The Deficit’s Down, and That’s Bad News Why?
You can never be too thin, or too rich. Or have too much deficit reduction. Right?
Maybe not. The latest cause for anxiety over the current expansion, which just entered its 47th month, is that the deficit is falling too rapidly.
The government won’t release the official April monthly data until it relates the Treasury Monthly Statement next week. But the Treasury Daily Statements provide a real-time look at the government’s revenue collection efforts. And comparisons of the Daily Statements from April 30, 2013, and April 30, 2012, show that the revenue machine has been firing on all cylinders.
April is always a huge month for the collection of federal revenue. On top of the usual withholdings from paychecks, individuals and companies have to pay quarterly estimates for taxes they owe on income earned in the first quarter of 2013. When 2012 tax returns are filed and processed in April, many taxpayers and companies get refunds. But many others may find they owe taxes— especially if 2012 turned out to be a better year than expected.
Here’s why. About two million more people were working in April 2013 than were working in April 2012, and at slightly higher wages. Meanwhile, many American workers are being taxed at a significantly higher rate in 2013 than they were in 2012. With the payroll tax holiday having expired on January 1, 2013, the tax on the first $113,700 of payroll income rose from 4.2 percent to 6.2 percent. In addition, new tax rates kicked in on higher income individuals thanks to the fiscal cliff avoidance deal. And so every couple of weeks, the government is taking in more money from paychecks. Withheld income and employment taxes in April were $163.657 billion, up $15 billion, or 10 percent, from $148.6 billion in April 2012. Corporate incomes taxes were up sharply, too, from $32 billion in April 2012 to $41 billion in April 2013.
Meanwhile, efforts that rich people took in November and December to avoid the impact of higher rates kicking in on January 1, 2013, are also helping to bring in significantly higher revenue. After President Obama’s reelection, as we reported last year, big companies, freaked out at the possibility that tax rates on the wealthy would rise sharply, shoveled cash out the door to shareholders. The Wall Street Journal tallied some 483 special corporate dividends announced in December alone. In addition, rich people rushed to sell homes and other assets in late 2012, the better to avoid higher capital gains rates in 2013. Well, in April, the lucky duckies who received dividends, accelerated bonuses, and capital gains in November and December 2012 had to pay taxes on their windfalls. The Daily Treasury Statement has a category of payments entitled, “income and employment taxes, not withheld.” And it shows that in April 2013, such payments amounted to $195.9 billion, an increase of $56 billion, or 40 percent, from April 2012. Meanwhile, in part because of the late-in-the-year gusher of profits, refunds paid out by Treasury haven’t risen much. In April 2012, Treasury paid out $63 billion in refunds; in April 2013, just $69 billion.
It’s not atypical for the government to run a surplus in April. Here’s a breakdown of monthly totals for the last several years. In 2008, the government ran a $159 billion surplus, and last April the government collected $59 billion more than it spent. This April’s surplus is likely to be somewhere in between— at least $100 billion.
Earlier this month, we noted that we live in a golden age of deficit reduction. Through the first six months of this fiscal year, thanks to growth and higher taxes, revenue was up 12.5 percent from the previous year, while government revenue was down 2.4 percent, thanks to less money spent on unemployment benefits, reduced defense spending, and a general mood of austerity.
Both the higher revenue and lower spending trends accelerated in April, as the sequester took hold. As a result, something strange happened. Every quarter, the Treasury Department tells bond dealers how much it plans to borrow. Earlier this week, Treasury announced that while it will roll over some of the debt that comes due in the current quarter, it will pay down $35 billion in debt. As we sit here, the national debt is actually shrinking. Not to worry, though. During the third quarter, Treasury expects to add $223 billion in debt.
This short-term blip won’t make the debate over the deficit any less toxic. But the swift rise in receipts, combined with a less swift decline in spending, will have the effect of putting off the next round of debt-limit brinksmanship for a few months.
The combination of the higher revenue and lower spending will create a few hundred billion dollars of fiscal consolidation in the current fiscal year. That’s not enough to knock the economy into recession. But it is enough to slow growth down. As conservatives always remind us, taxes take money that could otherwise be used for consumption or investment. If you have more of the former, all things being equal, you’re likely to have less of the latter. As liberals remind us, government spending on employment, goods and services, creates demand for further employment and consumption of goods and services. Reduce government spending, and you’re likely to reduce employment and consumption, all things being equal.
Indeed, there’s a growing awareness that fiscal austerity is becoming an obstacle to higher growth. The Federal Reserve’s Federal Open Market Committee statement on Wednesday noted “Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth.” Goldman, Sachs CEO Lloyd Blankfein speaking at a conference in Washington on Thursday, noted: "What you really need is fiscal policy to kick in."
It turns out you can have too much of a good thing.