In what has been a year desperate for real economic improvements, the CBO (Congressional Budget Office) announced that the projected federal deficit would drop to roughly $642 billion for 2013. The deficit was $1.086 trillion in 2012, marking the fourth straight year of trillion dollar deficits for the country. The CBO is the nonpartisan agency that is responsible for economic and budget analysis for Congress.
If the deficit actually does decline to under a trillion dollars this year, it will mark the first time since President Obama was elected that has occurred. An important deficit measurement is the percentage of the economy that the deficit represents. In 2009, that ratio was 10.1 percent. Based on the many assumptions that go into the calculation, 2013s deficit could represent about 4% of our projected GDP. That would be a real headline.
Some reasons for the big jump are much higher tax revenues in the first third of the year. However, the bulk of these extra taxes came from affluent investors electing to receive income in 2012 before the capital gains and dividend tax rates jumped in 2013. Some companies elected to pay much or all their dividends in 2012 as opposed to 2013. The jump in Social Security taxes also has resulted in higher tax revenues being collected.
Another reason for the deficit improvement is the turnaround at Fannie Mae and Freddie Mac. Fannie Mae reported a $7.6 billion profit for 2012, the largest ever for the government housing agency. That was a significant turnaround from the $2.4 billion loss one year earlier. Freddie Mac also reported record earnings of $11 billion last year. These two government sponsored enterprises (GSEs) received nearly $200 billion in taxpayer bailouts over the past few years. Now they send nearly one-half of their profits to the US government.
The $600 billion-plus tax increase on upper income earners passed in January of this year will provide additional tax revenues.
I pray our elected leaders don’t become complacent after reading these headlines. The fact is we are still running a huge deficit (even with these projected improvements) for the largest economy in the world. Our current deficit is still north of $16 trillion, nearly double what it was in 2006. There is a colossal budget battle set to play out later this year. Republicans will push for promised across the board spending cuts after the big taxes they agreed to earlier this year.
As discussed in Abrams tank article, politicians need to remember that they are Americans first and foremost. They need to do what is in the best interest of our country and our children. The right thing is never popular and might cost you an election down the road. But unless we see our leaders finally acting in a responsible manner and doing what is best for everyone concerned, “We the People” are going to be pushed further and further apart.
Even more frightening is the example and legacy we are leaving for our children. How can they ever become responsible leaders in the future if they have no examples in the public sector today? They deserve better and so do we.
Kevin has been a financial advisor for the past 27 years and can be reached at email@example.com.