Federal budget numbers continue to impress

Bringing with them the close of FY 2012, September budget figures were encouraging. The deficit fell to just under $1.1 trillion, thanks to increased revenues—up 6.4% from the prior fiscal year—and a reduction in spending—down 1.7% from the previous fiscal year. These numbers reinforce the trend we have seen since the current recovery began: spending growth has been minimal, but revenues have continued to expand as the economy has grown and jobs have increased. 

The above chart shows the 12-mo. rolling sum of federal spending and revenues. Note that spending is almost unchanged since the recession ended, whereas revenues have risen significantly, and without the help of any tax hike. In fact, revenues have increased despite tax rate decreases, since there has been a partial payroll tax (FICA) holiday in effect for most of the past two years.

This next chart shows the same numbers as the first, only relative to GDP. Here we seen a welcome decline in spending, and only a meager increase in revenues.

The federal deficit as a % of GDP has declined significantly from its 10.5% high in late 2009 to what is now about 7%. This is very good news, since deficits above 9% of GDP can quickly become destabilizing.

If these trends continue, the deficit will continue to decline without any need for higher taxes.

The sad part of the story is that the federal deficit, which has totaled almost $5 trillion since the end of 2008, has effectively absorbed almost all of the after-tax profits (which have set all-time records) of U.S. corporations over the same period. Corporations have worked extremely hard to be productive and profitable, only to have the fruits of their labors in large part squandered by profligate government spending, which for the most part consisted of transfer payments (not to mention countless billions lavished on "green" industries that have since gone bankrupt). This is the simplest answer to the question: "why has this recovery been so weak?" If the fruits of the economy's labors are not spent and invested wisely, there is little reason to expect living standards to rise.

In this light, the reduction in the burden of government in recent years is a welcome development. The sum of what has happened is hugely disappointing, but the change on the margin is positive.