The Deficit Is Shrinking Fast!

Deficit as per cent of GDPThe deficit as a percentage of GDP.

One of our two political parties is still saying that the United States faces a “spending crisis” that must be immediately addressed by further cuts to federal spending.

If we do not cut spending, the Republicans say, our debts will spiral out of control and the country will implode.

The good news, for those who don’t relish the thought of the country imploding, is that this fear-mongering appears to be seriously overblown.

Our debt and deficit crisis is actually getting better fast.

The deficit itself is now shrinking quickly, and–as evidenced by today’s super-low interest rates–the bond market is not worried about our ability to maintain our debt load over the long haul.

The ongoing budget deficit, furthermore, is not just the result of a “spending problem.” It’s also the result of a “low tax problem,” at least relative to most prior history.

Over the long-term, if we don’t get our health care and military spending under control, we will face a big deficit problem. But we don’t today.

Don’t believe it?

Our deficit is still high in absolute dollars, but it's now shrinking rapidly. And this chart does not show the impact of this year's tax increases and spending cuts.

As a per cent of GDP, our current deficit looks even less extreme. If the deficit-reduction trend continues, which it should, we'll soon be back in well-charted waters!

The reason that the deficit is now decreasing, meanwhile, is a result of two factors: Spending (red) has plateaued, and tax revenue (blue) is recovering again.

When you look at spending and tax revenue as a per cent of GDP, it's clear that the deficit is caused by BOTH higher-than-average spending (red--22% of GDP) and lower-than-average taxes (blue--only 17% of GDP). But, regardless of the causes, the deficit is shrinking rapidly.

Importantly, the country's TOTAL debt to GDP has actually fallen significantly from the peak, even with the ongoing growth in government debt. This is very good news.

And the biggest drop in debt to GDP has come from American households--the real engines of the economy. Households are in much better shape than they were four years ago.

Thanks to today's amazingly low interest rates, moreover, households are spending less of their disposable income on debt service payments (interest) than they ever have before. That gives them more room to spend their money on other things.

In any event, you can chill out a bit about the federal budget deficit. As this chart from BCA Research shows, it's getting better fast.

By the way, the big economic argument that everyone has been having for the past five years is now over...

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