Wednesday, April 13, 2011

US Federal Budget Deficit

The more they talk in Washington about reducing the federal budget deficit, the larger it gets. In the past, during the third year of economic expansions, the deficit has always narrowed as the growth of tax receipts outpaced the growth of outlays. This year may be the first ever when the federal deficit widened to a record high this far into an economic upturn. During the first six months of fiscal 2011, which started on October 1 of last year, the federal deficit totaled $829.4 billion, up 15.7% and 6.1% from the same periods during 2010 and 2009. It is the biggest deficit for this period in history.

In the past, political gridlock was bullish because warring factions and special interest groups checked and balanced one another’s fiscal ambitions and excessive demands. In recent years, they’ve learned that they can all get what they want by issuing more and more government debt. Today’s gridlock is all about nobody being willing to compromise by giving up any of the deficit-financed perks they managed to get from the government. But wait a minute: Won’t the need to raise the debt limit before the end of May force the Democrats and the Republicans to agree on a deficit reduction plan? They will. They’ll agree that the deficit needs to be cut by $4 trillion over the next 10-12 years. That may be as much progress as they are likely to make for a long time. (We update these charts regularly for subscribers in our Government Finance briefing book.)

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