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Can we grow ourselves out of a deficit?

It’s something economists talk about in low whispers. Perhaps because they don’t think anyone would believe them. But, what’s getting their attention and prompting these hushed conversations is the prospect that our nation’s deficit may in just a few years, drop significantly, or better yet, all but disappear. Even with our anemic recovery there is a very real possibility that the United States, in just a few years, will grow itself out of a deficit.

The deficit has been at the heart of our national debate over taxes and spending for almost a decade. Republicans and Democrats differ sharply on how to address it. Republicans want to cut spending, with a special emphasis on reforming large scale entitlement programs, but, as a rule, don’t want to raise taxes. Democrats on the other hand tend to favor increasing taxes and while willing to accept some spending cuts, don’t want to change the entitlement programs. These positions have become the rallying cry for both sides and a middle ground has been almost impossible to find.

The government has been taking in less than it spends, the very definition of a deficit, since the start of the 21st century. However, the situation became critical when the great recession began in 2007. In just two years our national revenues dropped by 17%. Spending, however, kept rising. The costs in military spending, with two active wars, the Obama stimulus package, unemployment insurance, and the ever increasing costs of entitlement programs, caused expenditures to increase dramatically. Last year we borrowed $1.2 trillion to cover our budget deficit. That’s roughly one out of every three dollars we spent.

However, in contrast to the rhetoric generated by the deficit debate, there has been a quiet, almost unnoticed change in the direction of our national deficit. This year, though still a frighteningly large number to most of us, the nation’s deficit will be at its lowest level in five years. This is caused by two factors. One is that sequestration, disruptive as it may be, will trim $100 billion from this year’s budget. And second, and most important, revenue collected by the federal government has been steadily increasing.

The size of government revenues whether it’s collected through individual income taxes, payroll taxes, excise taxes, corporate taxes, or various fees, is directly tied to the health of the economy. If the economy starts to improve, as measured by the GDP and unemployment, government revenue will go up as well. The economy, after months of contraction, began its slow recovery in 2010 with growth averaging about 2% a year. That’s not a robust improvement, but even at such a comparatively slow pace, the income collected by the federal government has increased substantially.

Another factor, equally slow in recovering, but slowly beginning to fall, has been unemployment. Payroll taxes are the largest single source of revenue for the government. During what has been a period of sustained high unemployment, covering the past five years, this source of cash for Uncle Sam was down sharply. However, as unemployment has declined, with more people working and paying taxes, and not collecting unemployment, this important source of revenue has started to edge back up.

The expectation is that even if the recovery continues to be a slow one, the nation’s deficit, thanks to the increase in government revenues, will decline by several hundred billion over the next three years. The deficit, under some of the most hopeful models all but disappears in 2016. The Congressional Budget Office isn’t quite that optimistic but nonetheless believes the deficit, which is currently at $845 billion, will fall by half during the same period. That’s a lot better than the $1.4 trillion it reached in 2009.

However, even if growth reduces the deficit, perhaps even taking it to zero for a couple of years, many of the longer term financial problems, such as reforming our tax code or dealing with entitlements aren’t going to go away. Any respite in our deficit woes is going to be temporary at best. But, it might just give us a break from the continuing series of cliffs and deadlines that have characterized our nation’s finances for the past four years. If we’re lucky, it will be a financial breather, and we need to take advantage of it while we can.

You may reach David Kerr at This email address is being protected from spambots. You need JavaScript enabled to view it.

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