When will the budget move into balance?

I mentioned I was going to zero in on the question of when and if the unified federal budget outcome would move into balance if current trends continued.  Here’s the chart we’ll be watching each month (click to enlarge), followed by an important explanation:

Important explanation
Each data point on this chart is a 12-month total, ending with the most recent month.  Based on several emails I’ve received in the last two years—two of them hysterical about what they perceived as the delusional idiocy of the chart—“rolling 12 months” seems to be a difficult concept for some people to grasp.  But in reality, it’s simple; think of it this way: just treat any given month as the last month in a “fiscal” year.  One time out of twelve (September), it just so happens to coincide with the federal government’s chosen definition for “fiscal year.” 

During my corporate career, we used the rolling-12 chart to help us track the sales volume trends in our core brands, because it eliminates the effects of seasonality within a year, and therefore clearly isolates the overall trends.  It was a time-saver, frequently pointing us to the right questions very quickly.

This is not a forecast, it is just a projection of current trends.  If there’s one thing that’s certain, it is that trends do not last forever; they are almost always broken by some kind of major event that creates a spike, or a discontinuity; it's only a matter of time.  Each month. we’ll be watching for two things:
(1) Is either trend accelerating or tapering off?
(2) Have we experienced an event that renders previous trends obsolete?

For partisan ideologues, if you know any
Although this chart is just a report of what the Monthly Treasury Statement is telling us, that of course doesn’t stop anyone so inclined from jumping directly to knee-jerk political conclusions.  Let’s face it, some people already have their minds made up, and have a habit of trying to spin everything they see into evidence that the other side is a bunch of idiots, or sneaky bad guys.  (“Are those evil Republicans sandbagging the deficit forecast?”  “Why are the sneaky Democrats covering up the tax revenue growth that’s been happening without any tax hikes?”)  The propensity to “spin first” is an attribute of many on both the left and right, although I personally have noticed a higher frequency of knee-jerk hysteria from the left.  In any case, it’s just human nature for lazy people, and for ideologues attempting to masquerade as economists.  [One person thinks this chart is “complete garbage” based on “noisy” data.  No explanation, just a blanket conclusion.  That kind of feedback does not help me, nor does it impress me; however, I cannot deny that it would fit nicely on a political bumpersticker, or sound cool in a post at a political blog.] 

Anyway, this is the chart we’ll be watching each month.  For almost two years now, the crossover point, i.e., the point at which the budget outcome is in balance, has been oscillating between mid-2008 and mid-2009.  I’m personally hoping for mid-2008, solely for the entertainment value we’d enjoy during campaign season. 

[What's really ironic is that I am not even in favor of a balanced budget as it is currently (naively) defined; but I can't deny the numbers and trends.]

Comments

[Buddy Kidd]

Does the Total Actual Federal Outlays include the current levels of military spending?

[Kurt Brouwer]

Thanks for the excellent information, as always. One question: in the yellow box it says, Latest 12 month deficit = $209.2 B [last month: $242.8 B]

What does that parenthetical comment mean? Last month: $242.8 B?

[Steve]

Buddy: Yes, whatever the Treasury has spent money on is included.

Kurt: The deficit for Jan'06-Dec'06 was $209.2 B; the deficit for Dec'05-Nov'06 was $242.8 B. It's a rolling 12-month total.

[Kevin]

Big deal, MY budget went into surplus a year ago. Right about when I gave up Tequila.

[marmico]

The rolling 12 month simple moving average chart is less than ideal.

The 12/2005 data point (when real GDP expanded 5.6% in Q1/2006)should carry less weight than the 12/2006 data point (when the projected real GDP is estimated at 2.5% for Q4/2006).

An exponential moving average chart would be a superior tool.

In any event, it seems unlikely that the fiscal gap of 1.9% of GDP will close in the next 18 months unless the gap is filled by a revenue increase. Fiscal 2006 saw revenues of 18.4% and outlays of 20.3% of GDP.

Outlays have been near or above 20% of GDP for four years running and there seems to be no restraint on the spending side of the ledger. On the revenue side, growth is slowing, corporate taxes have probably peaked, and the housing market slowdown may ripple further throughout the economy decreasing the growth rate in revenues.

Even the CBO maintains that a surplus will only occur in 2010/11 after the 2003 tax cuts have sun setted.

[Matt]

I thought a balanced budget was a BAD thing! Clearly we need to have a deficit so that we can maintain higher rates of growth in the economy. Thus, projecting a balanced budget must also be a projection of an economic slowdown.

[John F. Opie]

Hi -

As a professional forecaster, one who has been making a living doing it for the last 15 years, let me make one comment to your methodology: you're doing a good job under the circumstances.

Why?

Because you're simplifying a very complex model into trends. While this might not be what a major bank wants in terms of calculating how many US government bonds might come on the market, it has the virtue of simplicity. The use of a rolling 12-month is part of how something like Census X-11 actually workes (the trend component of which is a rolling 3-month of a rolling 12-month after the random outliers and strike effects are removed), so your basic methodology is sound.

You've also zeroed in on a legitimate model specification: you're interested in the date of convergence of two trends, nothing more. For that purpose your methodology is fine.

Now, this means that you won't have a balanced budget on that date: your trends will converge, but the actual budget balancing will depend on the variances of the data behind the trend.

And you're making your point for me: that growing the economy is a vastly superior way of reducing fiscal debt accumulation (assuming that this is considered to be A Bad Thing) than raising taxes would be. Given that so little of the budget can really be cut without a bunch of chickens flapping wildly about, politically speaking, then growth is the ideal path.

One that the Democrats really don't want to see happen until, say, early 2009, and then only if a Democrat wins the Presidency and they retain at least the House.

[Steve]

Hi John,

You're right, that's about as simple as it gets. Not many disadvantages compared to more sophisticated models, but has the big advantage of wide-audience understandability. Trend shifts are easy to spot, too. (We used rolling 52-wk charts for the numbers that were tallied weekly, and rolling 12-mo charts for numbers that closed monthly.)

[JorgXMcKie]

Gosh, if having noisy data means you have to give up, I guess the past dozen years or so have been wasted for me. Maybe I should just be digging ditches. Maybe you, too, Steve.

[John F. Opie]

Gosh, Jorg, if you don't know how to extract trends out of noisy data, maybe you should be digging ditches.

Noise is just that: meaningless movements, or more exactly movements in a time series that have no systematic meaning. It can be pink noise, white noise, grey noise or even that elusive black noise, but it remains noise.

And neither Steve nor I "give up": instead, try making lemonade out of the lemons that you have.

[Iago]

Faithful reader, love your stuff, hope you feel better.

The red projection line is straight. The blue projection line curves (slightly) upward. It is not obvious from the existing data that either receipts or expenditures show a rising curve. So, why does the blue projection line curve upward?

The lowest portion of the blue projection line (first six months 2007) extends back in time somewhere south of the actual receipts data points. Why?

[Andy]

To me, it doesn't appear to be curving. It looks like a normal statistical trend line.

[AGoyAndHisBlog]

This is excellent news, Steve - as was today's revelation.

http://www.breitbart.com/news/2007/01/31/D8N09RQO1.html

Of course the econ writers in exempt media are still forced to couch it as "unexpected" and "an improvement over the last quarter", not to mention how badly the middle class is doing... blah, blah, blah. They absolutely refuse to acknowledge the ongoing healthy growth associated with tax cuts.

One other theme I've seen a lot of lately is the notion of our "military economy" - as in "we're only in Iraq to keep our military contractors rich and happy." Do you happen to know if there are statistics or data anywhere showing what percentage of our GDP is actually contributed by industries associated with military production?

Glad to see you're recovering!!

[jp]

What is very interesting is that 2007spending growth will slow dramatically, while the economy stays strong, as seen by wednesdays GDP report...Spending growth will slow because the Dems have been forced to adopt a continuing resolution for fiscal 2007 spending...basically keeping most of the budget flat over 2006 (excludes defense, and mandatory Soc Sec, Medicare/Aid, etc....expect Steves model to come very close to reality.

[Mark Kleiman]

And I've still got $10K that says you're wrong: the MTS will not show a surplus in any twelve-month period ending before January 2010. Any takers?

[Steve]

Iago:

I took annual growth to the month level; that's why both projections are slightly curved. Also, I used the most recent data point as the starting value, to keep it simple.

We could tweak the assumptions ad nauseam, but we'd be tweaking the wrong side of the decimal point; i.e., we'd be wasting our time.

[Albert]

I'm curious as to why you only took the data back to Jan 05. The trend lines would be much more compelling if they continued for more than just a couple of years.

Albert

[Steve Dalton]

So, you've probably already commented, but what is the affect of balancing the budget on interest rates?

[Steve]

Steve Dalton:

Excellent question. The answer is: nothing. (I know that contradicts the "Crowding Out" theory, but that's reality. Crowding Out is a beautiful theory desperately searching for sufficient supporting evidence -- as it always has been.)

Steve

[CoRev]

Steve, thanks for the simple and readable chart. If you don't mind I would like to use it t my house.