- No mas: Principal bans Spanish language in intercom announcement
- Hacking software could put ‘zombie drone army’ in user’s hands
- Support for stricter gun laws drops: poll
- 10 whales dead, 41 others stranded in Everglades
- John Boehner faces bipartisan pressure to allow gay-rights vote
- Martin Bashir resigns from MSNBC over ‘ill-judged’ comments about Sarah Palin
- Rep. Duncan Hunter: While Obama prays for Iranian change, U.S. should ready its nukes
- Best company ever? Veteran Beer Co. exists to employ vets, provide quality beer
- Iran official: Sanctions ‘utterly failed’ to stop nuclear program
- ‘Black Santa’ display at IU sparks student outrage
Tax timing, Fannie and Freddie help cut federal deficit in half
CBO forecast shows improved 5-year trend
Washington didn’t take much time to celebrate the dramatic reduction in federal deficits announced by congressional budget analysts a week ago, but Wall Street saw it as reason to cheer and send stocks to record highs. For many investors, the more than halving of the deficit from a high of $1.55 trillion during the depths of the recession is the latest sign that the economy finally has turned the corner and is on a solidly upward path.
Nearly all of the improvement in the government’s finances is a result of the economy, most notably a surge in revenue on corporate bonuses, stock dividends and capital gains payments at the end of last year that was timed to beat the Jan. 1 start date for higher tax rates on wealthier citizens. That helped fill the Treasury’s coffers with a surge of nearly $100 billion in revenue to a monthly record of $407 billion when the tax bills came due in April. At the same time, the government got a big boost from $95 billion in dividend payments from Fannie Mae and Freddie Mac, the two bailed-out mortgage giants that turned profitable at the end of last year amid a rebounding housing market.
The combination of windfalls enabled the Congressional Budget Office to slash its deficit forecast by a record $203 billion for this fiscal year to $642 billion — the deficit’s level before the crisis broke out in 2008. The CBO’s projections show further significant improvement in the next five years as the deficit falls to $378 billion, or 2.1 percent of economic output by 2015 — a fraction of the worrying 11 percent peak hit in 2009 — before turning up again.
While some argue that the April surge in revenue was only a one-time affair, and the long-term deficit problem generated by fast-growing entitlements is far from solved, there are some promising long-term trends. For one, higher tax rates put into place this year ensure that revenue will continue to pile in at higher rates and hit 19.3 percent of economic output by 2015, up substantially from the recession-induced low of 15 percent in 2009. Moreover, while a portion of the spring dividends from Fannie and Freddie were results of one-time tax factors, the mortgage giants must continue to turn over the billions of dollars they make in profits to the Treasury unless and until they are reformed or eliminated.
Perhaps most important, on the spending side of the ledger, Congress and the administration — with help from the slowly mending economy — have made significant headway at reducing outlays from a high of 25 percent of economic output in 2009 to 22 percent today. The CBO outlook even contained a kernel of good news on entitlements: A trend toward slower growth in enrollments and health care spending prompted the nonpartisan budget office to slash its deficit forecasts for the next decade by nearly $200 billion — a promising turn of events that could help solve the long-range deficit problem.
Wall Street notices
The reversal of fortunes has not been lost on Wall Street.
“The most threatening artifacts of the financial crisis — financially damaged households and destabilized public finances — are to a very large extent history,” said Michael Gavin, an analyst at Barclays Research, noting that the combination of economic growth and vigilance by Congress has pushed down the deficit to pre-crisis levels. “We think it is likely to get better before it gets worse.”
Confirmation that the turnaround was mostly the result of an improving economy comes from the 50 states, most of which also are reporting better-than-expected revenue this year. A handful of states — including California, whose financial picture has brightened dramatically in recent years — are even debating what to do with unexpected surpluses.
“The U.S. economy is in much better shape today than was expected four years ago, and the federal budget outlook is significantly better today than was expected four years ago,” said Wall Street economist Scott Grannis, noting that the improving economic and budget trends “go a long way to explaining the equity market rally that began four years ago and continues today.”
“The main driver of higher revenues is simply the ongoing growth of the U.S. economy, which in turn has boosted incomes, corporate profits and capital gains,” he said. “The bigger story, however, is the huge decline in federal spending. No actual cuts were necessary to reduce the burden of government spending by over 3 percentage points in just four years.”
After years of fearing the worst about the deficit, investors and analysts are starting to hope for the best, Mr. Grannis said. “Where once there was no hope whatsoever, there is now reason to be optimistic.”
For longtime budget analysts, there is a sense of deja vu. The economy historically has been a more important factor than Congress in reducing deficits, as seen after World War II and during the 1980s and 1990s. Some analysts predict that the economy will continue to surprise with further dividends, as it did in 1996 when a monumental budget battle between Republicans in Congress and a Democratic White House was largely resolved when the robustly growing economy started flooding the government with revenue.
Sy Harding, founder of Asset Management Research Corp., said the economy could repeat its surprise performance of the 1990s, which has many parallels with today. Then, as today, a sluggish period with high joblessness followed the recession. But after a slow start in the 1990s, the expansion blossomed into a period of robust growth with a stock market boom and record low unemployment that helped turn large budget deficits into unprecedented surpluses by the turn of the century. Some economists think something similar could happen this time.
© Copyright 2013 The Washington Times, LLC. Click here for reprint permission.
About the Author
- Spending on social welfare rose as economy tanked during recession
- Treasury aims to sell off GM stock by end of year
- Janet Yellen nomination approved by banking panel
- Chevron trial nears its end
- Fed nominee Janet Yellen objects to audit of monetary meetings
Latest Blog Entries
By Tom Harris and Madhav Khandekar
Bad science puts rich nations on the hook for trillions in climate liabilities
- Angry NTSB ousts railroad union from N.Y. train crash site
- Hola: Boehner prepares to push amnesty bill through House
- Kill team: Obama war chiefs widen drone death zones
- Puerto Rico caravan honoring Paul Walker ends in 6 drunken-driving arrests, 72 speeding tickets
- Apple wins facial recognition patent for iPhone 6
- Xbox One, Playstation 4 games penalize users for cursing in their own homes
- First Dog Sunny knocks down Ashtyn Gardner; Michelle Obama yanks leash
- Inside China: Nuclear submarines capable of widespread attack on U.S.
- HURT: Postal Service misses address by a whole continent
- Allen West warns Obamas backdoor gun control is moving forward
Independent voices from the The Washington Times Communities
Criticism may not be agreeable, but it is necessary. It fulfills the same function as pain in the human body. It calls attention to an unhealthy state of things.
Wall Street news for retail investors who want to know what's going on.
Does it take over 25 years in public service to really know what goes on in Washington?
Despite cynicism about the law, it can provide you justice, protection, and ensure your rights.