When your next dinner party conversation turns, inevitably, to public finance, here are a few fun factoids you can “Wow!” all your guests with.
Thursday, the US Treasury reported that with 11 months of fiscal year 2014 in the books, the US deficit fell again on a year-over-year basis, to $589.5 billion—a 58% reduction from the peak, fiscal 2009’s $1.42 trillion. August 2014’s deficit was $128 billion, and the news media picked up the story, reporting it for what it is—a 13% year-over-year reduction in the deficit and just moved on. Of the last 30 Septembers, 24 posted a monthly surplus—so it seems likely even that $589.5 billion figure could drop. Perhaps to match the Congressional Budget Office’s (CBO’s) $506 billion forecast made last month! Absent were fears the US would morph into the next Greece, without the fun ruins.[i] Absent also were claims American austerity would crush demand. So what gives? Simple—sentiment is slowly catching up with reality, and the deficit is one way to see it.
In fiscal year 2007, the US federal government spent $162 billion more than it took in. But when recession arrived the following fiscal year, deficits rose to $455 billion, based on a slight dip in revenue and increased spending. The following year, fiscal 2009, crisis response boosted spending sharply, in the form of the American Recovery and Reinvestment Act (fiscal stimulus) and spending associated with other crisis response programs. Meanwhile, the feds’ tax receipts fell by $419 billion. The combination resulted in surging deficits, which peaked at more than $1.4 trillion. Exhibit 1 shows the progression from Fiscal 2007’s pre-recession low through the present.
Exhibit 1: US Federal Deficit Through 11 Months and Full Fiscal Year, Fiscal Years 2007 - 2014
Source: US Bureau of the Fiscal Service, a very special branch of the Treasury. The US fiscal year runs from October 1 to September 30. 2014 figure is the Congressional Budget Office’s estimate of 2014 full-year deficit.
It’s where those lines go way up that the debate really began. 2009 was the first ever fiscal year with deficits in 13 digits. 2009’s 9.8% deficit-to-GDP ratio was the highest since 1944, when spending surged on military equipment for WWII.[ii] (Exhibit 2) And hey, $1 trillion is a big number, a big round number, which the media really has a penchant for. Fears of higher interest rates and inflation—which seem wildly off today—were rampant. Fears remained high in 2010, 2011 and 2012 while the feds ran annual deficits exceeding $1 trillion for four years. Frequently, folks claimed America was going Greek.[iii]
Exhibit 2: US Federal Deficit as a Percent of GDP for Fiscal Years 2007 – 2014 (Estimated)
Source: Congressional Budget Office, White House Office of Management and Budget. 2014 figure is the CBO’s official estimate published in August 2014.
But the tide turned in fiscal 2012, and the deficit—both as a percent of GDP and in absolute figures—began falling fast. That year, the deficit fell by around $330 billion from its 2009 peak. The next year, fiscal 2013, deficits dropped $409 billion, or 38%. The big reductions spurred major blowback from those who thought US demand needed government help. Heck, many even argued the US didn’t do enough in 2009, when deficits ran $1.4 trillion! Yet there is near total radio silence from the commentariat today, this despite the fact deficits have now fallen by nearly $1 trillion.
But it isn’t really so odd when you consider what has caused this fast deficit reduction: Tax revenue is way, way up. That’s no doubt in part due to tax rate increases, but those are only on the fringe. The really big factor is the economy is growing, which kind of crushes both the fears we’re turning Greek and we lack domestic demand. After all, as Exhibit 3 shows, we’ve dialed back the deficit without dialing down spending much at all.
Exhibit 3: Federal Receipts and Outlays, Fiscal Years 1985 – 2013
Source: Bureau of the Fiscal Service.
[ii] An interesting factoid for you to WOW your friends with: The US spent $1.7 billion on national defense in 1940. In the next five years, it spent a total of $261 billion. Some of our national debt today was originally issued as part of that rise in deficit spending. Which again, just interesting trivial factoid.
[iii] Not in the fun college way, either.