The Truth About Falling Deficits Continues To Be Ignored

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In deficit reduction's "shared sacrifice," spending cuts continue to shirk...and shrink. Whether it is the rapid fall in the federal budget deficit or the threat of another economic downturn, spending cuts continue to get top billing over increased revenues. Yet for over a year now, while the headline has belonged to spending cuts, the story has belonged to increased revenues.

In fiscal year 2013 (concluded last October 1), the federal deficit fell from $1.089 trillion to $680 billion - a roughly 30% decrease. While still historically high at 4.1% of GDP, the general focus has been the fall, with particular scrutiny on federal spending cuts. Whether last March's sequester, last October's shutdown, or the recent budget deal, the focus is always on decreased federal spending and its impact.

However looking inside the numbers shows another story. According to the Congressional Budget Office, in FY 2013, federal spending fell $84 billion, while federal revenues - fueled by a series of tax hikes - increased $325 billion. Even at first glance, deficit reduction splits $4-to-$1 in favor of higher revenues over lower spending.

Skewed as that is, the actual split is even more so. As CBO stated in its fiscal year wrap-up, the government's spending success was due to the two federal housing programs, Fannie Mae and Freddie Mac. "Net outlays for the government's activities related to Fannie Mae and Freddie Mac were $97 billion less than the outlays recorded last year for two reasons... a one-time payment to the Treasury of around $50 billion...[and] because both Fannie Mae and Freddie Mac were profitable in 2013, the companies were required to make quarterly payments to the Treasury..."

The key in both instances is "payment." Without, these payments to the Treasury, government spending actually would have increased.

Of course, the defenders of spending will observe that tax hikes got a headstart in the deficit reduction race, because taxes were hiked last January, while federal spending was sequestered last March. So, what do we see in the current fiscal year's first quarter, when hiked taxes and sequestered spending ran simultaneously?

Again on the surface, the story seems one of balance. According to CBO, revenues are 8% ($48 billion) ahead of last year's and spending 7% ($60 billion, accounting for timing shifts) less than last year's. But once again, there is more to the story - or in the case of spending cuts: Less to it.

Quoting CBO: "Much of the drop in spending occurred because payments from government-sponsored enterprises Fannie Mae and Freddie Mac to the Treasury were $34 billion more than they were last year, for two reasons... a onetime payment to the Treasury of about $24 billion... [and] the companies were required to make quarterly payments to the Treasury..."

Again, the key word is "payment" and the key effect is that these payments offset other federal spending. As CBO goes on to explain: "Those payments are recorded in the budget as offsetting receipts - that is negative outlays." Without those offsetting payments, federal spending only fell about 3.2%.

Thus far in 2014, the real ratio of decreased spending to increased revenues is actually $1-to-$1.8. Although narrowing the gap of $1-to-$4 from last year, taxes are still carrying the deficit reduction load.

Looking closer still at where the spending cuts came from, they are not coming from the entitlement spending driving Washington's deficit and debt. According to CBO, FY 2014 Q1 spending has fallen $11 billion in defense, $7 billion in agriculture, $7 billion in reduced interest costs, and $7 billion in lower unemployment costs. Without their $32 billion in reduced spending, federal spending - greatly comprised of entitlement spending - increased.

The evidence from the last and current fiscal years is clear: Washington's deficit problem remains one of spending, yet its solution remains one of taxing. From 2007 to 2009, federal spending jumped 29%. With the exception of a slight drop (1.7%) in 2010, federal spending did not dip below that level, until last year. From 2009-2012, the deficit was never under $1 trillion - averaging $1.27 trillion.

Despite repeated evidence, the truth continues to be ignored - few even bothering to look at the overall numbers, let alone inside them. As long as Washington keeps ignoring its real spending problem, it can keep taxing America to pay for it.


J.T. Young served in the Treasury Department and the Office of Management and Budget from 2001 to 2004, and as a congressional staff member from 1987 to 2000. 

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