Talks of expanding deficits and President Obama should take a reprieve with the latest report released by the U.S. Treasury Department. According to Jeffrey Sparshott of the Wall Street Journal, we can attribute the improvement to the expiration of the payroll tax, higher taxes on households earning more than $400,000, and rising incomes. Right now, the deficit is projected to fall by 26% to $642 billion and could shrink to $378 billion by 2015, according to Congressional Budget Office projections.
Both sides denigrated each other stating that the other side was hampering the economy with their stubborn positions. For Democrats, they were frustrated that Republicans did not acquiesce to further tax increases from the rich and used the threat of substantial cuts to national defense to drive conservative to the table. On the other hand, Republicans were bargaining for more spending cuts to domestic spending, including Social Security and Medicare. So far, neither side was able to fully advance their agenda, but that may be a good sign.
While Republicans were able to thwart higher taxes that could have stunted our economic progress, Democrats were able to prevent severe reductions to domestic spending. One could argue that either proposal could have incurred more damage to the economy and that this watered-down approach that combined policies advocated by both parties ended up being more beneficial to the economy.
We are still near the midpoint, so we will see if the momentum continues. If we look to Federal Reserve Chairman Ben Bernanke, then there is reason for optimism. Talk of slowing the purchase of U.S. Treasury bonds by the Federal Open Market Committee hints that they are more confident of a stronger economy in the future. If they were pessimistic, then they would have maintained the same aggressive monetary policy that keeps interest rates down, but can spark inflation if the economy picks up steam. Therefore, that speaks to possible better times.
On the other hand, the delayed effect of the sequester and the looming October fiscal fight in Congress should be cautionary signs that our economy is still not out of the woods. The unemployment rate still remains very high at 7.6% as of May 2013 and economic growth has only broken the 3% barrier twice since twice since 2010, which is a historical barometer of average growth. Both are indicators that our economic recovery remains fragile.
Trying too hard to raise revenues through higher tax rates could actually increase the deficit, if businesses decide to curtail hiring and economic activity. Conversely, pursuing significant spending cuts could also have an unintended consequence of bulging deficits. That would be due to lower economic activity arising from less government support on the economy. In fact, Europe is a prime example of how pursuing austerity through higher taxes and government spending cuts led them to another recession.
It is essential that we find the right mix of enhanced revenues and restrained spending in order to maintain the momentum of lower deficits.