Runaway government spending? Kasriel reports, you decide

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This post is a guest contribution by Paul Kasriel, Chief Economist of The Northern Trust  Company.

The U.S. Treasury released its budget status for July. As Chart 1 shows, the cumulative deficit in the 12 months ended July was $1.318 trillion – the lowest since June 2009’s $1.255 trillion. So far, the largest 12-month cumulative deficit reading has been $1.477 trillion in the 12 months ended February 2010.

The deficit is narrowing because total federal spending has begun to decline and because total federal receipts are declining at a slower pace. As shown in Chart 2, in the 12 months ended July 2010, total federal cumulative spending contracted by 1.94% vs. the cumulative spending in the 12 months ended July 2009. The fastest growth in 12-month cumulative federal spending was 19.17%, which occurred in July 2009. Also shown in Chart 2 is the slowing in the rate of decline of federal receipts. In the 12 months ended July 2010, cumulative federal receipts contracted by 2.42% vs. the 12 months ended 2009. This is the slowest rate of contraction in 12-month cumulative federal receipts since September 2008 at minus 1.71%. The most severe rate of contraction in 12-month cumulative receipts occurred in November 2009 at minus 17.59%.

On the receipts side of the Treasury’s ledger, two factors that are playing important roles in slowing down the rate of decline in federal receipts are corporate income taxes and Federal Reserve profits (see Chart 4). Now that corporations are once again earning profits after the largest contraction in corporate profits in the post-WWII era, corporate tax receipts have begun to grow again. And with the explosion of the Fed’s balance sheet from $877 billion at the end of 2007 to over $2 trillion today, the Fed is enjoying record profits, most of which it turns over to the Treasury. Hooray for seigniorage!

Source: Paul Kasriel, Northern Trust – Daily Global Commentary, August 11, 2010.

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1 comment to Runaway government spending? Kasriel reports, you decide

  • Bert McLachlan

    If the federal spending is decreasing, and that is the reason for the improvement in the deficit, then why does the latest federal estimate (7/23) forecast 2010 on-budget spending ($3.046 trillion) as higher than 2009 ($3.005) and 2011 as even higher (at $3.259 trillion)? Isn’t the government’s very optimistic expectation of revenue increase (from $1.5 trillion in fiscal 2010 to $1.764, or an 18% increase next year, although on-budget revenues are running essentially flat through July) the way they are spinning the facts? If 2011 revenue stays as flat as 2010’s (at about $1.5 trillion), the deficit will be over $1.7 trillion, that of course being a new high and certainly a continuation of the problem. On-budget outlays were $1.516 trillion ten years ago (in 2001) compared to expectations of $3.259 for 2011), with 2001 revenue being essentially the same as 2010 revenue. Might not excessive spending be the real problem?

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