The Deficit Excuse Is Fading Fast
Should Chris Christie ever stop talking, political attention will likely be focused once again on the question of extending unemployment benefits. This month, the assistance expired for the long-term unemployed—some 1.29 million people were collecting as of late December. The Senate is moving to expand them. This week, a procedural vote passed with 61 votes, allowing the full Senate to vote on it.
The House, naturally, is resisting. Many House Republicans don’t believe unemployment benefits help the unemployed. And the party line is that, even if the benefits were of some value to the people struggling to pay their bills, the new spending of $6.4 billion should be accompanied by offsetting cuts elsewhere. Last week, Boehner spokesman Michael Steel said the House GOP would think about extending benefits “as long as it’s paid for and as long as there are other efforts that will help get our economy moving once again.”
Of course, the idea that the spending of a measly $6.4 billion—a mere 0.3 percent of total budgeted spending—needs to be offset by cuts is absurd. Especially at a time when the deficit is shrinking rapidly, and when the government is actually turning a significant profit (for a few weeks anyway). Indeed, so far this fiscal year, which started in October, we’ve had about $10 billion of deficit reduction every week—even while paying extended unemployment benefits.
We’ve long noted that this is the Golden Age of Deficit Reduction. Many people—including many who follow this stuff for a living—fail to grasp the immense procyclical forces at work in our fiscal affairs. When the economy gets going, natural forces cause the annual deficit to shrink: Companies and individuals pay higher taxes at the same time that spending on government programs like unemployment benefits fall. That reduces the deficit.
In addition, policy changes in recent years have had significant effects on the annual deficit. Defense spending has fallen thanks to the winding down of the wars in Iraq and Afghanistan. The Budget Control Act of 2011 and the sequester have cut discretionary spending across the board. The end of the payroll tax holiday, the increase in marginal tax rates on the wealthy’s income and investments, and the tax increases associated with the Affordable Care Act have all helped boost revenue. Meanwhile, the Federal Reserve turns over its ever-rising profits to Treasury, and tens of billions of dollars in aid to banks and to Fannie Mae and Freddie Mac have been returned to Treasury.
Put it all together, and the U.S. has the happy coincidence of rising revenue and falling spending. As a result, the deficit has been plummeting rapidly—in real terms, and as a percentage of gross domestic product. From a high of $1.4 trillion in fiscal 2009, the annual budget deficit fell to $1.1 trillion in fiscal 2012 and to $680 billion in fiscal 2013. That’s a decline of more than 50 percent in four years. The $6.4 billion required to extend the benefits equals less than 1 percent of last year’s deficit.
And it’s likely that the situation is still improving. The government conservatively projects that the deficit for fiscal year 2014 will rise to about $750 billion. But given what’s happened in the first three months of this fiscal year, it’s looking like the deficit will be much, much smaller.
Through the first two months of fiscal 2014 (October and November), revenue rose by $36 billion, or 10 percent, while spending fell $29 billion, or 4.6 percent. As a result, the deficit for the first two months of fiscal 2014 was $226 billion, down 22 percent from $291 billion in the first two months of fiscal 2014.
The Treasury Department will release its official figures for December next week. But we already have a pretty good look at December’s data. Ordinarily, December is a good month for Treasury. In addition to collecting withheld payment taxes, companies and individuals pay quarterly taxes. As a result, it’s not uncommon for the government to break even, or even post a small surplus in December. In December 2012, for example, the government ran a tiny $1.2 billion deficit.
But this year, it’s likely to be significantly better. Because more people are working at slightly higher wages, the volume of withheld income and payroll taxes is on the upswing. And on Dec. 31, Fannie Mae and Freddie Mac made a combined $39 billion payment to Treasury— dividends from their most recent massive quarterly earnings.
The Congressional Budget Office this week published its estimates for the finances for the first three months of the fiscal year. Looking at what we know about the first two months, it looks like the government actually ran a $44 billion surplus for December. As a result, according to CBO, the estimated deficit for the first three months of fiscal 2014 was $182 billion—that would represent at 38 percent decline from $292 billion in the first three months of fiscal 2013.
Think about that. Through the first 13 weeks of the current fiscal year, the deficit has declined by $110 billion—or about $8.5 billion per week.
The $6.4 billion needed to extend unemployment benefits represents about five days of deficit reduction.
So, yes, it’s important for the government to get its fiscal house in order. And yes, the principle that new spending initiatives (or tax cuts) be “paid for” with offsetting cuts or revenue elsewhere is a sound one. But given the size of the government’s balance sheet, and the pace at which the deficit is falling, $6.4 billion is something like a rounding error.
There may be a valid reason for opposing the extension of unemployment benefits. But concern over the government’s annual deficit can’t really be one of them.