Menzie Chinn, who has been keeping an eagle eye out for signs that the rapid shrinkage of the federal deficit since 2004 might be coming to an end, finds them in the Monthly Treasury Statement for October. Tax receipts have clearly stopped growing as a share of GDP. Writes Chinn:
Seems to me a fair bet that, given current estimates for a slowdown to around 1.4% GDP growth … in 2007Q4 … receipts will fall as a share of GDP.
Hence, I stick with the conclusion from my previous post on this subject: A balanced budget is far off.
Just as lots of people were taken aback by how quickly tax receipts rose as the economy and financial markets strengthened from 2004 to 2006, I think official Washington may be shocked at how quickly receipts fall now. The lesson from 2001-2003 is that federal revenues have become increasingly sensitive to corporate earnings and financial markets, as top earners are paid mostly with stock, performance bonuses and the like. And I hear corporate earnings growth has stalled and financial markets haven’t been doing so great lately.