Federal budget continues to improve

One of the great, largely-untold stories of the past three years is the ongoing and substantial improvement in the federal budget. Thanks to very slow growth in spending and a decent rise in revenues, the budget deficit has declined from a high of $1.47 trillion in late 2009 to $1.03 trillion in the 12 months ended January 2013. Relative to GDP, the deficit has dropped from a high of 10.5% to 6.7%. This was achieved despite no increase in tax rates (and in spite of a 2-year payroll tax holiday), despite no announced budget cuts, and despite the Senate not having once passed a budget. Three cheers for Congressional gridlock, and a hearty "well done" to an economy that has managed to grow despite all the headwinds it has faced!

Looked at another way, the burden of the federal deficit has dropped by a very impressive 36% in the past three years. More important, perhaps, is that the burden of government spending has dropped by 10% over the same period. These rank as significant improvements in the underlying economic fundamentals of the economy, since they allow the private sector to keep more of its earnings. The private sector is much better at spending money than the government, so getting government out of the way and out of our pockets is a good thing.

Over the past year, federal revenues have grown by over 9%, mainly because the economy has been adding jobs. Even taking into account the surge in revenues in December, which was driven in large part by accelerated income and dividend payouts designed to avoid the threat of higher taxes in 2013, revenues had been rising at a 7-8% pace for most of last year, while spending in the 12 months ended January 2013 was up only 0.4%.

If current trends were to continue, the budget would be balanced within 7 years or so, without the need for budget cuts or higher taxes.

The problem, of course, is that these trends are not likely to continue, unless we get real healthcare and entitlement reform. Healthcare costs are going to rise enormously if and when Obamacare is implemented, and social security benefit payments are going to outstrip receipts unless the retirement age is increased, benefit increases are limited to the increase in inflation, and payouts are means-tested.

But for the time being, things are getting better, and that's good news that is not widely understood.