Economix Blog: The Incredible Shrinking Budget Deficit

For four years, during and in the wake of the recession, the federal budget deficit ballooned to more than $1 trillion. But because of belt-tightening in Washington and a strengthening economy, it has started shrinking — and fast.

The number crunchers at Goldman Sachs have lowered their estimates of the deficit both this year and next, on the back of higher-than-expected revenues and lower-than-projected spending. Analysts started the year projecting that the deficit in the current fiscal year would be about $900 billion. Earlier this year, they lowered the estimate to $850 billion. Now they have lowered it again, to $775 billion, or about 4.8 percent of economic output.

“Spending in the fiscal year to date is lower than a year ago and the nominal growth rate is lower than it has been in decades,” the Goldman economists wrote in a note to clients. “Revenues have also exceeded expectations, with a 12 percent gain fiscal year to date. What is more notable is that the strength in revenues preceded the payroll tax hike at the start of the year, and the spending decline does not seem to reflect sequestration, which has just started to take effect.” To translate: the deficit could come in even smaller than currently anticipated because of spending cuts and higher tax rates.

On the face of it, this sounds like something to applaud: The growing economy is bolstering tax revenue and reducing the need for spending on programs like unemployment insurance. Washington has gotten its act together. The budget is finally coming back into balance. Indeed, Goldman now expects the budget deficit to fall to just 2.7 percent of economic output by the 2015 fiscal year. Many economists consider budget deficits that small to be sustainable — particularly if the federal government is investing in public goods like schools and roads — with the accrued debt paid off by later years’ economic growth.

But a number of budget experts are booing rather than applauding, including the fiscal hawks at the International Monetary Fund. Last week, the fund nudged down its estimates for United States growth in 2013 and 2014. It said it saw many bright spots in the American economy, including the strength of the private sector, but it criticized Washington for imposing too much austerity, too soon, and thus sapping strength from the recovery and preventing the unemployment rate from coming down faster.

“The growth figure for the United States for 2013 may not seem very high, and indeed it is insufficient to make a large dent in the still-high unemployment rate,” the fund said. “But it will be achieved in the face of a very strong, indeed overly strong, fiscal consolidation of about 1.8 percent of G.D.P. Underlying private demand is actually strong, spurred in part by the anticipation of low policy rates under the Federal Reserve’s ‘forward guidance’ and by pent-up demand for housing and durables.”

The fund’s economists specifically dinged “sequestration,” the $85 billion in mandatory budget cuts that Congress promised to undo, but failed to undo, earlier this year. “While the sequester has decreased worries about debt sustainability, it is the wrong way to proceed,” the fund said. “There should be both less and better fiscal consolidation now and a commitment to more fiscal consolidation in the future.”

In its note, Goldman Sachs did specify a few trends that could widen the deficit this year, like a “negative economic surprise.” The investment bank did not elaborate much on what that economic surprise could be, but troubles in the emerging economies that are driving global growth, higher gas prices and an intensification of the financial troubles in Europe seem like plausible candidates, as do natural disasters like hurricanes and droughts.

Article source: http://economix.blogs.nytimes.com/2013/04/22/the-incredible-shrinking-budget-deficit/?partner=rss&emc=rss