This is the Golden Age of deficit reduction. Really.
You wouldn’t know it if you listen to the professional deficit hawks, who have plowed hundreds of millions of dollars and countless op-eds into a fruitless effort to drive a grand bargain on taxes and spending. But it is. Policy is nobody’s idea of optimal. But nonetheless the gridlock of the past few years has produced spending restraint and higher tax rates. President Obama has proposed more of both in the budget he released on Wednesday. The sequester has just kicked in. And sustained economic growth, the miracle deficit cure, continues to work its magic. The expansion is now in its 46th month.
While the national debt mounts, I’ve noted that the primary deficit—the annual mismatch between revenues and expenditures—is melting away. Check out the March Treasury Monthly Statement, which was released Wednesday. In March 2013, the government collected $186 billion in revenues and spent $292.5 billion, for a deficit of about $106 billion. Pretty bad. But in March 2012, revenues were substantially lower and spending was significantly higher. Then, revenues were $171.2 billion and spending was $369.37 billion, for a deficit of $198 billion. From last March to this March, revenues rose 8 percent while spending fell 21 percent, and the monthly deficit shrank 46 percent.
Now, monthly numbers can move around—if a big tax payment comes in on March 31 one year and arrives on April 1 the next year, or if a benefits payment that went out on March 1, 2012, instead went out on Feb. 28, 2013. So it’s useful to look at the trend. The fiscal year is now six months old. And guess what? It shows more deficit melting. Through the first six months of this fiscal year, revenues are $1.196 trillion, up 12.5 percent from $1.063 trillion in the first six months of fiscal 2012. Meanwhile, the government has spent $1.797 trillion in the first six months of fiscal 2013, down 2.4 percent compared with the first six months of fiscal 2012. The deficit for the first half of the fiscal year is $600.5 billion, down 22.5 percent from $775 billion in the first half of fiscal 2012.
The last six months of the fiscal year are always good ones for the government, as tax payments tend to produce surpluses in April and again in September. Should the current trends continue for the rest of the year, we’ll be looking at an annual deficit of about $850 billion for fiscal year 2013, down from $1.089 trillion in fiscal 2012. (The Obama administration projects a $972 billion deficit for the current fiscal year, but it will surely be less than that.) Put another way, that’s $240 billion in deficit reduction in a single fiscal year—in the absence of a grand bargain. The reduction is even more impressive when you consider that in fiscal 2009, the deficit was more than $1.4 trillion. It’s hard to envision a time in recent history when the deficit has shrunk so much in dollar terms in the space of four years.
And in theory, there’s more to come. The budget Obama presented, which is naturally dead on arrival, continues the spending restraint. Next year it projects spending will rise 2.5 percent. It aims to increase revenues by doing things like getting rid of the absurd carried-interest tax break for private equity and hedge-fund managers. Should all the proposals become law, the administration projects revenues will rise nearly 12 percent in fiscal 2014, leaving a deficit of $744 billion.
That’s still big. But it would represent as a decline of 47 percent in four years. And what ultimately matters isn’t the sheer size of the annual deficit but its size in relation to the economy. That’s shrinking too. The ratio of the primary deficit to GDP has been falling rapidly, from 10.1 percent of GDP in 2009 to a projected 6 percent in fiscal 2013 (it’ll probably be less), and 4.4 percent of GDP in fiscal 2014.
We may be no closer to a grand bargain than we were last year. Congressional Democrats are angry at Obama’s willingness to propose a reduction in the growth rate of Social Security, while Republicans can’t countenance any increase in revenues. And yet the deficit continues to decline.
As I said, we’re living in a Golden Age of Deficit Reduction.