Budget Deficit Shrinks; Long-Term Economic Trajectory Still Unstable

Budget deficit for 2014 has declined. For FY 2014 the budget deficit was $483 billion, or 2.8% of GDP. The Treasury published its quarterly economic policy statement yesterday for the fourth quarter of 2014, which coincides with the end of the 2014 federal fiscal year (October 1, 2013 - September 30, 2014). The FY 2014 budget deficit came in at $483 billion, versus Congressional Budget Office projections of $506 billion (as of August 2014). From the Treasury,

"The strengthening of economic conditions in recent years has occurred alongside a faster-than-expected reduction in the federal government budget deficit.  During the fiscal year that ended in September 2014, the budget deficit declined $197 billion to $483 billion, $100 billion lower than projected in the July Mid-Session Review.  The FY 2014 deficit was equivalent to 2.8 percent of GDP, the lowest share since 2007.  A combination of fiscal retrenchment and faster economic growth have lowered the deficit as a share of the economy by 7 percentage points from a peak of 9.8 percent in FY 2009 – the most rapid improvement in any five-year period since the demobilization after World War II."

I'm not sure why the Treasury's July deficit projections were $77 billion higher than the CBOs in August. Possibly due to staff using somewhat different economic estimates and the 1 month lag in updates. But that's just a guess.

• The good news is that the current deficit as a percentage of GDP has fallen to 2.8%, which compares to an average deficit of 3.1% over the past 40 years.
• The bad news is, well, the "rapid improvement" in the deficit that the Treasury sites is only in comparison to the extraordinary deficit spending of the past 6 years. The US taxpayers face a mountain of debt that has grown from the size of the rolling Appalachians to the atmosphere-scraping Himalayans.  
• The worse news is that persistent and growing deficits are projected through 2024, which will continue to pressure total federal debt higher, eventually restraining economic growth and increasing the risk of fiscal crisis (hello, Eurozone).

Unfortunately, deficit spending keeps the federal debt surging higher. Federal debt held by the public has more than doubled from 35% of GDP in 2007 (or $5.0 trillion) to 74% of GDP in 2014 ($12.8 trillion). This is analogous to the balance on a credit card increasing both outright, and as a percentage of annual net income. Every year the cardholder continues to outspend their net income and the amount they owe on their credit card rises.

Spending on entitlement programs to accelerate; cost of debt to rise. The CBO further projects that "persistent deficits through 2024 would push debt relative to GDP even higher," if current laws governing federal taxes and a spending remain unchanged. By far the biggest driver of the debt projections are the government entitlement programs: Social Security, Medicaid and Medicare. From the CBO's budget outlook,

"Between 2014 and 2024, annual outlays are projected to grow, on net, by $2.3 trillion, reflecting an average annual increase of 5.2 percent. Boosted by the aging of the population, the expansion of federal subsidies for health insurance, rising health care costs per beneficiary, and mounting interest costs on federal debt, spending for the three fastest-growing components of the budget accounts for 85 percent of the total projected increase in outlays over the next 10 years:

• Annual spending for Social Security is projected to grow by almost 80 percent. Under current law, outlays for that program would climb from 4.9 percent of GDP this year to 5.6 percent in 2024, according to CBO's estimates.
• Annual net outlays for the government's major health care programs (Medicare, Medicaid, the Children's Health Insurance Program, and subsidies for health insurance purchased through exchanges) are projected to rise by more than 85 percent. Outlays for those programs would grow from 4.9 percent of GDP to 5.9 percent, CBO anticipates.
• Outlays for net interest in 2024 are projected to be more than triple those in 2014—the result of both projected growth in federal debt and a rise in interest rates. Net interest outlays would rise from 1.3 percent of GDP this year to 3.0 percent by the end of the coming decade, CBO expects.

In contrast, taken together, all other spending is projected to grow by only about 20 percent. Relative to GDP, such spending would fall—from 9.3 percent this year to 7.3 percent by 2024, its lowest percentage since 1940 (the earliest year for which comparable data have been reported)."

The CBO's normal budget projections only go out 10 years, but their "long term" projections are even more disturbing, and foreshadow a crippled US economy due to massive social welfare programs that it cannot sustain without either significantly raising taxes, or cutting spending, or both. Think Greece. No, really.

Go vote. Tomorrow the markets may have a glimmer of clarity about which path the country can take out of this financial morass. But glimmers aren't mandates; mandates don't always produce consensus; and even consensus may not translate into legislation. But for now, let's all take the next step and exercise your right to be heard.

Under development: When I learn how to add Excel charts and images to my posts I will add some nifty graphs courtesy of the CBO. Until then, my apologies as I am still learning how to use the blogging templates.