The Congressional Budget Office recently concluded the budget deficit for the past year reached $588 billion, a whopping 34% increase over 2015. The 2016 deficit was equivalent to about 3.2% of GDP, well above the level of about 2.5% regarded as sustainable.
The key causes of the jump in the budget deficit from the previous year were two. First, federal receipts were up a paltry $19 billion, or about 1%. Individual income and payroll tax receipts were up modestly, but the increase was largely offset but a decline in corporate receipts suggesting a substantial drop in corporate profits from 2015 to 2016. On balance, the entire gain in federal receipts in 2016 reflected a $19 billion payment from the Federal Reserve associated with a revenue item from the recent highway transportation bill. Absent this fiscal dollop from the Federal Reserve, federal receipts would have been flat year over year.
Though receipts were flat, spending surely wasn’t. Federal spending rose 5%, or about 3.6% after inflation, driven largely by “mandatory spending”:
- Social Security outlays – up 3%
- Medicare outlays – up 5%
- Medicaid outlays – up 5%
- Department of Veterans Affairs – up 6%
- Net interest on the debt – up 9%
- Marketplace subsidies under the ACA – up 13.6%
For context, inflation over the fiscal year was about 1.4%.
Rapid spending growth, tepid revenue growth, all building on an already enormous budget deficit yields a substantial deficit increase. It’s not complicated, but it is the fiscal legacy to be left by this Administration to its successor.
Job one for the incoming administration will be to get the economy growing at a much faster clip. Unfortunately, few credible policy options remain. With deficits already climbing catastrophically, discretionary fiscal stimulus seems out of the question. With monetary policy already intensely stimulative, the propriety not to mention the effectiveness of additional measures is highly questionable. While various policies could be adopted to help the economy, such as a robust infrastructure program, immigration reform, fundamental regulatory and tax reform, and free trade, these policies’ benefits all appear over the long term. None are particularly relevant to boosting the economy in 2017.
Massive deficits, sputtering economy, bare cupboard – a very odd legacy, indeed.