Budget deficit down to only 2.2% of GDP

Not too long ago, it looked like the U.S. federal budget deficit would be measured in the trillions of dollars and double-digit percentages of GDP for as far as the eye could see. Fortunately, the future didn't turn out to be nearly as bad as expected. In the 12 months ended July 2015, the federal budget deficit was only $432 billion, or 2.2% of GDP. What was once a source of impending catastrophe is now just business as usual. Although conditions in the U.S. economy are far from optimal (about $3 trillion per year too far), they are orders of magnitude better than they could have been or were expected to be. Here's a brief recap of one of the more promising developments in the U.S. economy in recent years.

The budget gap has narrowed considerably, thanks mainly to spending restraint and growth in federal revenues which has averaged about 8-10% a year since 2009. Most of the latter is due to the fact that jobs and incomes have steadily increased, and corporate profits are very near all-time highs, both nominally and relative to GDP. In other words, thanks to budget austerity and economic growth, the deficit has returned to earth instead of heading for the moon.

Relative to GDP, federal spending and revenues are very close to their long-term averages. It's nice to see that, although things could be a lot better, at least they are no worse than average.

The budget deficit has collapsed to a mere 2.2% of GDP. Five years ago the deficit was $1.5 trillion; today it has fallen by more than two-thirds, to just $432 billion.

The lion's share of increased revenues—which are up by over 50% since 2009—has come from individual income taxes. In the year ended last month, the federal government collected $1.53 trillion in individual income taxes, up 74% from the 2009 low, for an increase of almost three quarters of a trillion dollars.

As election-year politicking picks up, it would be nice to see some candidates using these figures to argue for significant cuts in the top marginal tax rates for individuals and corporations. There's nothing wrong with the deficit today that continued austerity and faster economic growth couldn't cure. The "cost" of cutting marginal tax rates would almost surely be offset by faster growth. That's because, as I've pointed out repeatedly, one of the biggest headwinds the economy has faced in recent years has been high and rising marginal tax rates. That's why business investment and new business formation has been so weak—and what this recovery has been the weakest on record: on an after-tax basis, the rewards to taking risk and working harder are simply not attractive enough. Not to mention, of course, the burdens of increased regulations, which have surged with Obamacare and Dodd-Frank.

Today's federal budget offers very fertile ground for positive changes in fiscal policy going forward, if only savvy politicians would take note.