There Goes the Budget Deficit

So much effort has been put into worrying about the government's budget deficit and rising debt that we forgot things can, in fact, get better. 

That's what happened this year. In January, the Treasury forecast the government's finances in fiscal 2013 would look like this: 

Tax revenue

$2.71 trillion

Spending

$3.68 trillion

Deficit

$972 billion

Instead, the actual amount was this: 

Tax revenue

$2.78 trillion

Spending

$3.45 trillion

Deficit

$680 billion

Source: Treasury. 

With fiscal year 2013 in the books as of this week, spending came in $220 billion below budget, taxes were $70 billion above budget, and the budget deficit was $292 billion below forecast. That is remarkable improvement. 

Whenever I point this improvement out, a commenter invariably shouts, "Oh, whoopdeedoo. We still have a $680 billion deficit. You think that's OK?"

Well, yes. Let me explain.

When measuring government debt and deficits, what matters most aren't the raw numbers, but the numbers in context of the size of the economy and economic growth. For the same reason that a $100 million mortgage would be no big deal for Bill Gates, a country as rich as the United States can handle a lot of debt without much problem. 

Since a government has an indefinite lifespan, it can run in the red forever if annual deficits match, or are below, nominal GDP growth. As long as it does, debt-to-GDP does not rise, and debt burdens do not increase. (This doesn't apply to households, which eventually retire and die. That's why comparing a government budget to a household budget is logically flawed). From 1940 to 2000, the government ran a deficit in all but eight years, with an average deficit equal to 3.2% of GDP. That was fine, because nominal GDP growth averaged more than 6% during that period. Even though we racked up about $5 trillion in debt, the nation's debt burden fell by half. 

This year's budget-deficit improvement brings us to an important milestone: A $680 billion deficit equals 4.1% of GDP. That's below the economy's 4.2% nominal growth rate achieved in the last year.

In other words, we are now at a point where debt-to-GDP is no longer rising.

Things change fast, especially when the economy slows, but for now, our short-term deficit problem is gone. Long term, it gets scary as entitlements grow; but even those forecasts are under question as health-care cost growth comes in far below expected. It is Halloween, but here's one thing scaring me less and less: the nation's finances. 

For more, check out:

Or, read our report, "Everything You Need to Know About the National Debt." It walks you through with step-by-step explanations about how the government spends your money, where it gets tax revenue from, the future of spending, and what a $16 trillion debt means for our future. Click here to read it. 


Read/Post Comments (14) | Recommend This Article (17)

Comments from our Foolish Readers

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  • Report this Comment On November 01, 2013, at 12:15 AM, ChairmanMAObama wrote:

    That would make me smile if it wasn't for SSI and the real near future massive debt.

  • Report this Comment On November 01, 2013, at 11:22 AM, sagitarius84 wrote:

    Morgan,

    I really love reading your common sense articles! Keep up destroying others faulty misjudgments man!

  • Report this Comment On November 01, 2013, at 6:51 PM, jeepshepard wrote:

    And if interest rates rise...... then you have greater payouts on the national debt, eroding the GDP gains.

  • Report this Comment On November 02, 2013, at 3:10 AM, kyleleeh wrote:

    <<And if interest rates rise...... then you have greater payouts on the national debt, eroding the GDP gains. >>

    Interest rates do not rise arbitrarily. For interest rates to rise there would have to be increased demand for borrowing, which would cause increased spending, which would stimulate Higher GDP growth. Also the job market would have to become a lot better before consumers felt comfortable borrowing again. All of these things increase tax revenue and keep deficits down, not up.

    Japan has had low interest rates for 20 years now, because nothing has happened that would cause interest rates to go up in that country.

  • Report this Comment On November 02, 2013, at 7:46 AM, MartyTheCanuck wrote:

    @kyleleeh

    And how is Japan debt ? Worrying or not ?

    @Morgan

    4.2% nominal growth ? Can you explain the difference between nominal growth and the usual GDP growth that we hear about all the time and is much lower ?

  • Report this Comment On November 02, 2013, at 7:56 AM, TMFHousel wrote:

    Marty,

    Nominal GDP growth is the dollar amount the economy grows. So, GDP was $16.01 trillion last year, and it's $16.7 trillion this year. That's 4.2% growth. Real GDP -- the lower figure used more often -- is adjusted for inflation. Nominal GDP is important when measuring things like real debt burdens; real GDP is relevant when measuring standard of living.

    -Morgan

  • Report this Comment On November 02, 2013, at 10:20 AM, MartyTheCanuck wrote:

    Thanks Morgan.

    We often read about debt as a percentage of GDP. When deficit is 4.1% of GDP and nominal GDP growth is 4.2%, does that mean that debt as percentage of GDP will stop growing ?

  • Report this Comment On November 02, 2013, at 10:40 AM, plowhandle wrote:

    With the current low borrowing costs, now is the time for the fed govt to begin repairing our crumbling infrastructure. Doing so would increase employment and taxes paid and help reduce the deficit as well as help keep USA competitive.

  • Report this Comment On November 02, 2013, at 11:29 AM, Mathman6577 wrote:

    Interest on the debt is low now but will probably go up when rates increase down the road. Therefore, adding any amount to the debt load is a bad thing. We need to think about lowering the deficit to zero not patting ourselves on the back about deficit as % of GDP going down.

  • Report this Comment On November 02, 2013, at 10:19 PM, kyleleeh wrote:

    <<@kyleleeh

    And how is Japan debt ? Worrying or not ?

    >>

    I'm never worried about any nations debt as long as it's denominated in a currency that they have the ability to print to more of. It's bond holders that suffer under that situation, not the bond issuers.

    It's only nations like Greece that have debt denominated in a currency they don't control that get into trouble with their debt.

  • Report this Comment On November 03, 2013, at 8:49 AM, A2Matty wrote:

    This is great, you killed the household comparison argument!!! or did you??? Sure households go away and governments don't - ask the USSR. If you think of that in a different direction though, our debt doesn't go away, the people who accumulated it and benefited from it do!!! So yippee for us, we can keep wasting money and then just die. This gets back to the Keynesian school's rationale that ends before you actually have to pay back anything.

    Remember, when Keynes was asked what happened "in the long run?" he responded with the same premise you've argued for - "it doesn't matter we'll all be dead."

    The fact is we could rebuild every NFL stadium every month with the amount of money we spend to service our debt - and have money left over to buy hot dogs. That is with interest rates maintained at a low rate. What happens when people stop buying our debt or worse, our dollars?

    While we can spin numbers and argue that when we said "100% of debt to gdp was where the death spiral starts" (alan greenspan) was actually a miscalculation (see spain/Portugal/Greece), if we intend to maintain credibility internationally, excessive debt (and ours is) does not help. I could easily point to a room full of business students in China rolling out belly laughs when Timothy Geitner spoke to them and said the "dollar was strong."

    Sure things got better, who knows, in 10 years maybe we see a surplus, maybe sooner. But with politicians intent on handing out freebies to ensure re-election, making excuses in any fashion for not addressing the debt like adults is simply inane.

  • Report this Comment On November 03, 2013, at 1:05 PM, RxPro wrote:

    I think ultimately the point both sides should get from this article is that, yes our deficit was better than expected, but no we aren't shrinking our debt yet.

    Good debt update article though because $700B is certainly better than $1T in debt!

  • Report this Comment On November 03, 2013, at 3:46 PM, SkepikI wrote:

    Morgan: One of the persistient problems with measuring economic activity is the inadequacy of GDP. While I do not believe GDP to be a proper or even appropriate measure of actual economic growth, I will throw this theoretical argument at you just for thought purposes:

    As I recall, GDP contains government expenditures as an element of its "calculation" (I use the term loosely). If the entire growth of GDP is made up of Government spending -yes I know thankfully this year its not- then GDP growth will not keep runaway government spending from reaching a bitter end. The idea that increasing GDP is a panacea or perpetual motion machine for the economy, allowing debt to go anywhere it will is exceedingly dangerous to your economic health and to a lesser extent mine. We faced this in the late 70's and early 80's when J. Carter, the worst administration in my lifetime tried to prove this disconnect existed. Inflation ate us alive. Fortunately, we wised up quicker than the current crop of voters.

    The isolation of Government spending, debt and deficits from inflation, economic growth and consequences is a myth that has proven elusive over the centuries. I know you are NOT making this explicit argument, but that's where your logic leads.....

  • Report this Comment On November 03, 2013, at 3:50 PM, SkepikI wrote:

    ^ And that completely ignores the argument about every government $ of spending being economically advantageous. Some of it is simply wasteful. Others are actively oppressive to economic activity, and SOME are outright crooked.

    But I wont accuse you of this, or the MF, it is a distraction from the foolishness (ha) of pretending 680 Billion deficits are trivial.

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