One time windfalls reduce current deficit

Washington Times:

Washington didn’t take much time to celebrate the dramatic reduction in federal deficits announced by congressional budget analysts a week ago, but Wall Street saw it as reason to cheer and send stocks to record highs. For many investors, the more than halving of the deficit from a high of $1.55 trillion during the depths of the recession is the latest sign that the economy finally has turned the corner and is on a solidly upward path.

Nearly all of the improvement in the government’s finances is a result of the economy, most notably a surge in revenue on corporate bonuses, stock dividends and capital gains payments at the end of last year that was timed to beat the Jan. 1 start date for higher tax rates on wealthier citizens. That helped fill the Treasury’s coffers with a surge of nearly $100 billion in revenue to a monthly record of $407 billion when the tax bills came due in April. At the same time, the government got a big boost from $95 billion in dividend payments from Fannie Mae and Freddie Mac, the two bailed-out mortgage giants that turned profitable at the end of last year amid a rebounding housing market.

The combination of windfalls enabled the Congressional Budget Office to slash its deficit forecast by a record $203 billion for this fiscal year to $642 billion — the deficit’s level before the crisis broke out in 2008. The CBO’s projections show further significant improvement in the next five years as the deficit falls to $378 billion, or 2.1 percent of economic output by 2015 — a fraction of the worrying 11 percent peak hit in 2009 — before turning up again.

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While there has beens some reductions in spending from a high of 25 percent of GDP to the current 22 percent, spending still needs to be reduced to no more than 19 percent.