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The federal budget is still bleeding trillions

For the 12 months ending April '10, the federal budget deficit rose $60 billion to $1.42 trillion, or about 9.7% of GDP. The deficit has been running at a $1.4-1.5 trillion annual rate since last June. As a percent of GDP, the deficit has shrunk from a high of just over 11% last September, primarily due to a modest reduction in outlays and an upturn in the economy (nominal GDP rose 2.5% from September through March).

There are tentative signs that revenues may have stopped declining, and this would make sense given the economic recovery that began last summer. Although spending has declined from its peak, under current law it is unlikely to decline much further as new spending and entitlement programs kick in. Consequently, we are unlikely to see any meaningful improvement in the U.S. fiscal situation before the November elections. A very large budget gap., record levels of spending relative to GDP, and intense pressure to raise tax rates are almost sure to be the major issues of the campaign. Every survey I've seen suggests Democrats will suffer significant losses in November, enough surely to make legislative gridlock likely, and maybe even enough to allow Republicans to veto the spending needed to launch Obamacare, thus putting a lid on future spending. It is not impossible either to foresee enough pressure developing to block next year's scheduled increase in income taxes.

The situation today is not pretty by any stretch of the imagination, but there is reason to be optimistic for the future.

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