The Budget Deficit Is Collapsing

Morgan Housel, The Motley Fool
Updated

Raise your hand if you saw this coming: The federal budget deficit is collapsing. I mean really, it's in freefall.

None of you?

Let this be a lesson of how fast things change.


The Congressional Budget Office lowered its estimate of this year's budget deficit to $642 billion, $200 billion lower than it estimated in February, and down from $1.1 trillion last year. As a share of GDP, the deficit has declined more than 60% since 2009.

Three things are happening:

  • Tax revenue is coming in much higher than expected, thanks to a stronger economy.

  • Spending is coming in lower than expected.

  • Fannie Mae and Freddie Mac are repaying tens of billions of dollars in bailout funds.

Add it all up, and here's the CBO's new forecast:

More important than the raw number is the deficit in proportion to the size of the economy. As long as an economy runs a deficit smaller than nominal GDP growth, its debt-to-GDP ratio declines. With CBO's updated forecast, we're already about there. Nominal GDP has increased by an average of 3.9% over the last few years. This year's budget deficit is on track to be about 4% of GDP, which would keep the national debt relative to the size of the economy flat.

Here's another way to think about it: Since 1980, the budget deficit has averaged 3.5% of GDP. This year, we'll be at 4%.

In short, CBO expects national debt to GDP to be lower ten years from now than it is today:

Over the long haul, the biggest budget threat is runaway health care costs. But here, too, things are getting better. Health care cost growth is slowing to levels few thought possible, recently hitting a 50-year low. As Annie Lowrey of The New York Timeswrote last week:

Major new studies from researchers at Harvard University, the Henry J. Kaiser Family Foundation and elsewhere have concurred that at least some of the slowdown is unrelated to the recession, and might persist as the economy recovers. David M. Cutler, the Harvard health economist and former Obama advisor, estimates that, given the dynamics of the slowdown, economists might be overestimating public health spending over the next decade by as much as $770 billion.

Revised forecasts should reinforce the idea that forecasting is really hard, and subject to change. The fact that February's forecast was revised by more than 20% is a good reminder that the current forecast may change dramatically, too.

But we've been through a decade when almost all the news about the deficit was bad, worse, and terrifying. People may have forgotten that there can be positive surprises. And that those positive surprises can be just as shocking and jaw-dropping as they were when things were getting worse.

The article The Budget Deficit Is Collapsing originally appeared on Fool.com.

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