Sunday, January 18, 2015

Behind the Lower 2014 U.S. Federal Budget Deficit: A New Default

The U.S. Government’s fiscal deficit of $483 billion for fiscal-year 2014 is the lowest since 2007.[1] At a preliminary 3% of GDP, that deficit is much better than the 2010 deficit, which came in at 10% of the GDP. To be sure, the American economy was larger in 2014. Also, the federal government’s overall fiscal improvement masks changes “behind the curtain” that may not be so palatable.

In 2014, the federal government’s revenues first crossed the $3 trillion level.[2] Had the spending level of 2007 been that of 2014, the government would have run a budget surplus for the year. To be sure, going back to pre-recession spending-levels would ignore the gradual upward slope of spending since at least 2000; based on this slope, and assuming the actual revenue, the deficit for 2014 would have been appreciably more than $483 billion.

So, is the spending side to be lauded or criticized? In large part, this depends on the person’s political ideology. The same goes for the revenue side. What I find interesting about the spending is that a steeper upward slope (from that from 2000-2007) in from the fourth quarter of 2008 (the credit freeze having occurred that September) to mid-2009 is followed by flat-lined spending through 2014.[3] Put another way, spending departed from the gradual upward-sloped pattern to reach a new plateau. That it held from 2009 to 2014 explains why the spending level in 2014 is lower than it would have been had the gradual upward-sloped pattern continued unabated. Sequestration worked.

Even so, the jump in spending in 2008/2009 pushed it to a new, higher plateau. Even though spending might have been higher, fixing spending around roughly $35 billion represents a higher mark for revenue to reach, even during recessions. In short, the fiscal “new normal” after the 2008 financial crisis and the ensuing recession involves higher spending and more revenue in absolute terms. An alternative might have been to spike spending during the recession then peg the spending after 2009 to the level it would have been consistent with the previous gradually-ascending slope. That amount would have been roughly $30 billion (rather than $35 billion), and the U.S. Government would have shown a slight surplus for 2014.

[1] Josh Zumbrun, “Budget Deficit Reaches a Seven-Year Low,” The Wall Street Journal, January 14, 2015. The budget deficit for the calendar year came in at $488 billion.
[2] Ibid.
[3] Ibid.