The federal government unofficially closed its books on FY 2014 a few weeks ago, and the news was very good. The deficit plummeted from $680.2 billion last year to $483.4 billion, a reduction of $196.8 billion (28.9%) in just one year, and now stands at only 2.7% of GDP. The mainstream and business media seem to have missed this improvement, which is better than the Congressional Budget Office had estimated in August with its revised estimate of $506 billion. In FY 2014 Federal receipts rose by 8.9% (39% from individuals, 23% from corporation, and 38% from Social Securities payments), while outlays increased by only 1.4%, made possible by reductions in spending on Defense. Unemployment Insurance, and Agricultural outlays.
How could this be? Do the Fed, the President, or Congress deserve any credit? Probably all deserve some, but not all equally or in the same way. By staying the course on interest rates and slowly reducing asset purchases, the Fed has maintained the confidence of businesses and kept the cost of investment low. The President certainly deserves credit for standing his ground on restoring the top marginal individual income tax rate to 39.6% and on funding for the Affordable Care Act. Finally, Congress (particularly the House) deserves credit for finally ending its sabotage of the recovery by agreeing to a budget resolution, restoring some budget cuts, and removing barriers to raising the debt ceiling.
During FY 2014 federal receipts rose by $246.8 billion (8.9%), while outlays increased by only $50.0 billion (1.4%). Drilling into the receipts growth shows that $78.2 billion came from individual income tax, $47.2 billion came from corporate income tax, $77.6 billion came from social security taxes, and the remaining $43.8 billion from excise taxes, estate and gift taxes, customs duties, and miscellaneous other sources. A more in-depth look at outlays reveals that expenditures by most Departments and Independent Agencies changed little between FY 2013 and FY 2014. The notable exceptions are Defense outlays dropped by $29.8 billion, Labor outlays decreased by $23.1 billion ($24.7 billion from Unemployment Benefits), and Agriculture outlays decreased by $14.1 billion ($6.5 billion from Food and Nutrition Programs and $5.5 billion from Crop Insurance). The parts of government where outlays increased the most are Health and Human Services up $49.7 billion, the Social Security Administration up $38.4 billion, and Education up $18.7 billion.
Some of the increase in individual income tax receipts likely reflects residual effects of the American Tax Relief Act of 2012 and the Affordable Care Act, which both contained tax provisions that took effect January 1, 2013, because 2013 extension returns were not due until October 15th. Most of the increase reflects increased growth of the nation’s economy.
A continued reduction of the federal deficit is expected for FY 2015. The CBO August 2014 estimate has it dropping to $469 billion (2.6% of GDP). Given that the CBO overestimated the FY 2014 deficit, its estimates are likely $20 to $30 billion too high for FY 2015 as well. Economic growth above the currently assumed 3.2% real GDP growth rate and 134,000 new jobs per month will lower the deficit even further.