This Isn't Really Austerity In The U.S.

by: Cullen Roche

I keep hearing and reading all these stories about how there's now a crushing "fiscal contraction" in the U.S. But is that really true? Not according to the data. Here's what the CBO projects in the coming four years with regard to federal outlays:

  • 2012: 3,537
  • 2013: 3,455
  • 2014: 3,600
  • 2015: 3,777
  • 2016: 4,038
  • 2017: 4,261

And then here's actual current expenditures at an annualized rate. Notice it's actually up year over year, though only marginally:

  • Q2 2013: 3,817.8B
  • Q2 2012: 3,787.9B

Federal spending is obviously not falling, even if the deficit is. Anyway, the confusion seems to be the way some people are viewing the deficit. Remember, the deficit is government spending in excess of taxation. When the government runs a budget deficit it sells a bond to Peter, who gives the government his bank deposits, and then the government spends those bank deposits into someone else's bank account. Peter gets a bond that is a net financial asset for the private sector (i.e., it has no corresponding private sector liability).

So, why is the deficit falling this year if spending isn't contracting all that much? The main reason is tax receipts. While federal spending is flat year over year, the amount of tax receipts is up 6% as of Q1 and likely up even more than that when we see the Q2 data.

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What does it all mean? It means the government is still spending the same amount as it was last year, but it's issuing fewer financial assets as T-bonds because tax receipts have increased. From a flow of funds perspective, the government is still firing the economy full of spending. From a balance sheet perspective, you could potentially argue that the reduction in net financial assets is not helping to support a still weak, debt-laden consumer. But I would be careful about rushing to believe the "U.S. austerity" crowd. They're not telling the full story.