Smallest U.S. Deficit in 5 Years Because of Higher Payroll Taxes

Here is the good news: in the 12 months ending September 30, the U.S. had its smallest budget deficit in five years. Now the bad news: one of the primary reasons was the significant hike in payroll taxes. Seventy-seven percent of U.S. households had to pay higher payroll taxes in 2013.

Spending surpassed revenue taken in by $680.3 billion in those 12 months, which, despite the numbers in the red, was the smallest gap since 2008. Another factor that helped narrow the gap was the effect of sequestration cuts.

But entitlement reform, the 400-pound gorilla in the room, has been left untouched. As Bricklin Dwyer, an economist at BNP Paribas, said:

We’ve made a lot of fiscal progress in the U.S. because of the sequester cuts, tax rates going back to historic norms and the economy improving. Politicians have, thus far, avoided the most difficult choices–addressing unsustainable spending on entitlements such as Medicare and Medicaid.

The GOP wants to make cuts in spending on Social Security, Medicare and Medicaid, the lion’s share of the budget deficit, but Democrats will not consider that idea without raising taxes.

The 2013 deficit was 4.1 percent of GDP, but the Congressional Budget office estimates that spending on Medicare and Social Security will exacerbate the deficit problem, increasing the deficit to 6.5 percent of GDP in 2038, more than any year between 1947 and 2008. Former Federal Reserve Vice Chairman Alan Blinder said entitlement reform must happen: “Unless that happens, the budget deficit as a share of GDP and therefore the national debt as a share of GDP is headed off for the wild blue yonder. And that is what we need to stop.”