Tuesday, August 7, 2012

A New Deficit Record for Washington

The latest Monthly Budget Review from the Congressional Budget Office is now out and it contains a mixed bag of news.  In this posting, I’ll briefly look at the overall picture, followed by some detail on the data for the month of July and close with a more detailed look at total receipts and total outlays for the first ten months of fiscal 2012.

Overall, the CBO reports that, to the end of July 2012, the deficit was $975 billion, $125 billion less than the $1.1 trillion deficit incurred for the first 10 months of fiscal 2011.  Revenues rose by $114 billion and outlays dropped by $11 billion as shown on this screen capture:

The deficit in July alone was $71 billion, down $58 billion from a year earlier, however, if one eliminates one-time shifts in payment, the deficit for the month of July 2012 would only have been down $22 billion from the same month a year earlier.

Revenues in July were up 15 percent from the same month a year earlier, largely because of increased receipts from individual income and payroll taxes.  While that looks good on paper, about half of the increase was due to an additional work day in July 2012.

Outlays in July were $35 billion lower than a year earlier, unfortunately, once again because July 1, 2012 fell on a Sunday, about $36 billion in payments that would ordinarily have been made in July, were made in June.  Basically, eliminating yet another one-off, outlays in July 2012 were $1 billion higher than in July 2011. 

Now, let’s look at the entire 10 month period starting with revenues and closing with outlays.

Here is a screen capture showing revenues for the first 10 months of this fiscal year:

Revenues were up 6 percent on a year-over-year basis with the largest increase coming from corporate taxes which grew by $42 billion or 30 percent.  This is largely a result of changes in tax rules which govern how quickly firms can deduct their capital expenditures.  Individual tax receipts grew by only 4.1 percent with much of the increase due to growth in wages.  Total receipts grew from $1.893 billion in 2011 to $2.007 billion in 2012, an increase of 6 percent.  There was one interesting drop in revenue; receipts from the Federal Reserve dropped by $6 billion largely due to lower interest rates and the shift to lower-yielding less risky assets which resulted in smaller profits and thus, smaller payments to the Treasury.  See, there is another unintended consequence of the Fed’s actions!

Here is a screen capture showing outlays for the first 10 months of this fiscal year:

Spending through July was down less than 1 percent on a year-over-year basis.  Allowing for one-off events, Department of Defense spending dropped by 2.6 percent, Medicaid spending dropped by 11.4 percent while Social Security spending rose by 6 percent and spending on Medicare rose by 4.3 percent net of receipts.  By far, the largest year-over-year percentage drop in spending was for unemployment benefits which fell 21.1 percent from $104 billion to $82 billion despite the fact that the number of unemployed only dropped by 8 percent from 13.908 million in July 2011 to 12.794 million in July 2012.  As we all know, long-term unemployed Americans are simply falling off the statistical radar screen.

In closing, let’s take a quick look at two of my favourite numbers starting with the debt-to-the-penny and closing with the interest owing on the debt for the end of July 2012:

The total debt on July 31, 2012 was $15.933 trillion compared to $14.342 trillion on July 29, 2011, a rise of 11.1 percent.  The interest owing on the outstanding debt for the first 10 months of fiscal 2012 is misleading because of a one-time accounting adjustment.  Without the $75 billion adjustment, the total interest owing thus far this year would have been just over $398 billion.  Despite the fact that interest rates on Treasuries are at or near all-time lows, it looks like the interest owing on the debt for 2012 will come very close to hitting a new record, somewhere in the $450 billion range without the one-time event.  To put this into perspective, that’s roughly what Washington will spend on Medicare for all of 2012.

In closing, as most of us expected, Washington is headed for its fourth year in a row of trillion dollar plus deficits, a new record even when adjusted for inflation.  While the deficit is down from the levels “achieved” between 2009 and 2011, the only thing saving the current administration’s bacon is ultra-low interest rates on the outstanding debt.  If interest rates were to rise to a historically normal level of 5 percent, the amount of annual interest owing on the debt would swell to nearly $800 billion, more than what is currently spent annually on Social Security.  That pretty much puts things into perspective, doesn't it?


  1. One of the most ironic aspects is that many members of Congress are balking at the first major attempt to rein in spending. That attempt is the "sequester" and a lot of GOP are campaigning against it. I have no idea how they think we can reduce spending without cutting stuff! Fed up! --A proud supporter of the maligned sequester.

  2. Magic! It's the only thing that will work!

  3. The debt will get much better if we grow the economy at a higher rate than we are adding debt. Focus on that, forget the debt for now. You are taking your eye off the ball. Remember all those lean years from the end of WW2 until, oh about the mid-70s or so when we toiled so mightily to pay off all that debt we incurred during the war? No? Me either.

  4. Two points. First, if interest rates rise then that probably implies the economy is growing and that means higher revenues for the Gov't which could theoretically offset any increase in the interest. Secondly, treasuries are generally sold in secondary market and thus investors are only concerned about the borrower (i.e., the U.S. gov't) paying interest which amounts to about $1.75 per hour per full time employee ($450 bln/134,000,000 workers/1950 hours) before taxes are taken out. The average pay on non farm payroll is about $23 per hour. That equates to 7.6% per hourly rate of pay to cover the entire interest on U.S. debt. Does not paint a better picture?

  5. Interest rates can rise for reasons other than growth in the economy. Just ask the PIIGS nations. Three short years ago, their interest rates were all the same as their less indebted European counterparts. The secondary bond market certainly had a way of changing that quickly, didn't it?

    It's all a matter of perception. The beauty of bonds is in the eye of the beholder.

  6. Don't worry about the debt? That's one of the most illogical things I've ever heard! If you want real economic growth, do what Estonia did. Cut spending with REAL austerity measures! They did that in 2009 and halved their unemployment rate in three years and now has one of the fastest, if not the fastest, growing economies in Europe. Interesting since the PIIGS are refusing to make real cuts and are still struggling. I guess Austrian economics works.