Friday, August 09, 2013

Update: The Shrinking Deficit

by Bill McBride on 8/09/2013 02:48:00 PM

An excerpt from a post by Cardiff Garcia at FT Alphaville: Shrinking US deficit update, and a new debt ceiling projection

From a note this morning by economists at Barclays:
The US federal budget deficit has been improving at a dramatic pace in recent months. As a percent of GDP, the deficit peaked at 10.2% of GDP in the four quarters ending in Q4 09; over the past four quarters, it has totaled 4.2% of GDP, down from 7.7% one year earlier.
On Monday, the Treasury will release the monthly update of the Federal Government deficit for July. The report is expected to show that the deficit for the current calendar year will be close to the Congressional Budget Office's (CBO) projections in May.   The CBO already released their Monthly Budget Review for July 2013:
The federal government incurred a deficit of $96 billion in July 2013, CBO estimates, $27 billion more than the shortfall in the same month last year. But that comparison is distorted by quirks of the calendar: Because July 1, 2012, fell on a Sunday, certain payments that ordinarily would have been made in July were made earlier, reducing outlays in July 2012 by about $36 billion. No such payment shift occurred in July 2013. Without that shift in the timing of payments in 2012, the deficit for July 2013 would have been $10 billion less than the deficit for July 2012.
Watch out for reports that don't mention the timing issue!

For the current fiscal year (ends September 30th), the CBO is projecting a deficit of 4.0%.  This is down sharply from 7.0% last year.  And the CBO expects the deficit to fall to 2.1% of GDP in 2015.

US Federal Government Budget Surplus DeficitClick on graph for larger image.

This graph, based on the CBO's May projections, shows the actual (purple) budget deficit each year as a percent of GDP, and an estimate for the next ten years based on estimates from the CBO.

After 2015, the deficit will start to increase again according to the CBO, but as I've noted before, we really don't want to reduce the deficit much faster than this path over the next few years, because that will be too much of a drag on the economy.

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