Saturday, November 7, 2009

No Big Deal: US Budget Deficits will be lowered.

On Nov. 3, birders sighted the rare skinny parrot hawk, which repeats back calls about fiscal probity. Said President Barack Obama on that date: "The government is going to have to get serious about reducing our debt levels."
Yes, deficits are large. But a lot of this debate is for the birds.
But there's a larger reason we shouldn't let the deficit hawks ruffle our feathers: As the volume of squawking has risen, the situation has actually become less dire. And even without drastic action, the situation will improve materially in the coming year.
Much of the horrific explosion in the national debt—the deficit soared from $248 billion in 2006 to $1.4 trillion in the recently concluded Fiscal Year 2009—can be pinned on cyclical factors. When the economy goes in the tank, it creates a fiscal double whammy, gutting tax receipts and boosting demand for government spending programs that are both ordinary (increasing unemployment benefits) and extraordinary (bailouts, stimulus). Spending rose 18 percent and revenues fell 16.6 percent in fiscal 2009—the worst decline seen since the 1930s, with corporate income taxes plummeting 55 percent. Had revenues been steady, the deficit would have been only (only, he said) $1 trillion.
But signs of recovery returned with the spring. As the financial system came back from the brink, banks paid back billions in TARP funds. In its mid-session review, issued in late July, the Office of Management and Budget dialed back its estimate for the fiscal 2009 deficit from $1.84 trillion in May to $1.58 trillion, due in large part to the trimming of cash piles set aside to help Wall Street. The stock market rally, recovering corporate profits, and an economy that began to expand at a 3.5 percent rate in the summer have translated into higher-than-expected tax receipts. And so, as the treasury department's Financial Management Service reported, the final numbers came out better both on spending and receipts—with a $1.42 trillion deficit, $138 billion smaller than was forecast in July.
The consensus of economists and politicians has continually underestimated the strength and timing of the recovery. So as the recovery rolls on, we'll continue to see more upside surprises. On Nov. 2, the Treasury Department announced it would need to borrow $276 billion in the fourth quarter, 42 percent less than it thought it needed in July. All those Goldman Sachs bonuses will be taxed at the highest marginal rate. Add in the prospect of more TARP repayments and job growth, and the United States is likely to experience a sharp cyclical upturn in tax receipts. The Obama administration forecasts that the economy will grow next year at a 2 percent rate and produce a $1.5 trillion deficit. But if the economy grows more rapidly, at 3 percent or 3.5 percent, it's plausible that the deficit will shrink by 10 percent to 20 percent on its own.

Courtesy: http://www.slate.com/id/2234722/

No comments: