Thursday, February 07, 2008

U.S. Budget Deficit Increasing Sharply

Even before the implementation of the coming "stimulus package", the U.S. budget deficit is again increasing fast. Yesterday's Congressional Budget Office's monthly budget estimate, strangely ignored by the financial media showed a significant increase in the budget deficit for the first 4 months of fiscal year 2008 (fiscal years start 3 months before the calendar year, so fiscal 2008 is October 2007 to September 2008).

January is normally a surplus month, because a disproportional share of tax payments is supposed to be paid in January. However, the surplus was only $15 billion this year, down from $38 billion in January 2007. Some of this reflected calendar effects, but it also reflects a genuine sharp deceleration in the growth of tax revenues. Tax revenues are up only 3.3% so far this fiscal year in nominal terms, meaning that they are falling in real terms. And it would have been even worse hadn't it been for the significant increase in nonwithheld income tax receipts. Such receipts largely reflect payments for income earned some time ago, meaning they do not reflect current economic conditions very well. Interestingly, corporate income tax receipts fell by 10%, clearly reflecting a significant decline in corporate profits.

Spending on the other hand continues to increase as fast as ever, with a calendar adjusted increase of 8.2%. The spending post increasing the fastest is interest payments. This mainly reflects higher interest payments for TIPS because of the high rate of inflation, so in one sense one can say this increase is illusory. And given the sharp decline in bond yields recently, one can expect interest payments to decline as the government refinances its debt, despite the continued increase in the level of government debt. On the other hand, net medicare spending was temporarily held down as overpayments of benefits in 2006 were received. As this is only a temporary factor, this means that net spending will rise a lot faster later in the budget year. So overall spending might just continue to rise by about 8% or so for the rest of the budget year, much faster than the 5% increase in nominal GDP the latest year.

Because of the deceleration of revenue growth and the acceleration of spending growth, the deficit for the first 4 months of the fiscal year rose from $42 billion in fiscal 2007 to $90 billion in fiscal 2008. Or in other words, the monthly deficit is up on average $12 billion, which would imply an annual increase of $144 billion. Considering how some tax payments lag economic activity and considering the so-called "stimulus package", the deficit will however increase a lot more than just $144 billion (which would have been bad enough).


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