Thursday, September 1, 2016

Federal Deficit Is Surging, Sending Ominous Signal About Future Growth

While the world has been focused on the Federal Reserve, the markets and the upcoming election, few have noticed the expansion of the deficit in recent months which is now in excess of $667 billion up from a recent low of $530 billion.
During the financial crisis, the deficit ballooned to a record of $1.35 trillion as tax revenue declined as government spending swelled. Importantly, the federal deficit approached 10 percent in 2009, a historical record for the U.S., but it still remains at levels associated with weaker economic growth rates and recessions.
The decline in the deficit was artificial in many ways as it was primarily due to the reforms from the Budget Control Act of 2011 that included tough spending cuts and a big tax bite affecting most of the middle class. Much of that “austerity” has now been reversed.
The surge in tax revenues was a direct result of the “fiscal cliff” at the end of 2012 as companies rushed to pay out special dividends and bonuses ahead of what was perceived to be a fiscal disaster and higher tax rates.
The large surge in incomes was primarily generated at the upper end of the income brackets where individuals were affected by higher tax rates. Those taxes were then paid in April and October of 2013 and accounted for the sharp decline in the deficit. Also, it is important to remember that payroll taxes also increased with expiration of a 2010 tax cut. (Note: the increased tax collection from payrolls remains currently.)

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