The Latest on the Budget Deficit

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the federal budget deficit.

• The federal budget deficit continues to shrink.  For the month of July, the deficit was $98 billion.  Though large, it is down from $117 billion this time last year.  The 12-month cumulative deficit is also shrinking.
• The reason for a smaller-sized deficit is that the housing market is recovering nicely and contributing to economic growth.  As more people work, more pay taxes and fewer receive government benefits.  Sequestration of automatic government spending cuts is also helping reduce the deficit.  In addition, the profits from Fannie and Freddie are turned over to the government since these organizations have been effectively nationalized.
• Though it is good news that deficit is falling, it is still a deficit (too much spending in relation to tax revenue) and still very high by historical standards.  Only faster economic growth can eventually help turn a deficit into a surplus – as happened during the late 1990s.
• In today’s world economy, Germany is the only notable economy with virtually no deficit.  That is due to low unemployment in the country.  Munich in particular has only a 2 percent unemployment rate, with Bavarian Motor Works (otherwise known as BMW) cranking out cars for exports.  Germany did have high unemployment a decade ago and was known as the sick man of Europe.  However, the labor market reform which permitted companies to easily fire workers led entrepreneurs to aggressively hire workers (Companies do not like to hire if they cannot fire).  In addition, unemployment benefits were sizably reduced.  The consequent job creations are contributing to a healthy German economy.
• The falling U.S. deficit is good news for homebuyers.  Lower budget deficit will mean less pressure for the interest rates to rise quickly over time.