Spending Our Way Over the Fiscal Cliff

One day after the presidential election and it's in; the Fiscal Year 2012 Monthly Budget Review from the Congressional Budget Office.  Let's go!

For the entire fiscal year, Washington incurred its fourth year in a row of trillion dollar plus deficits, ringing up a deficit of $1.098 trillion.  Fortunately, since the economy for most of the year was showing economic growth, albeit modest at best, the deficit-to-GDP ratio dropped from 8.7 percent in fiscal 2011 to 7.0 percent in fiscal 2012.  Before those who spend our hard-earned tax dollars start patting themselves on the back, this was still the fourth largest deficit as a share of GDP since 1946 so there really is little to be proud of.  

Here is a chart showing the fiscal year totals since 2007:

In case you don't have a calculator handy, the cumulative deficits since fiscal 2007 total $5.712 trillion, this means that over one-third of America's $16.2 trillion debt has been accumulated in the last six fiscal years alone!

Back to this year's data.  On a year-over-year basis, the deficit declined by $207 billion on the backs of a 6 percent increase in tax revenue and a 2 percent drop in spending.   Big whup.  In nominal terms, the government's revenue stream increased for its third year in a row, reaching $2.449 trillion, however, that level is still down 5 percent below 2007's peak of $2.568 trillion.  As a percentage of GDP, receipts in fiscal 2012 were 15.8 percent of GDP, down from the forty year average of 18 percent of GDP.

On the spending side of the ledger, total outlays were $3.538 trillion, about the same as in 2011, however this is up 29.6 percent from 2007.  As a percentage of GDP, expenditures in fiscal 2012 dropped by 1.3 percentage points from 2011 to 22.8 percent, however, this is again well above the forty year average of 21.0 percent.

Here's a very basic graph that shows us where the problem lies:

Notice that the purple dotted line (receipts) are, except for a very short period of time around the turn of the millennium, lower than the red line (outlays)?  That's why America has a $16.2 trillion nightmare!

Let's take a quick look where Washington gets the money that it spends (and more!).  In fiscal 2012, total receipts of $2.449 trillion were made up of $1.132 trillion worth of individual income taxes (46.2 percent of the total), $242 billion worth of corporate taxes (9.9 percent of the total) and $845 million of social insurance (34.5 percent of the total).  The corporate tax haul was the largest in the last three fiscal years, up 33.8 percent on a year-over-year basis but still well down from the high of $379 billion in 2007 as shown on this graph:

Now, let's see where Washington spent its/taxpayer's money in 2012.  The biggest year-over-year drop in spending was on unemployment benefits, dropping by 24 percent,  not terribly surprising as unemployed workers ran out of benefits and because somewhat more Americans have found work.  You'll notice that the two largest spending increases came from Medicare and Social Security, up 3.3 and 6.0 percent respectively.  Outlays for these two programs were up just under 8 percent of GDP, slightly below levels seen in 2010 and 2011.  Defense spending dropped by 3 percent after rising at an average annual rate of 6 percent over the past five years.  This is largely because of the reduction in personnel in both Iraq and Afghanistan.  Here is a chart showing where all of your tax dollars (and more) are going:

Looking at the preliminary figures for the first month of fiscal 2013, we appear to be off to a grand start with October's deficit coming in at $113 billion, $15 billion higher than the same month one year earlier.  Excluding extraordinary items, the deficit for October should have been several billion less than  a year earlier, again, big whup.

From this information, you can see how critical it is that the "newly minted" President Obama and Congress put their rancorous partisan politicking behind them and provide a working solution for the looming fiscal cliff.  America simply cannot afford to spend its way over the fiscal cliff.

Dealing With Debt Reality - Obama's First Item of Business

Let's open with a classic video:



An interesting opinion piece by Ron Haskins, Co-Director of the Center on Children and Families, Budgeting for National Priorities, on the Brookings website, takes a look at the fiscal problem that will face President Obama and a divided Congress first thing in 2013.  The looming "fiscal cliff", a series of tax increases and spending cuts that will act to decrease the deficit, will expire on January 1.

These changes, if they actually occur, will result in a 19.6 percent increase in tax revenue and a measly 0.25 percent drop in spending.  This will cut the deficit to an estimated $641 billion in 2013, half a trillion dollars less than the deficit in fiscal 2012.  Unfortunately, there are consequences; the Congressional Budget Office suggests that these fiscal measures could throw the United States into a recession with real GDP declining by 0.5 percent between the fourth quarters of 2012 and 2013.

Right now, debt held by the public stands at 72 percent of GDP (by some measures); while that doesn't seem bad by European standards, it has risen from 36 percent of GDP at the end of 2007 and has only remained as low as it currently is because of economic growth.  The deficit in 2012 is 7.3 percent of GDP; if the tax increases and spending cuts are allowed to proceed unhindered, this will drop to 4.0 percent in 2013, 2.4 percent in 2014 and to 1.0 percent between 2015 and 2022.  After four years of deficits totalling more than $4.5 trillion, the CBO's projections show that deficits under the "higher tax and lower spending" scenario will total $2.3 trillion between 2013 and 2022 with debt-to-GDP falling from 72 percent to 58 percent.  Here's what it looks like in graphical form:

The darker blue line shows what happens to debt under the "fiscal cliff" scenario and the lighter blue line shows what happens to debt when the aforementioned legislation is extended, keeping taxes low and spending higher. 

Unfortunately, as I noted above, this scenario has a heavy short-term cost; another recession with slower economic growth and unemployment remaining above 8 percent with an additional loss of 2 million jobs.  It's not like the recession ever ended for many Americans and, understandably, this would be a very bitter pill to swallow.

Mr. Haskins has four suggestions for Congress:

1.) Postpone the various legislative elements of the fiscal cliff for four months and raise the debt ceiling to avoid another prolonged partisan mudslinging episode.

2.) Give Congress until June 1, 2013 to come up with a solution that would reduce the deficit by a set amount over a set period of time.  This solution would be voted on with no amendments.

3.) The compromise would include an automatic backup that would provide for tax increases and spending cuts equivalent to produce the same amount of deficit savings if Congress doesn't meet its June 1 deadline.

4.) Spending cuts over the next ten years totalling half a trillion dollars would be implemented in any case.

Washington can no longer afford to kick this can further down the road.  While a highly partisan and divided Congress has, thus far, successfully pushed the problem onto future generations, obviously this cannot continue ad infinitum.  Action on this huge problem will be a "damned if you do, damned if you don't" moment for the new administration.  The short-term pain of a recession in 2013 may look positively cheery compared to the pain of a European-style debt crisis should the world's bond traders lose confidence in their piles of Treasuries.  A bit of compromise by Congress and the president could go a long way to restoring that confidence.  Unfortunately, with the next Congress not being sworn in until January 3, 2013, it may already be too late.

First Half of Fiscal 2012 - How Is Washington Doing?

On March 31, 2012, the U.S. Federal Government is officially half way through fiscal 2012.  The Congressional Budget Office released the data for the first half of this economically confusing year in their Monthly Budget Review and here are a few of the highlights.

Overall, Washington racked up a budget deficit of just under $780 billion for the first half of the fiscal year, a drop of $53 billion or 6.8 percent from the previous year as shown here:

For the month of March 2012 alone, the deficit was $196 billion, up $8 billion from the previous year.  In this posting, I won't be focusing on the changes to the rather volatile monthly receipts and expenditures since I'd prefer to concentrate on the six month cumulative data.

Here is a screen capture from the report showing revenues through the six month period to the end of March:

Receipts for the first half of the year were $46 billion or 4.5 percent higher than last year with nearly 70 percent of the gain or $29 billion resulting from a net increase in net corporate tax receipts resulting from higher payments and lower refunds.  Corporate income tax revenues reached $84 billion, up 53.2 percent on a year-over-year basis.  While this seems like a big improvement, keep in mind that this is what corporations have paid in previous full fiscal years:

From the graph, it is still quite apparent that corporate taxes are set to be among the lowest in the last eight years if the remittances in the second half are the same as in the first half of fiscal 2012.

In the first six months of fiscal 2012, individual income taxes rose by $10 billion or 2.1 percent to $486 billion; corporate taxes still make up only 14.7 percent of the total income tax haul of $570 billion, well below the levels reached in the mid-2000s when Corporate America's contribution to Washington made up between 20.97 and 25.32 percent of the total.  The CBO attributes the rise in personal taxes to improving wage and non-wage incomes, however, the overall impact of the growth in incomes on individual tax receipts will not be known until taxes are collected in the month of April.

Here is a screen capture from the report showing expenditures through the six month period to the end of March:

Total expenditures were down a very marginal 0.4 percent on a year-over-year basis from $1.849 trillion in the first half of fiscal 2011 to $1.842 trillion in the first half of fiscal 2012.  Most notably, expenditures on unemployment benefits dropped by 21.8 percent on a year-over-year basis from $67 billion to $52 billion, largely because fewer new claims were filed as we well know from mainstream media reports in recent months.  Unfortunately, the number of insured unemployed Americans is dropping but still remains at levels that are nearly as high as the peaks after the 1990 - 1991 and 2001 recessions as shown here:

Nearly 1 million more Americans are unemployed as measured by continued claims than were unemployed during the economic "good times" prior to the Great Recession.  As well, the number of long-term unemployed is well above levels that would normally be experienced nearly three years after the end of a recession as shown here:

The long-term unemployed are of particular concern, necessitating costly federal "extended" unemployment benefits.  Currently, there are about 3.25 million people receiving these extended benefits along with the 3.69 million that are receiving continued benefits as shown in the chart above for a total of 6.94 million beneficiaries.  The situation could become critical if the "Eurozone Debt Influenza" floats across the Atlantic Ocean and results in an American recession since the baseline for employment is far worse now that in normal post-Recession periods.

The CBO also notes that net spending on big ticket items including Social Security and Medicare rose by 5.1 percent and 2.9 percent respectively for a total of $606 billion or just under 33 percent of all outlays.  Spending on Medicare dropped by 16.3 percent to $121 billion because legislated increases in the federal government's share of the program's costs expired in July 2011.

In closing, let's look at two of my favourite numbers:

1.) The debt to the penny on March 31, 2012:  $15,582,078,681,188.69 up $1.312 trillion or 9.19 percent on a year-over-year basis.  Here's a graph showing the growth of the debt since 1991, noting that, in general, the growth rate is rising:

2.) Interest owing on the debt for the first six months of fiscal 2012:  $211,352,941,695.70 or $674.50 for every man woman and child in the United States.

The only thing saving Washington's bacon is the ultra-low average interest rates on the debt as shown here:

Thank you Mr. Bernanke for your wonderful easing and twisting.

If the first half deficit figures are repeated in the second half of fiscal 2012, it looks like the U.S. federal government may well be headed for a new record level of over-expenditure.  A more likely scenario suggests that fiscal 2012 will find Washington overspending by roughly $1.3 trillion, the same level as fiscal 2010 and 2011.  Fortunately (or not), the government still has just over $855 billion worth of deficits that they can incur before they reach the new debt ceiling of $16.394 trillion.  At least we won't have to watch Washington bicker like school children over a new debt ceiling until the early part of fiscal 2013...hopefully.