Economy’s growth means federal deficit is now a manageable 2.9% of GDP
Shhh! Don’t tell anyone, but over the past couple of years, the U.S.’s debt burden, the big issue that swept Tea Party-led Republicans into control of the House of Representatives in 2010, has quietly improved.
According to the Congressional Budget Office, the federal budget deficit was $506 billion for fiscal 2014, which ended in October. That’s about a third the size of the deficit in 2009, in the depths of the Great Recession.
The deficit also has fallen from more than 10% of GDP in fiscal 2009 to only 2.9% of GDP in fiscal 2014. (See the chart below, courtesy of A. Gary Shilling & Co.) That would put the U.S. below the 3% limit at which the European Union requires member countries to take corrective action. The CBO expects us to stay around that level for the next five years.
The big improvement in the federal debt should be a boon to the U.S., which has been a magnet for global capital over the last couple of years.
Still, if we don’t address long-term obligations like Social Security and Medicare, the decade of the 2010s may turn out to be a quiet respite before the retirement of millions of Baby Boomers puts us back in the fiscal soup.
But for now, the improvement is impressive even to economist A. Gary Shilling, one of the few to warn about a housing bubble and impending debt storm long before the financial crisis hit.
“The federal government is recovering faster than the household sector,” he told me, mainly because of the economic rebound.
“You’ve had stronger tax collections, especially in the corporate area,” he explained. “When you’ve had any kind of economic growth, you really have a big jump in tax revenues. Economic growth covers a multitude of sins, and a lack of growth exposes them.”
The other big factor, of course, is that the epic August 2011 debt-ceiling battle between Congressional Republicans and President Obama ultimately led to $1 trillion in cuts in discretionary domestic and defense spending over nearly a decade. The “sequestration” process was legislative sausage making at its ugliest, resulting in a credit rating downgrade and later, a government shutdown. But it did the job: Few other developed countries have been able to cut so much without slowing growth dramatically.
Meanwhile, state and local governments have cut more than 600,000 jobs, which along with higher tax revenues have markedly improved the fiscal condition of even big spending states like New York and California.
Unfortunately, Shilling told me, U.S. households are recovering much more slowly.
Because of the housing and credit bubbles, total household debt (including car loans, credit cards, student loans and home mortgages) doubled from 65% of disposable personal income (DPI) in 1980 to a mind-boggling 130% in 2007. (The chart below was provided by A. Gary Shilling & Co.)
Similarly, the savings rate dropped from 12% of DPI to a minuscule 2% in 2005. Who needed to save money when you could refinance your mortgage and spend your home equity?
The savings rate is up to 5%, and total household debt has fallen to 103% of DPI, Shilling said. Usually it takes a decade for consumers to work off the debt they racked up during a boom.
But now, he said, “you’ve been at this process for six years. At this rate, it would take a lot longer than four years to complete. … It’s a long way from where I think it’s going.”
Consumers’ deleveraging and stagnant middle-class incomes have depressed consumer spending for all but the affluent. “You no longer have the consumer spending like a drunken sailor,” said Shilling.
But there’s a silver lining. The weak U.S. consumer recovery, combined with another recession in Japan and near-recession in Europe, has helped subdue inflation here. (Read about falling oil and commodity prices.)
That could take the pressure off the Federal Reserve to raise interest rates soon and may improve the federal debt situation even more.
Why? The CBO is projecting 3% Treasury bill rates by 2017 and a 5% 10-year Treasury note by 2018.
Shilling, however, expects the yield on the 10-year to fall to 1%. (Germany, Japan, and Switzerland’s 10-year notes all yield much less than 1%.) But even if rates stayed around current levels, it would mean billions of dollars in additional budgetary relief over what the CBO projects.
The vastly improved fiscal situation may last only a few years, but it’s a big plus for U.S. markets and the U.S. dollar — and another nail in the coffin for the gold bugs and doom-and-gloomers who can add one more item to the long list of things they got really, really wrong.
[by Howard R. Gold, writing for MARKETWATCH]
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NORM ‘n’ AL, Minneapolis