Archive for the tag 'budget'

Balanced Budget In May 2009

Kurt Brouwer October 22nd, 2007

We have discussed the shrinking budget deficit before (see below) and, at one point, I had high hopes that the budget would be balanced by mid-year 2008. Unfortunately, tax revenue growth is slowing down (mainly on the corporate side) and so the date for a balanced budget has been pushed back.

This is still good news because it was only a few years ago that we had huge and growing deficits. The sad news is that many people have not even heard that the budget was quite close to being balanced. I’m not sure why this has not been a media topic, but it should be. One of my favorite bloggers, Steve Conover, has covered this issue frequently and he posted this update on the state of the deficit as of September 2007 [emphasis added]:

‘…Unfortunately, the trends are pointing towards a May 2009 balanced budget. The reason that’s unfortunate is because May 2009 is seven months too late to keep the politicians on both sides from demagoguing “the deficit” during the presidential campaign…

…Anyway, here’s the latest balanced-budget-trend chart;…’

Source: Skeptical Optimist

As you can see from Steve Conover’s chart, tax revenues are growing at 6.7%, which is faster than spending growth of 2.8%. As long as this trend continues, the deficit will fall and eventually will move into balance. The obvious question is what happens if tax revenues stop growing as fast as they are growing or if spending grows faster? Those questions, of course, are primarily political questions rather than economic ones because Congress has in its power that ability to cut spending in order to balance the budget. And there are many things Congress could do to spur economic growth. Conover continues:

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Budget Deficit Down Considerably From Last Year

Kurt Brouwer October 6th, 2007

The Congressional Budget Office gave us good news on the budget deficit. It will come in pretty much as expected at 1.2% of GDP or $161 billion. John Godfrey at Real Time Economics Blog reports:

‘…The Congressional Budget Office estimated Friday that the U.S. federal budget deficit for fiscal year 2007, which ended Sunday, was about $161 billion, or 1.2% of gross domestic product. That’s down from the $248 billion shortfall recorded in fiscal 2006, which translated into 1.9% of GDP. The Treasury Department will report the official tally later this month.

Much of the improvement in the nation’s fiscal outlook in the last year has come from continued rapid growth in federal revenue. CBO estimates that [at]18.8% of GDP in fiscal 2007, up from 18.4% 2006 and 16.3% in 2004 and 18.4% in 2000. Outlays came to an estimated 20% of GDP, about equal to the average over the previous five years.

While annual federal spending grew 2.8% in fiscal 2007 over fiscal 2006, year to year, revenue grew 6.7%. Individual income-tax receipts are estimated to be 11.3% higher than last year, and corporate income tax receipts are estimated to be 5% higher. Revenue growth has cooled substantially from the 11.8% fiscal year-to-year increase from 2005 to 2006. Spending growth also slowed…’

The 40-year average budget deficit is over 2% of GDP, so this is good news because the current deficit is about half the long-term average. The key to the decline has not really been spending discipline although spending has not grown much faster than inflation. The real key has been revenue growth.

As the economy has grown, it is not surprising that tax revenues have grown too. And, it certainly does not hurt that capital gains rates are low because that encourage investors to liquidate low basis investments when the time is right from an investment perspective. In fact, I would not be surprised if some investors feel the time is right to take profits because tax rates for long-term capital gains may well go up.