Friday, October 7, 2011

Congressional Budget Office Fiscal 2011 Review - Up The Creek and No Paddle in Sight

The Congressional Budget Office has just released its Monthly Budget Review for the 2011 fiscal year.  From their preliminary estimates, it appears that the federal budget deficit reached $1.298 trillion this year, roughly the same as last year.  This works out to 8.6 percent of gross domestic product, down from 8.9 percent in 2010 and 10 percent in 2009 but greater than any other year since 1945 when the government was funding the massive effort required to fight World War II.  All is  not as grim as it first appears however, because October 1 fell on a weekend, some payments from fiscal 2012 were switched to fiscal 2011; without that shift, the deficit would ONLY have been $1.27 trillion.  This is the third year in a row that the deficit has exceeded the $1.29 trillion mark.  Congratulations Washington!  And they said it couldn't be done!

Let's break down the numbers a bit more.

Total receipts for the year reached $2.303 trillion, up $141 billion from last year or 6.5 percent.  Total outlays reached $3.456 trillion, also up $144 billion from last year.  Note that total tax revenue is well below the $2.524 trillion level reached in fiscal 2008.  Here's what the breakdown of total revenues looks like:

Washington's take from individual income taxes was $1.093 trillion, up 21.6 percent from a year earlier despite the high level of unemployment.  The take from corporate income taxes was $180 billion, down 5.7 percent from a year earlier despite a very profitable year for many American companies, some of which would rather keep their profits from the taxman by sheltering them in multiple overseas subsidiaries.  This works out to 16.5 percent of individual tax revenue.  Apparently, the entire $11 billion year-over-year decline may reflect delays in certain filings due to natural disasters.  That said, revenue increases from higher profits were offset by revenue reductions resulting from tax legislation changes in 2010 that accelerated business deductions for depreciation.  If we look back to fiscal 2009, corporate tax revenue dropped by 5.4 percent to a rather paltry $139 billion (15.1 percent of individual taxes) reflecting the impact of the Great Recession on profitability.  The deficit reached a massive $1.4 trillion or 10 percent of GDP, a new post-World War II record.  In 2008, corporate tax revenue was $305 billion or 26.5 percent of individual tax revenue and the deficit was $438 billion or 3.1 percent of gross domestic product.  Let's go back to the year 2007, just prior to the Great Contraction.  In that year, the deficit reached $161 billion (seems tiny, doesn't it?) which worked out to a miniscule 1.2 percent of gross domestic product.  Individual income taxes reached $1.162 trillion and corporate taxes reached $372 billion or 32 percent of individual taxes.  From the numbers for fiscal 2007 alone, you can readily see that in fiscal 2011, corporate taxes made up a rather insignificant (and shrinking) part of Washington's total revenue stream.  As Wall Street is promoting, perhaps it really is time to cut the corporate tax rate from 35 percent (he said dripping with sarcasm) so that America's corporations can sharpen their pencils even further in a desperate attempt to cut their tax bills even further.

Now let's look at the breakdown in how Washington spends our hard-earned dollars:

One of the scarier items in the Monthly Budget Review is the outlay for Net Interest on the Public Debt.  These outlays reached $266 billion in fiscal 2011, up 16.7 percent on a year-over-year basis despite the fact that interest rates are at historic lows.  This is the largest percentage increase in all federal government outlays.  Should interest rates rise to historical norms, the interest payments on the debt are certain to rise to most uncomfortable levels.  Here is a chart showing annual interest payments on the debt since 1988 from the Treasury Direct Website:

Congratulations are once again in order.  Washington has surpassed the former fiscal year interest on the debt level reached in 2008 by just over $3 billion!

When looking at the outlays, it's also interesting to note that Washington's expenditures on Unemployment Benefits dropped by 24.1 percent to $123 billion (less than half of what they spent on debt interest payments).  This is because fewer unemployment claims were filed (as people lose eligibility) and because a provision that boosted recipients benefits by $25 per week expired.  That's okay, the 14 million plus unemployed Americans don't really want help, do they?

In closing, let's take a look at the latest debt-to-the-penny numbers:

We'd better hope that Washington's Debt Super Committee shoves their partisan nonsense aside before America's debt debacle makes the Eurozone's recent sovereign debt issues look like a Sunday walk in the park.  At this point, the debt growth trend is looking increasingly unsolvable.

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