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Federal finances update

With today's release of December federal budget numbers comes good news and bad news. The good news is that federal spending is not growing very much and is shrinking relative to GDP. The bad news is that revenue growth has also slowed, and the deficit continues to be well north of $1 trillion per year.

Since the end of the last recession, federal spending (on a rolling 12-mo. basis) has increased only 4.1%. Revenues, in contrast, have increased 6.8%. Both have slowed down in the past six months.

In relation to GDP, spending has declined from a peak of 25.3% in Sep. '09, to 23.3% as of last month, by my estimates. Revenues have increased from a low of 14.5% in Mar. '10 to 15.1% as of last month.

As a result, the deficit relative to GDP has declined from a high of 10.4% in Dec. '09 to 8.1% as of last month. On a nominal basis, the 12-mo. deficit has fallen from a peak of $1.48 trillion in Feb. '10, to a current $1.25 trillion. If current trends continue, the deficit is likely to continue to decline—albeit slowly—relative to GDP. It will likely remain very high for the foreseeable future, but at least it is going to be less than the 9% which studies have shown is the critical level above which deficit-financed spending can lead to a weaker and weaker economy and an unstable outlook.

This chart shows federal debt outstanding owed to the public, which is a better measure than the oft-cited total federal debt which has now reached $15.2 trillion, almost the size of current GDP (which I estimate was about $15.4 trillion at the end of last year). That's because total debt includes about $4.8 trillion which is "owed" to social security; debt that the government owes to itself is not the same thing as debt that is owed to someone else—it's just an accounting fiction. The last datapoint in the chart is my estimate of what the true federal debt will be at the end of this year, based on current trends in spending and revenues. In the four years ending Dec. '12, I project that the federal debt will have increased by $5.47 trillion, or 86%, to $11.8 trillion. Federal government debt will have almost doubled in just four years. The only good thing that can be said about this is that the rate of growth in the debt is declining, albeit only slowly.

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