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Friday, October 28, 2005

And Don't Forget the Shrinking Deficit

I mentioned good economic news earlier today, but forgot to mention that the 2005 fiscal year deficit came in over $100 billion lower than originally anticipated:
The US budget deficit shrank to $319 billion last year as better economic conditions boosted tax revenues. [...]

The 2005 fiscal year deficit amounted to 2.6% of GDP, below the 3.6% recorded in 2004 and the post World War Two high of 6% in 1983.
2.6% of GDP also happens to be the average deficit since Reagan took office and I think deficits at that level are no problem - in fact that may be an optimal level (though I've recently revised my estimate of the optimal level down to between one and two percent of GDP). Recovery from the hurricanes may boost the 2006 deficit but it will also likely boost growth (deficits stimulate the economy). Then, assuming Bush doesn't get us into any more wars, the troops should start coming home from Iraq, and the deficit could drop quickly in 2007 and beyond. I think it's even possible that we'll go into the 2008 campaign season with a nearly balanced budget.

Category: cat_useconomy


Rob Spooner said...

Three big problems with this. One is that the deficit of several hundred billion is after we offset excess spending by about $150 billion of Social Security surplus. Out of one side of their mouths, politicians tell us that Social Security has funds set aside for Boomer retirements. Out of the other side, they give us annual deficit numbers that say those resources are mythical and unimportant.

Second is that a lot of the improvement versus the predictions has been due to last year's robust stock market. People made money and realized gains. Markets are down this year and capital gains taxes will follow after a certain lag. And of course, there's a lot of personal income growing out of the real estate bubble.

Third, the projections of future deficits are based on current law, which will undoubtedly bill modified to the detriment of the deficit, for instance by adjustments to the alternative minimum tax.

It's good to be optimistic, but realistically, the federal deficit isn't going away.

Bret said...

I agree that the points you bring up are likely to slow deficit reduction. However, steady real GDP growth above 3%, steady and strong total and multi-factor productivity growth, and fairly steady employment numbers all favor future profitability and thus a resumption of tax revenues from capital gains.

Note that the OMB and whitehouse budget estimates showed declining deficits anyway and now they're just declining faster than expected.