On Tuesday, the Treasury reported the federal government’s receipts and expenses for June. The upshot: Through the first nine months of fiscal 2010 (which started last fall), the federal government has run a $1 trillion deficit.
Deficits hawks will doubtless highlight these numbers as yet another reason why the National Debt Commission must move swiftly to cut social insurance and impose new regressive taxes. I take the opposite view. The fiscal 2010 deficit—$1 trillion and counting—is an encouraging sign.
Let me explain. Federal tax revenues are highly leveraged to economic growth and to the performance of markets, corporations, and rich people. This means they can be volatile. When markets and profits boom, capital gains taxes, payroll and income taxes, and corporate income taxes flow like a mighty stream. As a result, it’s not uncommon for tax receipts to rise 6 percent or 7 percent in a year when the economy grows by 3 percent. This volatility works to the downside, too. When the economy contracts and markets crash, capital gains and corporate income tax revenues dry up. For example, corporate income taxes (click here and scroll down to Page 30) fell from $370 billion in fiscal 2007 to $304 billion in fiscal 2008 (down 18 percent), and then plunged to $138 billion in fiscal 2009 (down 55 percent). In fiscal 2009, a period in which the economy shrunk about 2.6 percent, government receipts plummeted 16 percent, from $2.5 trillion to $2.1 trillion. To aggravate matters, some government spending is countercyclical. That means that in good times, when tax receipts are high, less money is spent on stimulus and social welfare benefits. In bad times, when tax receipts are ebbing, more money goes out the door. And that’s why surpluses and deficits can materialize out of nowhere.
So where’s the good news in the word of a $1 trillion deficit in just nine months? Well, consider how the short-term fiscal picture improved over the course of 2009 as the markets reflated and the economy revived. In February 2009, the government projected (click here for tables) a deficit of $1.7 trillion for fiscal 2009 (October 2008 to September 2009). By mid-2009, the economy had improved a bit. So in the midsession review, issued in August 2009, the OMB pegged the deficit for FY 2009 at $1.58 trillion. Two months later, when the books on fiscal 2009 were closed, the deficit came in at $1.413 trillion. Economic shifts brought about a $300 billion narrowing of the deficit over the course of seven months.
Fiscal 2010 has seen a similar improvement on original projections. Last February, when OMB released its budget for fiscal 2011, the administration forecast a deficit for the year—already half over—of $1.556 trillion. But this spring, revenues have come in much better than expected. In the first nine months of this fiscal year, corporate income taxes have totaled $133 billion—almost as much as for all of fiscal 2009. You can’t read too much into a single month, but June’s revenues, at $251 billion, were up 15 percent from $219 billion in June 2009. Since February, tax receipts are up 11 percent from the comparable period in the prior fiscal year. Meanwhile, so far this year, spending is down 3 percent from fiscal 2009. Let’s assume that for the remaining three months of fiscal 2010, revenues continue to be 9 percent greater and spending 3 percent less than in the final three months of fiscal 2009. The year would close with a deficit of $1.2 trillion—an improvement of $350 billion over the projection made in February. My guess is that OMB’s midsession review, which will come out in August, will show that the fiscal picture for both fiscal 2010 and 2011 is better than we think. (True obsessives can follow daily tax receipts at the Bureau of Financial Management’s daily statements.)
This improvement, such as it is, won’t do much to affect the long-term situation of entitlements—especially health-care related costs like the Medicare prescription drug benefit, which was enthusiastically approved by many of today’s deficit hawks. But it does mean the notion that the United States could soon be facing a short-term deficit crisis, like Greece’s, is based more on fear (and, by some, on hope) than on reality. As Washington worthies contemplate the difficult choices needed to bring the budget into balance, the economy and the markets are already doing some of the heavy lifting.