Fiscal Improvement

The macro-economic parallel to my earlier post regarding the dramatic decline in borrowing pace is that there is an urge to include the “improving economy” as a factor driving better fiscal fortunes. Unfortunately, like so many earnings reports, the budget deficit is enthralled by a series of “one-off” factors compelling the treasury toward what only appears like responsibility.

There was the surplus in December of $44 billion that compared favorably with the $1 billion deficit in December 2012. But as that comparison implies, December is typically a favorable month in terms of receipts vs. outlays, so there is little to be said about the appearance of surplus. As far as the overall deficit in the just-complete first fiscal quarter of 2014, it was a rather striking $111 billion less than the first fiscal quarter of 2013.

The revenue portion of that equation was higher by some $38 billion. Given the tax rate abatement in 2012, it makes comparisons between these periods especially difficult and thus rather unreliable, particularly when mostly interested in the state of citizens’ collected incomes for the period. However, the CBO itself noted that the vast majority of the increase in collected employment taxes related to the expiration of the social insurance reductions. Score one for the fiscal cliff over the economy.

On the expenditure side, outlays were reduced by $62 billion, none of which were related to economic improvement. Even the $4 billion drop in expenses related to unemployment benefits was due to the 99-week cliff rather than an improving labor market.

In addition to those, Fannie and Freddie ceded an incremental $34 billion to the US treasury as compared to the previous year.

If we add those three factors together, that totals a net improvement of $134 billion. Just on that back-of-the-envelope calculation as compared to the overall change in the deficit, it seems that there was very little to be said about economic improvement in the fiscal position of the US treasury, though that has not stopped mainstream commentary from inferring as much.

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