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Federal revenues continue to outpace spending





The January budget figures confirm the big story that not many have heard: federal revenue growth has been outpacing spending for more than a year. The 12-month rolling sum of federal revenues rose 10% over the past 12 months, and it rose at a 10.7% annualized pace in the past six months. Meanwhile, the 12-month sum of spending hasn't budged at all since Oct. '09.

This is not an unpredictable outcome, though many have ignored it. Recoveries typically result in a slowdown in spending (fewer people receive unemployment claims) and a pickup in revenues (more people working, rising corporate profits, rising capital gains realizations). Since the current recovery began, the deficit as a % of GDP has declined from a peak of 10.3% to 8.6%, and the 12-month deficit has declined to $1.28 trillion in January, down from a high of $1.48 trillion last February.

If Congress can hold the line on spending, and if the economy picks up a little speed, we could see the deficit fall to 7-7.5% of GDP by the end of this year. We would still be a in mess of trouble (adding at least another $1 trillion to the national debt as interest rates rise), but we would be making progress. Better fiscal policy from Washington would help improve confidence, which in turn would boost investment and job creation, which would then reinforce the positive developments in receipts and outlays that are already taking place. We are not at all in a hopeless situation.

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