In what apparently passes for an olive branch in Washington, the Republicans in Congress have offered a reprieve on the government debt ceiling (temporarily dodging the default bullet) in exchange for formal talks on reducing the U.S. budget deficit. Maybe they've been too busy posturing to notice that the deficit has already been slashed, deeply.
The September monthly report of the Congressional Budget Office, the non-partisan government agency that provides independent analysis of the government's accounts, showed that the federal deficit for the first 11 months of fiscal 2012-2013 (October through August) was $753-billion (U.S.) – a massive $411-billion lower than at the same point a year earlier. With federal government revenues expected to have outpaced expenditures in September, the deficit looks on track to be in the range of $650-billion for the full fiscal year – a 40-per-cent drop from 2011-2012.
(Ironically, though the fiscal year is now over, we don't have the CBO's end-of-year deficit estimate – because the CBO is closed due to the government shutdown.)
What has driven this stunning decline in the deficit? Well, it hasn't been the hard line on spending taken by the political right. Government outlays in the first 11 months of the fiscal year were down a modest 4 per cent from a year earlier – and much of that improvement came not from spending cuts, but from lower unemployment insurance payments, a consequence of a healthier job market.
The gains on the revenue side were much bigger, accounting for 70 per cent of the drop in the deficit. A significant portion of these came from the expiration of the payroll tax cut last January. But the revenue side also benefited substantially from the improved labour market, which has increased the national income tax base, as well as higher corporate taxes due to growing profits.
In short, the strongest weapon to fight the deficit has turned out to be a growing economy. It has boosted employment, earnings and corporate profits, raising Washington's tax revenues dramatically and reining in the deficit much faster than most experts had anticipated.
What's more, the CBO expects the trend to continue. Assuming no major changes in federal tax laws or programs, the CBO projects the deficit will be cut nearly in half again – to $378-billion – by fiscal 2014-2015. And that's assuming spending increases of 4 per cent in each of the next two years; the deficit reductions will all come from the revenue side of the ledger.
But that's not good enough for the budget-slashing zealots at the extreme edges of the Republican party. They want a smaller government and a balanced budget – and they've been willing to hold up the entire economy to get their way.
The process is as effective as holding your breath – and about as damaging to your self-interest. If economic health is the thing that has been solving the budget problem you so deeply want to solve, how is it a good idea to jeopardize that health by shutting down the government, putting people out of work and risking a debt default? Right now, the biggest threat to deficit reduction is the government deadlock itself.
If the Republicans really want to cut the deficit, the best solution isn't more talk. It's getting things moving again.
David Parkinson