Irrefutable Sign Of Recovery: Federal Receipts Are Up

chart federal government finances

Since its low-water mark last January, the rolling 12-month total of federal government revenues has been rising at an annualized rate of 10%. In the past six months, the rolling 12-month total of federal government receipts has risen at a 12.5% annual pace. This has nothing to do with tax rates, since they haven’t changed at all. It is entirely attributable to rising incomes and profits, and those in turn provide irrefutable evidence that the economy is improving. In a similar vein, Mark Perry in a series of posts has noted the long and growing list of states that are registering strong growth in receipts, the latest of which is here.

Just as declining revenues are a hallmark of recessions, rising receipts are a hallmark of recoveries.

I note with great relief that the 12-month rolling total of federal spending has been flat since June ’09.┬áThe narrowing gap between spending (flat) and revenues (rising) has brought the 12-month federal deficit down from a peak of $1.48 trillion last February, to $1.26 trillion in October. In terms of GDP, the deficit has declined from a high of 10.3% last December, to approximately 8.5% in October. This is welcome progress, of course, but to bring the deficit down to a more reasonable level (say, 3-4% of GDP) in coming years we need to avoid the huge spending ramp-up that will occur if ObamaCare is fully implemented and entitlement programs are not trimmed.

I am encouraged that the Republican victory in last week’s elections came with a clear mandate to curb the growth of government and keep taxes from rising. The political winds have shifted to a degree that should find at least a majority of Senators, and perhaps 60 or more, who are willing to extend the Bush tax cuts for all taxpayers for at least the next two years. Already the Republicans’ coming control of the House should be enough to put a break on the growth of spending, which could result in at least an important de-funding of the spending necessary to implement ObamaCare.

The early recommendations of the Bowles-Simpson deficit commission, released yesterday, are highly encouraging. If at least some of the ideas gain currency, we could see significant and very positive reforms. Eliminating deductions in order to get lower and flatter tax rates for individuals and corporations is a very positive change. Reining in the growth of entitlements, defence, and discretionary spending is essential, and it is a key part of the Republicans’ mandate and key objectives. Those reforms would almost certainly boost the prospects for future growth, and reinforce the healthier trends in spending and revenues that we have seen so far this year. There is plenty of light at the end of the deficit tunnel, and continued recovery seems all but assured.

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