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Deficits Down, but not Permanently

2 min readBy: Kyle Pomerleau

Yesterday, the Office of Management and Budget and the Treasury reported that the United States’ budget deficit during fiscal year 2013 was $680 billion dollars. This represents a 44 percent reduction from the $1.09 trillion deficit from fiscal year 2012. The deficit is 30 percent smaller (in dollars terms) than the $972 billion OMB projected for 2013. While this seems like good news for the time being, it is unlikely to last as spending on entitlements will increase.

The deficit is now 4 percent of GDP, which is smaller than last year’s 7 percent, but still a slightly larger deficit than the average since 1979. As the chart shows, the government’s deficit peaked at 10 percent of GDP in 2009 at the height of government spending and the recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. . Most recently, the deficit has shrunk from that high as stimulus spending has declined and the economy has slowly recovered. However, the newest numbers show a much faster reduction than the OMB projected. The deficit is 2 percentage points lower than the 6 percent they first predicted.

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This reduction is mostly driven by an increase in tax revenues over last fiscal year. In 2012, OMB reports that the government collected $2.4 trillion. It projected that in 2013, the government would take in $2.71 trillion. However, the government reported revenues of $2.77 trillion, a 13.3 percent increase over last year and 2.3 percent over what they projected. Revenues are now 16 percent of GDP which is slightly lower than the average of 18 percent since 1979.

The deficit also shrank from a reduction of spending. Due to troop drawdowns, lower unemployment compensation spending, and sequestration, government spending declined 2.4 percent from $3.53 trillion to $3.45 trillion. This is $230 billion, or 6 percent lower than the OMB expected and an $8.3 billion absolute decline from last year. As a percent of GDP, spending is now 20.8 percent of GDP, which is also slightly lower than the average of 21.2 percent since 1979.

Although this is generally good news—government spending declining and revenues increasing—it is important to keep in mind the government’s long term finances. According to the CBO, the deficit as a percent of GDP was expected to shrink in the next couple of years. However, as Social Security, entitlement spending, and interest on the debt grows, the deficit will increase again. By 2022, the deficit will be back to around 4 percent and grow every year after. The following chart shows that under CBO’s current law assumptions, government spending will continue to climb far into the future, possibly reaching near 40 percent of GDP, absent any meaningful entitlement reforms.