Harper: U.S. Budget Deficit Falls But Will Rise In Coming Months

Jan 26, 2017

In this week’s Economic Report, Dr. Rick Harper looks at a temporary reduction in the deficit, an unexpected drop in existing home sales and how the high cost of textbooks affects access to higher education.

This week, the Congressional Budget Office projected a slight drop in the U.S. budget deficit.

“That, of course, is good news. The budget deficit has been too large for too long,” Harper said. “I don’t know that many of us here locally would say that $559 billion is a small number, but in the context of a $4 trillion federal budget, it’s somewhat small. But it still means that roughly more than $1 out of every $8 that the federal government spends is done with borrowed money.”

Harper said that kind of borrowing is not sustainable over time.

“Congress has passed every one of the laws that has led to a relatively large budget, and it’s passed every one of the laws that has led to relatively small tax collections to support that type of spending,” he said. “What we need to see is a resolution to close that deficit because it’s only going to get harder.”

As the U.S. population ages, the deficit is likely to rise again.

“The baby boomers are now poised to retire. They’re going to start taking advantage of the two largest entitlement programs in the federal panoply of programs, and that’s Medicare and Social Security,” Harper said. “The drop in the deficit is a temporary thing because Medicare and Social Security expenditures will go up.”

With the economy nearing full employment, Harper said likely increases in interest rates by the Federal Reserve will also increase the deficit.

Credit Michael Spooneybarger/ CREO

“We’ve already seen the 10-year Treasury rise from 1.5 percent yield to 2.5 percent yield since the election on expectations of more government spending putting upward pressure on rates,” Harper said. “That’s going to drive up the cost of financing the U.S. government debt.”

Existing home sales in the U.S. fell more than expected in December as the supply of houses on the market dropped to its lowest level in almost 20 years.

“We’ve seen since the Great Recession construction employment is not back to anywhere near its peaks in 2004-2006,” Harper said. “And in Florida, where we lost 53 percent of construction jobs during the recession, we still are thousands of jobs below in construction. We’re about 20 years behind in terms of the number of construction jobs, and that then shows up in the inventory of homes available for sale.”

And while inventory is low, Harper also expects demand to slow down over the coming months.

“We’re going to have mortgage rates going up,” Harper said. “The 30-year fixed conventional mortgage loan follows the 10-year Treasury very closely. As those rates rise, look for demand for homes to fall. So it’s probably a good thing we don’t have a large inventory overhang of homes for sale right now.”

The UWF Innovation Institute’s Florida Virtual Campus recently released the results of their 2016 Student Textbook and Course Materials Survey and found that there was a significant impact to college affordability due to the high cost of textbooks.

“It’s a timely issue that the Legislature has been very concerned with,” Harper said. “The Legislature actually passed a statute requiring instructors to have chosen their textbook well in advance of the start of the course so that students would be able to identify that textbook and shop around for the lowest price or an older edition to keep their costs down.”

Harper said the high cost of textbooks has been an issue that has been around for quite some time.

“Textbook sales has been kind of a racket for a long, long time. A new edition every three years, whether the material covered in the text has changed or not. And that cost was simply passed on to the student,” Harper said. “But that’s changing. There are alternative sources to get information that’s relevant, accurate, timely about the subject material, and more and more professors are using those and actually moving to alternatives that enhance learning, but aren’t so expensive for the student.”

The high costs also have a negative effect on student success, the survey found.

“Students are pressed to pay that in-state tuition cost of an additional course of, say, $600 for each course, each semester. Some students are lucky enough to have more Bright Futures scholarships than others, but a major reason that students take longer to complete their university coursework and get that degree is because they have to earn while they learn in order to get through college,” Harper said. “Anything we can do to keep their costs down is going to be beneficial.”

Dr. Rick Harper is an economist at the University of West Florida. He can be reached at rharper@uwf.com. CREO staff writer Mike Ensley contributed to this report. He can be reached at kensley@uwf.edu.

This article is part of a collaboration between WUWF and the UWF Center for Research and Economic Opportunity.