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Federal budget update: modest improvement




With today's release of May federal budget data, we see the continuation of a healthy trend: federal revenues have increased by 10.7% in the past year, while spending has increased by only 4.4%. Revenues are outpacing spending, believe it or not, and that's happening without any increase in tax rates. As a result, the 12-mo. rolling sum of the federal budget deficit has declined from $1.36 trillion to $1.29 trillion over the past year. It's still monumentally large, of course, but at least it is shrinking modestly instead of increasing further.

Revenues almost always pick up as the economy recovers, and this business cycle is no exception. Indeed, the pickup this time has been more robust than what followed in the wake of the 2001 recession. Growth creates more jobs, more income, and more profits, and these in turn are what generate higher revenues.

The lesson for politicians is simple: we can fix the budget deficit by reining in the growth of spending and reducing the burden of government, and by pursuing policies that help the economy grow. As today's WSJ editorial notes, Texas is living proof that smaller government and a freer economy can work miracles: "37% of all net new American jobs since the recovery began were created in Texas."

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