If there was any question as to whether we are living in a Golden Age of Deficit Reduction™, the June Treasury Monthly Statement, released Thursday afternoon, should silence the doubters.
Not too long ago, critics, mostly on the right, warned that the U.S. was going the way of Greece. Given the rising, massive deficits—$1.3 trillion in fiscal 2010, $1.3 trillion in fiscal 2011—and the inability to forge a grand bargain on deficit reduction, the U.S. would face an imminent debt crisis that would condemn America to terminal decline. The answer was to immediately embark on a program of austerity, and then rip up Social Security and Medicare—all while keeping taxes where they were. Alan Simpson and Erskine Bowles and countless others have made a career out of sounding the alarm.
Of course, they were wrong. It’s possible to reduce the short-term deficit—dramatically—without destroying the social safety net, and without having a big Kumbaya moment. All you need is persistent growth, a willingness to tax, an end to two enormously expensive wars, spending restraint imposed by Congress, and a housing recovery. This year we’re getting all of that—and more.
One of the most frustrating things about writing about fiscal policy over the last several years has been the failure of many people in the press and politics, including those who profess to specialize in the subject, to grasp that deficits are procyclical. When the economy is contracting, revenues fall sharply and spending on benefits and bailouts rises. So deficits can explode very quickly. That’s what happened in the 2008–11 period. But when the economy is expanding, revenues rise, spending on benefits declines, and money spent on bailouts comes back. So deficits can contract very quickly. That’s what is happening now.
June’s numbers are fairly stunning. In June 2012, the government notched a deficit of $59.7 billion. In June 2013, it rang up a surplus of $116.5 billion. I’ll repeat that: a surplus of $116.5 billion. The government collected $286.6 billion in revenues, up from $260.2 billion in June 2012, and spent only $170 billion, down from $320 billion in June 2012.
There were some quirks here. In the current fiscal year, a big chunk of spending (and some revenue collection) that usually takes place in June happened in May instead. And there was a big revenue asterisk, on which more later. But the trend is unmistakable. Through the first nine months of fiscal 2013, revenues are up 14.5 percent from the first nine months of fiscal 2012, while spending is down 4.8 percent in the same period. The result: the deficit for the first three quarters of this fiscal year was $509.8 billion, down 43.4 percent from $901 billion in the first nine months of fiscal 2012.
What’s behind it? Revenues are rising because more people are working now—about 2 million—than a year ago, at slightly higher wages, and they’re paying more taxes. On January 1, the Social Security payroll tax rose to 6.6 percent, and new taxes kicked in on high earners. (And guess what, the higher taxes didn’t torpedo the economy or stop jobs growth.) Through the first nine months of fiscal 2013, individual income taxes have totaled $992 billion, up $152 billion, or 18 percent from the year before. Spending is muted for a variety of reasons. The sequester is taking a bite out of discretionary spending. The defense budget is down, thanks to the winding down of the two wars, off $33 billion, or 6.7 percent so far this year. Since unemployment claims continue to decline and the job market improves, the amount of money spent on unemployment benefits has fallen by 24 percent, or $18.3 billion so far this year.
June is always a big month for revenues, since companies and individuals pay quarterly tax estimates. But the results were flattered by a onetime event. In late June, the bailed-out housing agency Fannie Mae made a $59.3 billion dividend payment—in partial repayment of the cash it has taken from taxpayers to remain afloat. As we’ve discussed, the agency’s profits have recovered as the housing market has bounced back, and its mortgage portfolio performs well. That’s not likely to be repeated in the next few months.
Even so, the trends of higher revenue and lower spending are firmly intact. Roll it forward for the remaining three months of fiscal 2013, and the deficit could easily come in at under $700 billion for the year. That would represent nearly $500 billion of deficit reduction in a single year. Of course, the deficit hawks will wave away these results—which they all failed to predict—as irrelevant, and point instead to the danger of long-term deficits. But in order to tackle long-term debt that has built up over the past 50 years, you have to align the government’s revenues with its spending. That’s happening. And because the deficit is falling rapidly while the economy expands, albeit at a modest pace, the ratio of the annual budget deficit to the size of the overall economy is shrinking rapidly.
Repeat after me: the U.S. is not Greece. And we’re living in a golden age of deficit reduction.