Federal Budget: What Deficit?

Do you remember the American government shutdown of October 2013? Just five months ago, the “deficit hawks” of the United States Congress refused to finance the continuing operations of most of the federal agencies and functions.

They claimed that they were deeply concerned about the unrestrained debt financed spending habits that were imperiling the financial futures of the American people. And they had a point; after all, the federal government deficit had exceeded $1 trillion in each of the four fiscal years 2009 through 2012.

Last week, however, the U.S. General Accountability Office (GAO) announced some stunning news. Apparently, the deficit had plummeted to $680 billion in fiscal 2013; it represented the fastest deficit decline in the United States since the end of World War II.

Before we get too excited by that “historic” decline, of course, it would be helpful to remember why any such decline was possible in the first place. After all, had the deficit not climbed to record levels during the previous four years, it would have been impossible for the GAO to announce such a dramatic decline this year!

Nevertheless, for individuals who remain concerned about American profligacy, the decline can be perceived as a return to a level of relative normality. The United States produces $17.1 trillion of Gross Domestic Product (GDP) per year, an amount that is roughly 25 times as large as the $680 billion debt.

A ratio of 25 to 1 may be worrisome, but it is certainly not catastrophic in scope. It is analogous, for instance, to a family that earns $100,000 per year and that needs to borrow an additional $4,000 to make ends meet during a financially challenging period.

The total accumulated debt of the United States now exceeds $17.3 trillion. That is roughly 1% higher than the $17.1 trillion of annual GDP, representing (again) a troubling but not terrifying difference. It is analogous to a family with annual income of $100,000 that decides to carry a $101,000 mortgage.

These analogies are not perfect, of course. The federal government’s debt must be refinanced at regular intervals, while a family can often “lock in” mortgage debt at low fixed rates for up to thirty years.

On the other hand, a family can lose 100% of its earnings when a head of household loses his (her) job. The federal government, though, can continue to receive significant tax revenues throughout the most dire depression periods.

These facts may explain why Congressional Republicans recently “caved” (in the words of their own supporters) during negotiations over the debt ceiling. Although long term budget projections do show federal deficits climbing back to unsustainable levels within a decade, politicians on both sides of the aisle appear to be content to permit current budget policies to remain in place for now.

If you were Comptroller General Gene L. Dodaro of the GAO, would you regard the 2013 budget deficit as a promising sign of fiscal health, or as a troubling sign of fiscal stress?