Here we go again. The debt ceiling is approaching, and Washington is in the grips of another round of mania. Will the Republicans in the House engineer a default, or a near-default, on America’s sovereign obligations? Will President Obama agree to delay the implementation of the Affordable Care Act in exchange for a debt-ceiling increase? Will Obama and House Majority Leader John Boehner finally be able to engineer a grand bargain on taxes, spending, and deficit reduction? (The New York Times reports this morning that Boehner is appealing to Democratic White House leaders and the White House for help.)
The answer? Maybe, no, and no.
There’s a great irony afoot. This week, there was plenty of new evidence that Washington is set to prove, yet again, its dysfunctionality on dealing with the basics of taxing and spending. But there was also fresh evidence that there has been enormous progress in the effort to cut the annual budget deficit.
In fact, we’ve long argued that we live in a Golden Age of Deficit Reduction. The August Treasury Monthly statement, released Thursday, and a Congressional Budget Office report released earlier this week, show just how far we’ve come in the space of a year.
A lot of the deficit reduction has come in the best way possible.
In August, revenues were $185 billion, up 3.4 percent from $178.9 billion in August 2012. Spending was $333 billion, down 9.7 percent from $369 billion. The result: the deficit for the month of August was $147 billion, down 22 percent from $190 billion in August 2012. Some of the decline in spending is due to timing issues – benefits paid on the 31st of the month one year that aren’t paid until the 1st of a different month the following year. But the broader trend is intact: more people are working at higher wages, and wages are being taxed at a higher rate. Through the first 11 months of fiscal 2013, which ends at the end of this month, revenues are up 13 percent and spending is down 3.6 percent. The deficit for the first 11 months, at $755 billion, is off $409 billion, or 35 percent, from $1.164 trillion in the first 11 months of fiscal 2012. The picture is likely to get better, because in September, the government typically runs as a surplus as companies and individuals pay quarterly taxes due. Last year, the surplus for September was $75 billion. Should the September 2013 surplus come in at the same amount, the full year deficit would come in at $680 billion. That would represent a decrease of $409 billion, or 37 percent from last year. All in the absence of a grand bargain.
Many professional deficit hawks have argued that this year’s deficit reduction has come in the worst way possible. There hasn’t been any rational grand bargain or tax reform, and the sequester has functioned as an indiscriminate meat cleaver. But that’s not entirely true. A lot of the deficit reduction has come in the best way possible – from taxing those who can most afford to pay, from economic growth, from cutting spending on defense, and from falling spending on recession-era entitlements like unemployment benefits. According to the CBO, some $24 billion of the reduction comes from a decline in spending on unemployment benefits, because the number of people filing claims and receiving benefits has plummeted as the labor market improves. Because companies are earning more profits, they’re paying more income taxes—$216 billion through the first 11 months of fiscal 2013, up 16 percent from the first 11 months of fiscal 2012. That accounts for another $30 billion in deficit reduction. Individual income taxes are up $160 billion so far this year, because people are earning more and because the very rich are now paying higher taxes. And social insurance receipts (basically the Social Security and Medicare payroll taxes) are up by $101 billion so far this year, in part because the two-year cut on the Social Security payroll tax expired on January 1, in part because of the Obamacare excess payroll tax on Medicare, and in part because two million more people are on payrolls today than last year. The cuts attributed to the sequester, about $75 billion this fiscal year, account for only a small portion of the deficit reduction we’ve experienced this year.
And so as Washington continues to dither about the debt ceiling, funding the government, and a grand bargain, the annual deficit quietly melts away.