R.I.P., Red Ink

12.12.13

This Is the Golden Age of Deficit Reduction

As Washington chewed over the Paul Ryan-Patty Murray budget deal, the Treasury Department announced a walloping drop in red ink. Turns out government didn’t need a “grand bargain” to get its fiscal house in order.

The Murray-Ryan budget deal was anti-climactic. After all this—three years of failed grand bargain talks, the sequester, a shutdown—we have a deal that will cut deficits by a grand total of $22 billion over ten years. No wonder the Tea Party crowd is incensed. Yet the outrage over the federal debt—$17 trillion and rising—won’t stand in the way of this deal. That’s because, thanks in part to the sequester, but thanks largely to the miracle of sustained growth, the annual deficit is shriveling.

Indeed, on Wednesday afternoon, just as official Washington was chewing over the implications of the Murray-Ryan deal, the Treasury department released the November Treasury Monthly Statement. And it reinforced what I’ve been arguing for months now: We live in the Golden Age of Deficit Reduction.

Consider the numbers. Since peaking at $1.417 trillion in fiscal year 2009, which ran from October 2008 through September 2009, the annual deficit has fallen sharply. It fell to $1.294 trillion in FY 2010, bumped up slightly to $1.296 trillion in FY 2011, fell to $1.089 trillion in FY 2012, and then plummeted to $680 billion in FY 2013. That’s a decline of 52 percent in four years. That’s stunning, considering there was no grand bargain to cut spending, reform entitlements, or raise taxes. Of course, Washington can take some credit. The Budget Control Act of 2011 and Republicans’ general push for austerity since 2011 have helped restrain spending. The expiration of certain components of the Bush-era tax cuts, the enactment of new taxes under the Affordable Care Act, and the expiration of the Social Security payroll tax holiday at the end of 2012 helped produce more revenues.

But a good chunk of the deficit reduction can be chalked up to the national pro-cyclicality of tax collections and entitlement spending. Put simply, when economic times are bad, tax revenues fall off a cliff at the same time that the government has to spend more on programs like food stamps and unemployment benefits. And so the deficit can swell very rapidly during a recession. That’s what happened in 2008 and 2009. But when things turn around, when the economy grows at a decent clip for a long period of time, the process works in reverse. Employment, payroll, and corporate income taxes rise sharply at the same time that government spending on items like unemployment benefits decline. And so the deficit can contract just as quickly as it expanded.

That’s what has been happening in the past few years. In FY 2013, for example, revenues rose by a healthy 13.2 percent ($324 billion) from FY 2012, while total spending fell 2.3 percent ($84 billion) from FY 2012. The sequester and declining military spending (thanks to the unwinding of two wars) helped contribute a great deal to the spending reduction. But lower levels of spending on unemployment benefits, thanks to the improving labor markets and the expiration of curtain extended benefits, accounted for about $24 billion of that $84 billion reduction—or nearly 28.5 percent.

The deficit can contract just as quickly as it expanded.

These trends have continued into the first two months of the 2014 FY year. Revenues are rising at a smart pace, and spending continues to fall, led by declines in defense and unemployment benefit spending. In November, for example, the government collected $182.45 billion in revenues, up 12 percent from $162.7 billion in November 2012. At the same time, spending in November came in at $317.7 billion, down 4.8 percent from $333.8 billion in November 2012. As a result, the deficit in November 2013 was $135.2 billion, down from $172.1 billion in November 2012. That’s a decline of 21 percent.

Now, these monthly figures can be pretty noisy. If benefits are paid out on the last day of October one year and then paid out on the first day of November in the next year, it can influence the figures. So it makes more sense to look at the trend. But the data from the first two months of FY 2014 tell the same story. For the first two months, revenues are $381.4 billion, up 10 percent from the first two months of FY 2013. Meanwhile, spending, at $603 billion, is down nearly five percent from $633 billion in the first two months of FY 2013. As a result, the deficit for the first two months—$226.8 billion—is down 22.6 percent from last year. Lower spending on defense (down $11.7 billion) and on unemployment benefits (down about $3 billion) account for roughly half the decline in spending.

Should these trends continue—even with the unwinding of some of the sequester cuts—the deficit could easily come in at under $600 billion for the current FY year.

To be sure, the deficit is still large by historical standards. But it’s melting away in real terms and as a percentage of gross domestic product. Sen. Marco Rubio is loudly opposing the Murray-Ryan deal in part because he believes the U.S. is facing an imminent debt crisis. The surging revenues and muted spending show, however, that the debt crisis, like Rubio’s presidential aspirations, is largely imaginary.