The Imaginary Threat of the Budget Deficit

A new reports shows the deficit is the smallest it’s been as a percentage of GDP in four years.

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You know how we have a massive spending problem that's fueling a budget deficit that's on the verge of crippling our economy and destroying our future? Not so much, according to a new report from Bloomberg News which notes that, as a percentage of GDP, the deficit is the smallest it's been in four years and figures to get a lot smaller.

Bloomberg's Mike Dorning writes:

The federal budget deficit narrowed from more than 10 percent of the gross domestic product at the end of 2009 to 5.7 percent of GDP for the 12 months ended March 31 -- the smallest gap in four years, according to data compiled by Bloomberg.

With tax collections rising and spending growth slowing down, the deficit is on track to drop to 4 percent of the $16 trillion U.S. GDP for the fiscal year ending Sept. 30, according to a May forecast by the Congressional Budget Office. It will shrink to 3.4 percent of GDP next year, the CBO says, close to the 3.3 percent average over the past 30 years, according to Bloomberg data.

[See a collection of political cartoons on the budget and deficit.]

As news goes, this is actually not earth shattering. That the deficit is under control is a matter that has been widely covered, including on this blog previously (here and here, for example). But as is so often the case with Washington discourse, there remains a reality gap – a disconnect between what's happening in the real world and the reality pols wish to inveigh against.

To wit, House Majority Leader Eric Cantor's comment this weekend that Congress should remain "focused on trying to deal with the ultimate problem, which is the growing deficit." Again, the deficit isn't growing. (Yes, it's projected to start growing down the road, but that's not what he said.)

Reports like today's Bloomberg article are important because, however slightly, they help dislodge the narrative that has dominated D.C. economic discussion for the last several years, one that has emphasized deficit reduction and budget cutting over job creation and economic growth. This was why Obama's speech last week in Chattanooga was important, because of its effort to redefine the notion of a "grand bargain" away from the Beltway's deficit monomania and back onto jobs.

And this is especially important given the – unnecessary – fiscal fights that are percolating once members of Congress returns from their five week sojourn back in their districts.

[See a collection of political cartoons on Congress.]

First, the fiscal year closes at the end of September, meaning that new spending bills have to be enacted by then in order to keep the government open. Conservative fanatics are threatening to shut down the government if President Obama doesn't fulfill their defunding-Obamacare fantasies. And even once the government funding hurdle (or more likely hurdles – first a "continuing resolution" to keep the government open while they work out a deal and then the actual deal) is cleared, there's the matter of the government's debt limit, which is likely to be reached in November.

President Obama and his aides have flatly said they won't negotiate on the debt ceiling. "The president is not going to negotiate over it," senior Obama adviser Dan Pfeiffer said last week. "The days of debt ceiling brinksmanship are over, so put that aside." Republicans, meanwhile, are still trying to figure out what hostage they're going to demand in exchange for raising it. This would directly risk our economic well-being, mind you. "You'd never be able to reverse" a debt default, High Frequency Economics' Jim O'Sullivan told Bloomberg, adding, "You'd probably always have a little bit of an extra premium" on U.S. obligations. And Republicans will frame this threat to the economy as being necessary to counter growing deficits which we know to be imaginary.

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