In previous years we would have been breaking out the champagne on this news: The monthly budget review released yesterday by the Congressional Budget Office estimated that the federal budget deficit fell by $125 billion from 2009 to 2010. This by far is the biggest one-year nominal drop in the deficit that has ever occurred.
There were two primary reasons there was no cheering yesterday.
First, it’s not at all clear that reducing the deficit was the correct fiscal policy given the slow growth in the U.S. economy.
Second, in the current political atmosphere even a 50 percent reduction would have still left lots of room for those who want to do so to use the deficit as an issue. To those folks, the $125 billion reduction simply isn’t as important as the $1.29 trillion deficit that’s available for campaign fodder.
In other words, the $125 billion reduction in the deficit was both too much and not enough.
A quick word of caution. The CBO numbers are estimates; the official final number, which will be released later this month by the Treasury, is likely to be a little different. My back-of-the-envelope guess is that it will be a bit lower.