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Federal budget update

Here's an update of the federal budget situation. It's still in awful shape, but on the margin things have improved a bit. Spending growth has slowed, revenues continue to grow faster than spending, and the deficit has consequently shrunk a bit.

With all the talk in Washington about the need for higher taxes, I note that federal revenues have grown about 9% in the past year. That's what usually happens during a recovery, as more people return to work, incomes rise, corporate profits grow, and capital gains get realized. It doesn't take higher tax rates to get more revenue, it just takes a bigger and stronger economy. Considering that the economy has been recovering a pace that is definitely subpar, 9% revenue growth is actually pretty impressive. If we could get the economy to grow at 5% or better, we would probably see a huge pickup in tax revenues.

The biggest problem, therefore, is spending. Spending is very elevated by any measure, and it will only balloon further if current law and programs are unchanged (social security and Obamacare promise to be real budget-busters). As I've argued repeatedly, excessive government spending is likely one of the chief causes of a disappointingly slow recovery. Cutting back spending should be the top priority, and from what I see of the goings-on in Washington and the opinion polls, most people understand this. Higher tax rates are not only unnecessary, they could easily jeopardize the recovery by reducing the after-tax incentives to work and invest.

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