First, Paul Krugman notes the decline in corporate profits recently, a key factor in recent revenue increases:
Red tide rising, by Paul Krugman: The fall in the federal deficit since 2003 has been widely used by conservatives — including the Bush administration and all the leading candidates for the GOP presidential nomination — as proof that tax cuts actually increase revenue.
So here’s a heads-up: the good times are about to stop rolling.
The key factor in rising revenue hasn’t been a growing economy — it has been a surge in corporate taxes as a share of GDP.
But now profits are falling. Revenue will follow — and the deficit is about to get bigger again.
Next, Menzie Chinn says not to expect a balanced budget anytime soon:
Budget Deficit Watch: Receipts Stabilize, Deficit Fails to Shrink, by Menzie Chinn: Reader CoRev, in commenting on this post, advises me to look at the actual data for October (instead of the CBO estimate) before declaring a trend deterioration in the budget balance. Well, the data are out.
Figure 1: Twelve month moving average of budget balance divided by nominal GDP (blue, left scale) and in billions of nominal dollars (red, right scale). Budget balance (on balance sheet and off balance sheet), as recorded by Treasury (October statement), divided by GDP interpolated using quadratic match. October GDP assumes 5% nominal GDP growth, in line 1.4% real GDP growth and 3.6% inflation in 2007Q4 (see WSJ survey). NBER-defined recessions shaded gray. Sources: Treasury's Monthly Treasury Statement data for October, and historical data, BEA October 31 GDP release, NBER, and author's calculations.
It turns out that the $55.6 billion deficit is not that different from the CBO's estimate of $59 billion. But it is the trend that is of greatest interest to me.
In addition, nominal receipts are slowing their ascent, while as a share of GDP, they have clearly plateaued.
Figure 2: Twelve month moving average of receipts divided by nominal GDP (blue, left scale) and in billions of nominal dollars (red, right scale). Receipts (on balance sheet and off balance sheet), as recorded by Treasury (October statement), divided by GDP interpolated using quadratic match. October GDP assumes 5% nominal GDP growth, in line 1.4% real GDP growth and 3.6% inflation in 2007Q4 (see WSJ survey). NBER-defined recessions shaded gray. Sources: Treasury's Monthly Treasury Statement data for October, and historical data, BEA October 31 GDP release, NBER, and author's calculations.
Seems to me a fair bet that, given current estimates for a slowdown to around 1.4% GDP growth SAAR in 2007Q4 (see this post), receipts will fall as a share of GDP.
Hence, I stick with the conclusion from my previous post on this subject: A balanced budget is far off.
Some more things to keep in mind as you think about the budget deficit. This is from a report from by the CBO:
Box 2. The Effect of the Aging of the Population on Spending on Medicare and Medicaid In coming decades, the share of the population that is covered by Medicare will expand rapidly as members of the baby-boom generation become eligible for the program, and the share that uses long-term care services financed by Medicaid will also probably increase. Although the aging of the population is frequently cited as a major factor contributing to the large projected increase in federal spending on those two programs, it accounts for a modest fraction of the growth that the Congressional Budget Office (CBO) projects. The main factor is excess cost growth—or the extent to which the increase in health care spending for an average individual exceeds the growth in per capita gross domestic product (GDP). As shown in the figure, if the age distribution of the population were fixed—so that the average age did not increase over time—and there were no excess cost growth, spending on Medicare and Medicaid as a share of GDP would remain essentially constant. That scenario is represented by the bottom line in the figure. The next line shows projected spending on Medicare and Medicaid if the age distribution of the population changes as expected—so that the average age of the population increases—but excess cost growth remains at zero. The difference between that line and the bottom line captures the effect of the aging of the population on projected federal spending on Medicare and Medicaid. The top line in the figure shows CBO’s projection of spending on those programs, which includes the effects of the aging of the population and of excess cost growth. By itself, aging accounts for about one-quarter of the projected growth in federal Medicare and Medicaid spending through 2030. By 2050, that share has fallen to under 20 percent, and by 2082, to only about 10 percent.
And two more graphs from the report:
If revenues begin to fall and the budget deficit begins increasing, we will hear that we need to cut taxes even more to solve the problem, which I hope you realize is a silly suggestion, and that we'll need to cut back on social programs - Medicare, Medicaid, and Social Security in particular to reign in spending. But I hope these graphs make clear that Medicare and Medicaid are not the problem, nor are demographics. I also hope that by now you are also well aware that the problems with Social Security, which are minor, can be fixed any number of ways none of which is prohibitively costly (or even nearly so). As the CBO report says, "The main factor is excess cost growth—or the extent to which the increase in health care spending for an average individual exceeds the growth in per capita gross domestic product (GDP)." If the deficit does begin to increase as expected, don't be fooled by the misleading rhetoric that is sure to come from those who see it as an opportunity to push their ideology. "Socialsecuritymedicareandmedicaid" is not the main problem.