The shrinking deficit, the growing economy, and more

The Monthly Treasury Statement for November revealed that the growth rate of federal spending has dropped to about half the growth rate of tax receipts.  At current rates, the budget would move into balance on November 16, 2008, twelve days after the next presidential election. 

Here’s the usual deficit chart; click to enlarge.

Some might look at that and say:

“Wait a minute: How can tax receipts be growing?  The Democrats haven’t had a chance to increase tax rates yet, so how is this situation possible?  Their talking points don’t even have an entry that explains this phenomenon.  All we keep hearing is that the Bush tax rate cuts must be allowed to expire in 2010.  What gives?” 

Answer: The Democrats almost never talk about economic growth (i.e., a growing tax base) as an alternative way to increase tax receipts; the only method they can seem to fathom is an increase in tax rates.  But the fear-peddlers are painting themselves into a corner, just in time for the next big election.  This is good. 

There's more.  Here’s another curve ball for them: Interest on the debt is getting easier and easier to pay.  That helps make our nation’s creditworthiness stronger and stronger.  That and our economic growth are probable causes of the falling long-term interest rates we’ve been witnessing. 

[Both charts above employ rolling 12-mo totals, to smooth out seasonality effects.]

I sincerely hope the Democrats, including the Blue Dogs, will learn an important lesson about the power of economic growth from the live demonstration our economy is giving them today—if they’ll just pay attention to it.  (That also goes for any Republicans on the verge of falling for the specious arguments for tax rate hikes.) 

Last time I looked at these charts, I was wishing the deficit would level off, but I’ve definitely changed my mind—not because of the economics, but because of the political effects.  The 2008 political debates could turn out to be very entertaining, if we start asking the right questions of our politicians.  I won’t let up on the message about the power of economic growth here at this blog, and I hope you’ll spread the word, too.  If more of us start asking the right questions, we’ll be able to break the false dilemma (cutting spending vs. raising tax rates) by adding a brand new third dimension, the most important one of all: boosting our economy's growth rate.

I can hardly wait.

Comments

[jp]

glad you saw the news.

further to your point, all spending excluding defense and homeland security appropriations will be funded for all of 2007 on a continuing resolution (as confirmed by pelosi), meaning that 50% of the entire budget will experience no spending growth. this should cut the overall outlays growth to around 3%....which means that the budget will probably be balanced by the end of 2007...try the calcs!!

cheers
jp

[Stephen Reed]

jp, you are being way to optimistic. Once the politicians realize that the deficit is shrinking, they'll come up with some way to spend the extra money.

Also, Steve, if the budget deficit does happen to be nearly in balance before the '08 elections, the democrats are going to try to take the credit for it. It is congress that makes and passes the spending bills after all, they'll argue.

[Bob]

I echo Mr. Reed's comments. I will add that the Dem's will find a way to increase taxes.

Nevertheless, a lot has to go right and it depends quite a bit on growth of the economy. I'm not suggesting the "R" word but am not optimistic about anything more than tepid growth at best.

[jp]

steve the deficit has been shrinking for 2 years now. do the math...i did, and so did steve. a continuing resolution means that outlays stay exactly flat...and 1/2 of the entire govt spending for 2007 will be held flat year over year. i stand with my prediction.

[Denny]

Steve - How come the debt clock is still ticking up?

[muirgeo]

Shrinking deficit? I'm unimpressed.

http://www.publicdebt.treas.gov/opd/opdhisto4.htm

Now there WAS a shrinking deficit during the Clinton era but tax policy was in conflict with what you say it should be for good economic growth. In fact the current economic growth pales by comparison.

http://www.academycomputerservice.com/economics/charts.htm

[muirgeo]

Sorry the last link is here.

[muirgeo]

“Wait a minute: How can tax receipts be growing? The Democrats haven’t had a chance to increase tax rates yet, so how is this situation possible? Their talking points don’t even have an entry that explains this phenomenon."

I've got an entry... A good hunk of the increased reciepts are a result of increased public and private deficit spending.

I tend to think you are more of an optimist then a skeptic.

Oh one more try with that link;

http://www.academycomputerservice
.com/economics/charts.htm

Posted by: muirgeo at Dec 14, 2006 7:10:44 PM

[Syphax]

"Now there WAS a shrinking deficit during the Clinton era but tax policy was in conflict with what you say it should be for good economic growth. In fact the current economic growth pales by comparison."

Here are the major flaws in that argument...

1) The economy in the late 90's was good as a result of the internet boom and if you want I can get you 50 sources citing this as the reason for economic success in the late 90s. Find 1 source that successfully argues Clinton was responsible.

2) You should be impressed by the shrinking deficit... Why? Because its shrinking WITHOUT tax rate increases and WITHOUT cutting spending. During the Clinton era it was shrinking WITH tax rate increases, WITH spending cuts and WITH a strong economy as a result of the internet boom. If all these conditions were true today(with the exception of tax increases since they DON'T increase revenue!)... we'd probably have a trillion dollar surplus.

3) Tax rate increases don't increase revenues. Tax revenues actually increased faster during tax cutting Reagan and Bush 43 than during tax increasing Bush 41 or even Clinton's first 4 years(obviously his tax increases were enacted by then but the internet boom had not taken its full effect). Economic growth increases revenue.

Finally, that site you gave a link to is clearly biased and a panel of economists agreed the recession occurred in 2000 rather than 2001(not that one could reasonably argue Bush could be held responsible even if it did happen in 2001).

http://www.washingtonpost.com/ac2
/wp-dyn/A38826-2004Jan22?language
=printer

[muirgeo]

Syphax,

I don't know. It just seems to me that the long term data soundly refutes yours and Steve's claim.

Debt to GDP soared under Reagan, Bush 43 and seems to have consistently went down under Democratic control.

http://zfacts.com/p/318.html

[Syphax]

The deficit did soar under Reagan and Bush, but it was mostly due to increases in defense spending and the poor economy in the first few years of their administrations.

Kennedy's tax cuts were enacted in 1964 and they didn't increase the deficit. Former President Bush increased taxes in 1990 and the deficit increased. Why were these two scenarios so different? Because Kennedy's tax cut didn't accompany large defense spending increases(and a recession) and Bush 41's tax increase didn't accompany a defense spending decrease(and an economic boom).

[ilsm]

The deficit tracked here is the cash required over total US G receipts.

It is declining because SS and several other federal revenue streams are surplus.

Someday the debt to these "income streams" will be demanded to pay for things these taxes were collected to support.

The only thing going down here is the future security of the US system.