Federal Deficit Continues to Drop

Statement

Federal Deficit Continues to Drop

New estimates suggest that the federal budget deficit has dropped below prior expectations for the third consecutive year. Recent figures have been released by the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO). The administration estimates that at the end of September, which ends the federal government's fiscal year, the deficit will have dropped over 50% to $158 billion.

Recently, we have heard Federal Reserve Chairman Ben Bernanke, and before him former Chairman Alan Greenspan, warn of the consequences of large deficits. As mayor, I considered balancing Dayton's budget during all eight years of my tenure to be one of my major accomplishments. Similarly, balancing the federal budget remains our goal.

Without a doubt, $158 billion is an unfathomable number. However, it is easier to understand when the deficit is put in perspective compared to the size of the entire U.S. economy. The deficit is only 1.5% of the U.S. economy.

At 1.5% of the nation's nearly $14 tillion GDP, the deficit is far below the 40-year average of 2.4%. Last year the deficit was 1.9% of the GDP. So, as the overall economy grows and the overall deficit shrinks, the debt becomes a smaller and less significant share of the overall economy.

The primary reason the deficit has been cut in half over the past three years is what out-going OMB director (and former Ohio Congressman) Rob Portman referred to as a "tidal wave of tax revenue," in a Wall Street Journal (WSJ) opinion piece last year. Just before leaving OMB, Portman told the WSJ that: "The deficit reduction was being driven largely by surging corporate profits...the deficit could end up below the…projection." Only a few months ago OMB had projected this year's deficit to be $205 billion and the CBO was projecting the deficit to drop to $172 billion. Indeed, the deficit dropped further than either agency had projected.

Tax receipts are expected to increase 6.7% this year, according to OMB. This year's federal revenue increases follow several years of double digit growth. Since 2004 tax collections are up by a total of nearly $700 billion. That is the largest revenue gain (during a similar time frame) in U.S. history. Cutting marginal tax rates has historically resulted in increased federal revenues. This proved true after the Kennedy tax cuts of the 1960s, the Reagan tax cuts of the 1980s, and the 2003 tax cuts which I voted for.

The revenue gains began after Congress passed the Jobs & Growth Tax Act, which I was excited to vote for in my first term as a U.S. Congressman. The tax cuts passed in 2003 reduced tax rates for everybody paying taxes and allowed American families to keep more of the money they earned. The "growth package" portion of the legislation reduced the capital gains tax, and has helped to stimulate the stock market to record heights. When the federal government cuts capital gains taxes (as it did in 1997), the stock market has responded with periods of growth and federal coffers have benefited.

The key to reaching the target of balancing the budget within five years (by 2012) is to contain spending. In the 109 th Congress I voted for the Deficit Reduction Act of 2005 (H.R. 4244). That legislation reached across the federal government's massive budget and found nearly $39 billion in savings over five years, by simply slowing the rate of spending growth to help reduce the deficit.

In the 109 th Congress, I supported the House budgets which held non-security appropriations to 0.7% growth in 2006 and -0.4% in 2007. By freezing or cutting spending, as any household would do, Congress would bring the budget into balance even faster than the five years that has been projected.

After the tech bubble burst, corporate scandals, recession, and the economic damage inflicted by terrorists on 9/11, the federal budget showed red ink peaking again in 2004. Since then, the deficit has dropped in half over three consecutive years. Each year the deficit has fallen by more than was expected. This has happened primarily due to additional revenue that has been collected since the tax cuts were passed in 2003. Further, the 109 th Congress passed deficit reduction legislation which slowed the rate of growth of some programs. Continuing to reign in spending is one of the important tasks that face the 110 th Congress.

Source