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Deficit Reduction

Based on the most recent data from federal sources (graphed below), we can expect a reduction in the federal budget deficit beginning this year and extending into 2016 (Office of Management and Budget estimate) or into 2017 (Congressional Budget Office estimate).

This is obviously good news since it means the nation will be incurring debt at a slower pace for the next five or six years. These projections fit well into our forecast of economic growth in the US through 2017, except for a relatively mild 2014 recession.

Of course, there is bad news. These improvements come largely on the back of an $800 billion increase in tax revenue achieved through the expiration of the so-called Bush tax cuts, new Medicare taxes coming from the Healthcare Reform Act, and mandated increased taxpayer participation in the Alternative Minimum Tax.

There is more bad news. The improvement is only temporary. The underlying demographics make it impossible to sustain the improvement through the long haul unless major systemic changes are undertaken in the entitlement systems.

I may be cynical, but it seems to me that these deficit reductions may prove too tempting for Congress, and increased government spending on new or existing programs may result.

Bottom line: Accept the good news for what it is worth -- a temporary reprieve from the larger problem of national debt.

TAGS: The Economy
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