, the Harvard health economist and former Obama advisor, estimates that, given the dynamics of the slowdown, economists might be overestimating public health spending over the next decade by as much as $770 billion.

Revised forecasts should reinforce the idea that forecasting is really hard, and subject to change. The fact that February's forecast was revised by more than 20% is a good reminder that the current forecast may change dramatically, too.

But we've been through a decade when almost all the news about the deficit was bad, worse, and terrifying. People may have forgotten that there can be positive surprises. And that those positive surprises can be just as shocking and jaw-dropping as they were when things were getting worse. 


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  • Report this Comment On May 15, 2013, at 10:02 AM, DrP79 wrote:

    Since 1980, the budget deficit has averaged 3.5% of GDP. This year, we'll be at 4%.

    So while this year the budget deficit will be about MERELY 1/7th LARGER than the average for the last 30 years, we should celebrate?

  • Report this Comment On May 15, 2013, at 10:24 AM, QuarkHadron wrote:

    I'd like to get happy about our declining deficit, but the problem lies in the debt.

    So, great, we're only chalking up 2/3rds of a trillion 'deficit' each year - but that means that the 'debt' is growing at 2/3rds of a trillion. To me, that is like hearing 'the cancer is spreading a little slower. It is still gonna kill you, but you have a little longer." I can't say that sounds like news I can get real excited about.

    The CBO is independent and all that, which on the surface should be comforting, except our politics are so stratified I can't buy into 'independent' in any political body. Just look at the news to see how many 'independent' government bodies have been acting politically. Plus, they really are just trying to predict the future - and great margin of error is inevitable.

    The main, main, main thing that will blow up projections is inflation. Right now the Treasury is paying record low interest on the debt. When interest rates start to rise, the percentage of interest on the debt being paid compared to the tax revenues coming in will climb. Already adding to the debt through deficit spending and then we are going to deal with the reduced revenue available for spending because of the amount going to pay interest on the debt. Which of course means a larger deficit since we won't reduce spending.

    It is a scary, scary cycle. Get ready to say hello to 'austerity measures.' All the current politicians are hoping for is that it holds off until they finish their political careers and have enriched themselves enough to be insulated from the pain.

  • Report this Comment On May 15, 2013, at 1:05 PM, mdk0611 wrote:

    Yes, tax revenues are higher thus far in 2013. Some of the reasons, the end of the payroll tax holiday, higher rates and the beginning of the Affordable Care Act taxes on wages and unearned income will continue to be applicable. But what will not be replicated are the 1 time bumps due to the recognition of capital gains, accelerated dividends and accelerated bonuses. So the possibility of tax revenues coming in much higher than expected on an ongoing basis is not likely, particularly for fiscal 2014.

    Red Jahncke's op-ed in yesterday's WSJ discusses this in more detail from an historical perspective.

  • Report this Comment On May 15, 2013, at 1:05 PM, BMFPitt wrote:

    A cursory look at the numbers seems to imply that the CBO is projecting (or, to be fair, that they were told to project - they're usually good about pointing that stuff out in their own reports) that borrowing costs will remain at today's absurd low rates indefinitely.

  • Report this Comment On May 15, 2013, at 1:09 PM, seattle1115 wrote:

    @QuarkHadron: You equate debt with cancer. Why? Are you under the impression that federal debt is bad per se? You would be entitled to hold that opinion, of course, but it would be an idiosyncratic one based, apparently, on a very different understanding of economics than is held by most folks.

  • Report this Comment On May 15, 2013, at 1:57 PM, QuarkHadron wrote:

    @Seattle

    I hold that accelerating debt where the interest paid becomes a greater and greater part of spending is unsustainable and is like a cancer sucking the life from a healthy body, yes. As interest paid rises, revenue must increase or less revenue remains for other spending. Which in turn raises the amount of revenue spent on interest payments. If you don't the cancer analogy, how about Alice in Wonderland?

    “My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.”

    I often see U.S. debt poo-poo as unimportant and statements made that we are not like Greece and can't go under. But I rarely see an understanding of why that is - what makes the U.S. different. The reason it is currently true is because the U.S. dollar is the primary international reserve currency. (Easier to look it up than me to explain in detail.) But basically, we are insulated because most other countries buy/sell U.S. dollars to conduct transactions between each other. The problem is, that insulation is not guaranteed to last. The Dollar wasn't always the reserve currency - actually only a recent event historically. And there are already many other countries working to change it for the future: BRIC (now BRICS - they are growing) and OPEC for example. These countries compare our actions to those of a spoiled child abusing our privilege. And are calling to give us a well deserved spanking. If we continue the way we are, we will only add fuel to the call to no longer use the U.S. Dollar as the reserve currency.

    So, no, we cannot continue to ignore our escalating debt any more than any of the countries we see implementing austerity measures. (We are special, but not that special. ) We could avoid it by starting now to implement measures gradually and less painfully. But as long as we continue to believe our own lie that debt doesn't matter, we won't change until we go the route of painful 'austerity.' It may be years further out - like the next generation or their kids - but it will come to be if we don't accept the truth. Personally, I'd rather take some cuts now than put more painful cuts onto my children and grandchildren.

  • Report this Comment On May 15, 2013, at 2:20 PM, TMFMorgan wrote:

    <<So, no, we cannot continue to ignore our escalating debt any more than any of the countries we see implementing austerity measures. (We are special, but not that special.)>>

    We're special in the sense that we have our own currency and most of them don't. That's a tremendous difference when looking at debt burdens.

  • Report this Comment On May 15, 2013, at 2:53 PM, mdk0611 wrote:

    @Seattle - Water is needed to sustain life, but too much water can endanger life.

  • Report this Comment On May 15, 2013, at 7:12 PM, Gfulmore wrote:

    While it is nice to see the announcement from the Congressional Budget Office that our 2012/2013 fiscal-year deficit will come in at less than earlier projected, the number now given by the CBO for the current fiscal year, $642 billion, is not a good one. In fact, just through the period October 1, 2012, through April 30, 2013, the annual deficit had already accumulated $763 billion. The fiscal year started at $16.066 trillion; as of April 30, it was $16.829 trillion. This can be verified at www.treasurydirect.gov.

    So, why must the CBO continue to be dishonest with the American public, as it has been for decades, about the true value of the annual deficit? Why can it not admit that the numbers it has given in the past and now do not include “off-budget” values? Who are they kidding? We can do the math by simply comparing ending total federal deficit values with starting values.

    All this got in full swing, of course, under the administration of George W. Bush, when it started reporting deficit values of no more than half the real annual deficit. This, of course, was in the same era that we were told that “Deficits do not matter.” The federal debt increased 85% under George W. Bush in his eight years in office. It has now increased another 58% under President Obama, as of May 1, 2013.

    A real tragedy is that the CBO has not gone back to correct the mistakes of the past. For example, it still reports the deficit for the 2007/2008 fiscal year to be less than $500 billion, when we know the real deficit was more than $1 trillion! Why must the CBO continue to report annual deficits during the Bush administration that are not correct? These should be updated, and true federal deficits should be reported now and in the future. The American public deserves the truth!

  • Report this Comment On May 20, 2013, at 12:10 PM, SkepikI wrote:

    Morgan: a 200 billion reduction in a nearly trillion dollar deficit is a collapse? really? Call me when its a 690 Billion reduction and we run a surplus cutting into our extremely burdensome debt. If interest rates normalize, the escalation in debt interest could become a crushing weight.

    Maybe there is enough long term debt at low rates to avoid the hammer, but sooner or later, you have to issue new debt at higher rates to refund maturing debt. THAT's when the piper changes the tune....

  • Report this Comment On May 21, 2013, at 4:00 PM, sheldonross wrote:

    The last chart tells the true story the total debt is projected to be around 80% of GDP for the next decade. Historically (other than WWII) it appears to be less than 50%.

    Additionally, as mentioned, the CBO estimates are based an interest rates being relatively low. The debt is still a time bomb waiting for the bond market to cause a spark.

    Article could be paraphrased "We're still losing money, but not quite as fast as before!. YAY!"

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