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Mid-Session Review Shows a Smaller Deficit, as Federal Spending Drops

The White House released its mid-year budget estimate today, and as Jackie Calmes writes, it shows a smaller annual deficit for the year. She doesn’t bother to mention that this is exactly what we don’t need right now.

The annual deficit will be lower for the fiscal year 2012 and for the rest of the decade than projected earlier this year, the Obama administration said on Friday. Its required midyear report on the nation’s fiscal health showed that though revenues to the Treasury have been lower than expected, a consequence of a slowed economy, federal spending has been lower as well.

The report from the White House Office of Management and Budget projected that the deficit for the fiscal year ending Sept. 30 would be $1.21 trillion, which is $116 billion lower than the $1.32 trillion forecast in February as part of Mr. Obama’s annual budget. The new figure equals 7.8 percent of the size of the economy, down from the February projection of a deficit equivalent to 8.5 percent of the gross domestic product.

What this really means is that the government is providing $116 billion less in fiscal support to the economy than what was expected at the beginning of the year. This is a pretty dour scenario in the context of an economy growing at a substandard rate, especially for a recovery. As today’s GDP numbers show, all of the economic gains since mid-2010 have been concentrated in the private sector, with the public sector dragging on growth. This actually decelerated in the last quarter, but it’s been bumping along the bottom for about a year.

The truth of the matter is that Republicans have succeeded in strangling federal spending and reducing budget outlays. They made cuts to the budget in Fiscal Years 2011 and 2012. They set up a spending cap that slows the growth of federal sending significantly. They have resisted almost all efforts to increase spending, only relenting on the payroll tax cut/unemployment insurance deal at the beginning of 2012. As a result, spending is trending down, and the economy is actually trending down along with it, since government is the spender of last resort when there’s a demand gap.

As Paul Krugman writes today, the markets are extremely desirous of the US spending more money, offering negative real interest rates to do so. They want to see economic growth expand. But Congress has objected at every turn. And so we have the slow-growth economy we have. The lower deficit, simply put, is nothing to celebrate.

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David Dayen

David Dayen