The Deficit is Falling!


Budget news from Washington in mid-July sounded good: The U.S. deficit is falling! Compared to the last fiscal year—the worst deficit on record—this year’s deficit through the first corresponding nine months is indeed $76 billion lower.

Consequently, the projected deficit for the whole fiscal year (ending Sept. 30, 2005) has been revised to “only” $333 billion—not as bad as last year’s $412 billion deficit, but still the third largest in history. It’s not something to get very excited about.

The big reason for the improvement is that, so far, overall tax receipts have jumped 15 percent. Corporate tax revenue is up 40 percent and quarterly payments on business earnings and gains from sale of investments are 20 percent higher.

Closer analysis reveals that part of the reason for the tax revenue spike relates to a one-time factor—the expiration of a tax break that had allowed businesses to accelerate depreciation expense on new equipment. That anomaly reduced tax revenue last year by $61 billion.

Let’s get some perspective. The deficit is the annual shortfall between the revenue coming in to the government (its salary, so to speak) and what it spends. Last year, it spent roughly 20 percent more than it took in. This year, using tax revenue to extrapolate, the government might spend roughly 14 percent more than what it hopes to take in. While this is better, it’s not exactly a paragon of fiscal responsibility. You would think that with a 15 percent hike in revenue and unemployment at a relatively low 5 percent, we could do better than a $333 billion deficit.

Moreover, the debt is the cumulative total of each year’s deficits. Though this year’s deficit will probably not be as bad as last year’s all-time record, America’s debt is still skyrocketing. So don’t be fooled by the hype of a shrinking deficit.

Say you earned $40,000 last year but you spent 20 percent more than that, which would be $48,000. Your deficit was $8,000. This year, you receive a 15 percent raise so you’re earning $46,000. That’s a very good increase. However, your expenses also shoot up—to $52,500. The difference this year—or deficit—is “only” $6,500; about 14 percent more than what you are earning. Compared to last year’s deficit of $8,000, that is an improvement, but you still added $6,500 to your overall debt.

Imagine telling your spouse that after getting a 15 percent raise in one year, you refigured the budget and this year you’re going to spend “only” 14 percent more than you earn. He/she would be ecstatic and overcome with joy. Yeah, right.