We just went through a national poutfest over federal spending that’s too high and government borrowing run amok. What’s puzzling about the whole fiasco is that Washington’s annual deficit has fallen to the lowest level since George W. Bush was president, with pressure from Tea Party budget hawks partly responsible for the improvement.
The 2013 deficit was around $650 billion, with final figures not yet available due to the shutdown. That’s down from nearly $1.1 trillion in 2012. Projection for 2014 deficit is $568 billion.
Here’s the size of the annual deficit for each year since 2000, along with the national debt, as a percentage of the entire U. S. economy:
Obviously the deficit and the debt both swelled beginning in 2009, President Obama’s first year in office. Critics can blame Obama for that, though it seems likely that any president of any party would have approved a sizable stimulus package funded by borrowing, as Obama did, to help combat a brutal recession. That’s the main reason deficit spending soared.
Stimulus spending combined with reduced tax revenue kept deficits high through 2012. Each year’s borrowing added to the national debt, which now totals about $16.7 trillion. But the deficit fell sharply beginning this year, with steeper drops coming. ”The federal budget deficit has shrunk noticeably in fiscal year 2013, and it is projected to continue to decline for the next few years,” the Congressional Budget Office wrote in its latest economic outlook report.
There are three basic reasons the deficit is falling:
The recession is over. That means tax revenues are rising again and federal stimulus spending has basically ended.
The “sequester” cuts remain in effect. Those mandatory spending cuts at most government agencies that began earlier this year were a sop to Congressional Republicans -- including the Tea Party -- in exchange for a “fiscal cliff” deal that raised taxes on the wealthy. Many analysts thought those across-the-board cuts would be replaced by more targeted reforms, but they haven’t been and it seems less and less likely that will happen. The sequester, meanwhile, will reduce federal spending by about $110 billion each year it’s in effect. That isn’t all gravy, since lower federal spending reduces economic activity and tax receipts by some measure. But it seems to be helping reduce deficits nonetheless.
Health-care costs have been lower than expected. At least 20% of all federal spending goes toward health care, under programs such as Medicare and Medicaid, which are the biggest budget-busters on the books. During the last few years, however, health-care costs have leveled off, which means fewer taxpayer dollars going out the door. Economists aren’t exactly sure why that has happened, but it doesn’t seem to be related to the recession, so there’s hope those savings will persist.
Those trends are all positive, but there’s still trouble in Paradise-Upon-the-Potomac. The lull in deficits during the next few years is likely to be temporary, with Washington’s annual shortfalls beginning to grow again starting around 2018. That seems inevitable given the swell of baby boomers who will be flooding into Medicare during the next 20 years, which will push up total health-care spending even if costs fall on a per-person basis.
Government shutdowns and threats to default on U.S. debt make the whole problem worse, not better. This latest shutdown, which lasted 16 days, trashed consumer confidence and cost the economy about $3.1 billion in lost output, according to IHS Global Insight. That might seem small, in a $16 trillion economy that will probably bounce back quickly. But that figure doesn’t account for work Congress is NOT doing to help the economy, such as making the tax code more efficient or devising new ways to stimulate job growth.
Plus, the cumulative effect of Washington budget battles adds up to substantial damage. Forecasting firm Macroeconomic Advisors estimates that political brinkmanship over the federal budget has cost the U.S. economy 900,000 jobs in 2013 alone. That toll will rise if the latest short-term deal leads to further “crises,” as many expect.
The bottom line is that Washington still needs to kick its addiction to spending money it doesn’t have. But it also has a window of opportunity now — perhaps lasting three or four years — to devise smart long-term fixes and start phasing them in. The only crisis today is the one involving trigger-happy politicians.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.