The incredible shrinking budget deficit

I’m just going to highlight a few pieces from this Advisor Perspectives article written by Schwab’s Chief Investment Strategist Liz Ann Sonders.  In short, the federal budget deficit is shrinking rapidly thanks to improving personal incomes, corporate tax revenues and declining government spending.  The deficit has fallen from 10+% of Gross Domestic Product to under 5% of GDP since 2010.

(From the article)

  • The budget deficit has been cut by more than half…from over 10% of GDP to less than 5% today.
  • June saw a budget surplus!
  • The health of the private sector (given its deleveraging since 2007) more than offsets the drag from public sector deleveraging.

Here is a story still under-told. The US federal budget deficit is plunging. It’s been in a steady decline for over four years; but the pace at which it’s improving has really picked up in the past year, particularly last month. About two-thirds of the improvement has come from the spending side, with the remainder on the revenue (tax receipts) side.

Budget Deficit 6-30-13

Sonders goes on to point out that the slower GDP growth we have experienced in the last few years is likely the result of household and government deleveraging (debt reduction).

“Much has been said about the “new normal” rate of economic growth; sometimes referred to as “stall speed” growth. But that’s inclusive of government. Less noted is the “old normal” rate of growth by the private sector. Since the recession ended in June 2009, the overall average rate of growth of US real gross domestic product (GDP) is a relatively paltry 2.1%. However, excluding the government (federal, state and local) sector, the average pace of real GDP has been 3.1% over the same period. It shows that the government can and should continue to deleverage without tanking the economy, thanks to the relatively healthy private sector.”

Please read the full article here: Arc of a Diver: The Budget Deficit’s Plunge (Adviser Perspectives).

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