Academic journal article ABA Banking Journal

Decline in Federal Deficit Not All Good News

Academic journal article ABA Banking Journal

Decline in Federal Deficit Not All Good News

Article excerpt

According to the Congressional Budget Office's May forecast, the federal budget deficit in fiscal year 2013, which ends on Sept. 30, will be $642 billion, or 4% of GDP. This is a significant improvement from the fiscal year 2012 deficit of $1,087 billion, or 7% of GDP. It also is down from the $845 billion forecast from February.

A number of factors are contributing to the improving budget outlook. With almost four years of subdued recovery, economic activity has boosted incomes and corporate profits, leading to stronger federal revenues. Tax receipts also are up because of increases in the Social Security payroll tax and top personal-income tax rate that took effect on Jan. 1. Seven months into fiscal year 2013, revenues are about 16% greater than at the same point in fiscal year 2012.

At the same time, federal spending is falling. With the better economy, there is less need for social programs, such as unemployment insurance. Congress and the Obama administration also have worked to reduce spending. Defense spending is falling with the winding clown of operations in Iraq and Afghanistan. And now the spending cuts under the sequester are reducing outlays. Total federal spending this fiscal year, through April, is down about 1% from the same period in fiscal year 2012.

Another factor adding to the improved budget outlook is slower growth in healthcare spending in recent years. Because of this, the CBO has reduced the assumed rate of growth for future healthcare spending, which means greater near-term deficit reduction. This slowing in growth may be due to cost-containment measures included in healthcare reform.

Also, Fannie Mae and Freddie Mac are supporting the federal government's bottom line this year. …

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