NationNation Now

Remember the deficit? It's melting

WASHINGTON — The capital may be enduring a brief spell of record-low temperatures this week, but the federal deficit continues to melt away.

According to the latest figures from the nonpartisan Congressional Budget Office, the red ink for the first quarter of fiscal 2014, which began Oct. 1, dropped by almost 40% compared with the same period a year earlier.

The deficit has gone down so much that the federal government actually ran a surplus for December — a one-time occurrence that resulted from some special circumstances but still an indicator of the rapidly improving state of the government’s finances.

Indeed, many prominent economists, including outgoing Federal Reserve Chairman Ben Bernanke, have suggested that the deficit is now coming down too fast.

At a news conference last month, Bernanke said fiscal policy had been too tight recently — central bank jargon for suggesting that with the economy still operating below capacity, a somewhat higher deficit over the next year would help, not hurt.

The magnitude of the change is striking. For October to December 2012, the government ran a deficit of $293 billion. By the last three months of 2013, the deficit had shrunk by $111 billion, to $182 billion.

An improving economy and tax increases that took effect in 2013 both pushed revenues higher and accounted for about 40% of the improvement; spending reductions accounted for the rest. A chunk of the improvement involved one-time events, but most of the change represents a real, long-term shift in the government’s finances.

Assuming the economy continues to grow at its current rate or perhaps a bit faster, as most economists forecast, the deficit will continue to decline through the rest of the current fiscal year.

For now, that means the national debt — the money the government has to borrow to cover its red ink — will grow more slowly than the overall economy, making the debt burden easier to handle.

Most forecasts say the deficit will begin to rise again sometime during the 2020s as the baby-boom generation moves into retirement.

How soon that will happen, and how much the deficit will worsen, will depend heavily on the cost of healthcare. Medicare, the government’s health program for senior citizens, serves as the primary driver in most projections of the government’s long-run financial problems.

david.lauter@latimes.com

Copyright © 2014, Los Angeles Times
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