The Deficit Is Vanishing. America Isn't As Broke As You May Think.

The U.S. budget deficit plunged nearly 50% in just one year. See what's behind America's rapidly improving financial condition.

Jan 19, 2014 at 9:39AM

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You can't turn on the TV without hearing of the United States' burgeoning deficit. But while the deficit may be big in absolute terms, looking at it in relative terms reveals that the United States isn't doing as bad as some may want you to believe.

The cold, hard numbers
In calendar year 2009, at the depth of the recession, the deficit was a massive, $1.47 trillion. At the time, it was more than 10% of gross domestic product -- all goods and services produced within the nation's borders.

The United States' fiscal condition has since improved remarkably. Now, just four years later, the American deficit stands at $560.5 billion for the 2013 calendar year, nearly one-third of the deficit recorded one presidential election ago.

And if we look at the deficit in terms of GDP, we find that the 2013 deficit was just 3.6% of 2012 GDP. As of now, 2013 GDP numbers, though more impressive than the 2012 reading, aren't yet out. But the fact is that the deficit, in relative terms, is just one-third the size of the deficit in 2009. And it's nearly half the size of the deficit in calendar year 2012.

Us Deficit

Look at that! The U.S. Treasury ran a surplus in December 2013.

In the last three calendar months of 2013, the U.S. deficit plunged to just $174 billion, down from $293 billion in 2012.

What's behind the drop?
A nation's deficit doesn't drop from $1.06 trillion in 2012 to $560.5 billion in 2013 without some help. Here are the three biggest things behind a falling federal deficit: 

First and foremost, the U.S. government is making a mint from Fannie Mae (NASDAQOTCBB:FNMA) and Freddie Mac (NASDAQOTCBB:FMCC), having collected more than $100 billion from the two mortgage giants in 2013. Fannie Mae and Freddie Mac are currently in government conservatorship, so all profits flow to the U.S. Treasury. After years of pumping more and more money into the government-sponsored entities, Washington is finally taking money out.

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Jack Lew

Also notable are higher taxes. Before 2013, dividends and capital gains were taxed at just 15%. Now, high-income earners may pay as much as 23.8%. This has an incredible effect on government revenue, as high-income earners who earn the majority of their income from investments paid tax rates that were nearly 40% higher than they paid the year prior. Suffice it to say that there are many unhappy hedge fund and private equity managers who are now paying 23.8% on their earnings, instead of a low 15% capital gains tax rate.

Finally, unemployment and defense cuts helped reduce government spending. In 2013, unemployment benefits fell as the jobless rate dropped to 6.7%. Meanwhile, defense spending, halted by a budget deal, was limited to only 1.8% annual growth from 2012 to 2022.

While it's not all sunshine and rainbows, the fact of the matter is that the deficit, in relative terms, is nearly as small as it was in 2008. And at just 3.5% of GDP, the deficit is well on its way to match the Congressional Budget Office's projection of 2.1% of GDP by 2015. 

Is health care the wild card though?
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Fool contributor Jordan Wathen and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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