Tuesday, May 14, 2013

Federal deficit? What deficit

OK. So a CBO estimate of a FY2013 federal deficit of $642 billion is still $642 billion. But its $200 billion less than the CBO estimated just three months ago. And it's well below the $1.1 trillion 2012 federal deficit.

So what gives? Simple. Revenues are coming in faster than expected thanks to a "modest-at-best" economic recovery that is putting folks back to work and creating taxpayers. Moreover, repayments by Fannie and Freddie are also helping.

And let's not forget that spending restraint - federal spending will fall for the second year in a row - is also helping to sop up the red ink quicker than anyone thought possible.

At 4% of GDP and falling, the deficit is finally becoming manageable.

The next question - is the CBO estimate still too conservative?

The CBO said last August that the deficit would fall to $641 billion if the country went over the fiscal cliff. Wow! That's one helluva of a miss. But it also highlights the difficulty in forecasting revenues and spending.

At least for 2013, the country was able to extend the Bush tax cuts to 99% of the population and come within $1 billion of hitting the CBO's target.  Let me repeat - all without a cliff-induced recession!

Is the deficit falling too quickly? 
Sounds like an odd question to ask, but pulling cash too quickly out of the economy could slow growth.

So those who favor a more activist government would argue that additional government spending would slow any fiscal drag and create more jobs.

Those who want to see the government get out of the way would argue there is room for more tax cuts, which would unleash additional business and consumer spending.

You make the call.

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