Deficit Watch, end of fiscal 2007

Once every twelve months, the rolling 12-month numbers are synchronized with the official "fiscal year" (October thru September).  This is it, and it's a better-looking trend this month—largely because of the corrected timing issue that dragged $50 billion of September's social security spending into August's numbers. 

Unfortunately, the trends are pointing towards a May 2009 balanced budget.  The reason that's unfortunate is because May 2009 is seven months too late to keep the politicians on both sides from demagoguing "the deficit" during the presidential campaign.  [I have given up on the hope that someone will ask the candidates "What's wrong with a deficit that doesn't increase the debt burden?" I have therefore fallen back on the hope that the budget will come into balance before fall 2008, because that would induce cognitive dissonance in every candidate fond of using "fixing the deficit" to justify whatever fiscal agenda they've already staked out.] 

My dream scenario, still, is to see tax-hiking politicians—on national television—stuttering like Porky Pig as they try to explain why we need tax hikes when we're already running a surplus.  (No doubt their justification would quickly and subtly shift to "the grim reaper just around the corner"—but at least "today's deficit" would no longer be a plausible scapegoat.)  However, my dream scenario cannot happen if the budget doesn't come into balance by fall '08.  May '09 would be too late to improve the election debate; worse, it would be just in time for the next president to take undeserved credit for "balancing the budget, at last."  How disgusting that would be.   

Anyway, here's the latest balanced-budget-trend chart; click to enlarge.

Two of the biggest contributors to tax receipts are individual income taxes and corporate income taxes, shown below.  The slowdown in corporate taxes is not encouraging; a pickup in the economy's performance would help move the overall trend in the correct direction. 

Lastly, regarding the social security spending blip we saw last month: The other shoe has dropped.  Several people had pointed out that a large portion of September's social security checks were cut in August; they were right, and it all leveled out in September.  This chart illustrates the net (neutral) effect of the timing blip:

Comments

[Counter Revolutionary]

Steve, except for the joy of watching the Pols dance around the subject next Fall, the numbers are still going in the right direction in large chunks. Will put the chart up over at my house, again.

[Mike H]

I think it's more likely the debate will turn to, "we need more taxes so we can take care of everyone, and look, tax increases will go farther now that the budget is balanced. Good thing us Dems won when we did and kept spending down. We even did it much faster than we were planning, how great are we?"

[Kevin]

OK I have to confess there's one part I still don't understand, though I suspect this has been covered here before. The FY unified budget showed a deficit of $163 B.

Off Budget items ran a surplus of +181.5 B
On budget items ran a deficit of 344.3 B

Net Deficit therefore is $163 B.

So, how come actual total debt increased almost exactly $500 billion from 9/30/2006 to 9/30/2007?

I'd expect total debt to grow only $163 B (along with a shift in the pie chart between intra governmental debt and debt held by public) -- not grow by $500 B.

[Counter Revolutionary]

Kevin the Unified deficit gets added to the Federal debt as borrowing. The off budget surplus gets added as intra-governmental debt. I assume not 100% of the $181B actually xfers as debt.

Maybe some of the more knowledgeable readers here can add the details of what is not debt. Or correct me if I have it all wrong.

[Steve]

Kevin:
Good question; the unified deficit is (approx) what the government borrowed from the public, and "federal debt held by the public" is the more important of the two numbers. "Total debt" adds intragovernmental debt to publicly-held portion. The reason publicly-held debt is the more important number is because the liabiity's matching asset (the bonds) are held by the public, not by the government. (The SS trust fund, by contrast, holds the offsetting intragovernmental bonds -- the much-demagogued "IOUs" politicians love to mischaracterize, as if it would be better to have stashed non-interest-bearing cash in the trust funds instead. Don't get me started.)

A full reconciliation is published annually by the GAO titled "Schedules of Federal Debt"; the one for fy'07 won't be available until November, but you can get an idea of what it will contain by examining last year's report, at this link:
http://tinyurl.com/2a2vs8
See especially Note 3 for details of the intragovernmental portion; there's more to it than just the SS surplus.

When the fy'07 schedule is published, I'll summarize it and post the result, for the record.

[Kevin]

Eventually, presumably, intra governmental bonds within this hodgepodge of government trust funds will actually be converted into actual cash to make cash payments to intended beneficiaries.

I think it would be very much in keeping with the spirit of these things if we tax those benefit payments at 100% so that the government expenditures be offset dollar-for-dollar by new tax receipts.

And then God can just throw a big meteor at us and start over again.

[Boghie]

401(k)s were initiated in the early 1980's and picked up steam in the early 90's.

Likewise with IRAs...

Have the 'Doom and Gloomers' factored the fact that folks will be paying income tax on these assets well into their golden retirement years?

Folks are talking about pulling enough money out of their 401(k) plans to purchase a condo outright on a site I frequent. Yanking $200,000 out of a 401(k) in one year will place you in the AMT.

Eighty year old great, great, grandpas will be paying income tazes in 2025. On money invested for 30 - 50 years...

[Boghie]

Kevin,

Steve is simply stating that Social Security is investing their holdings in something that earns interest - Federal Social Security Bonds.

It is the ONLY investment Social Security can make - by law.

It is a better investment than a huge mattress - cash - where the value of the holdings is eroded by inflation.

That is why I like Bush's plan to spread the holdings - and thus the obligations and risk - throughout the economy. Only those who are already filthy rich can survive off the interest of their holdings. The vast majority of us need some growth. And, when it comes time to cash in holdings the redemptions would be spread around the economy as well.

Oh, well...

[A Tanatar]

I'd see those tax making politicians explaining why low corporate tax AND universal health care helps new businesses grow rather than old businesses swallow everything in sight.

Plus I'd also say the "trend" lines in the plot are off, especially for receits. I'd say that serves a conservative swine, doesn't it?

[Counter Revolutionary]

Kevin, I think your dooms day scenario is a little over the top. What will happen is the intra-governmental bonds will be converted to publicly held bonds. No change in debt. Only a change in ownership of already tracked debt.

BTW, if Steve and many others are correct, the conversion of these bonds, if it happens at all, may be at a low rate and for just a few years. It all depends on economic growth. Where have I heard that before?

[rufus]

Kevin, I would guess that the discrepancy between $500 Billion, and $344 Billion (the amount of the on-budget shortfall) would be attributed to when Bond Interest Payments came/are coming due.

[john]

Everyone is filling the 401(k)s at this moment. But there will be a point in time people will 'have to" start to sell the 401(k)s. Will that have a big or small effect on the markets???

[Kevin]

I'm not suggesting a doomsday scenario, just joking about the weirdness of the Govt issuing bonds to itself, which are then both debt and asset to the same owner.

The result is that almost no citizen understands what's going on in the Federal U.S. Balance sheet or how social security works; almost no one can talk intelligently about reforming social security; the news media is and always will be completely useless on the issue; and lying politicians find it very easy to demagogue the issue.

Then when you do pretty much understand it, it's still hard to analyze the very basics, such as when one of these "trust funds" grows in value -- well is that actually a good or bad thing? I know what growth portends for my 401(k), but not so sure about what it means in the Nuclear Waste Disposal Fund.

It's like the whole system was cleverly designed to maximize obfuscation.

[Counter Revolutionary]

Kevin, "It's like the whole system was cleverly designed to maximize obfuscation." It's really quite simple. Here goes: 1) take away the word cleverly. 2) Study US history for the past 200 cyears, 3) Specialize in your historical studies on the Federal Government's role(s) in that history. 4) Read the biographies of all congress critters associated with any and all the laws associated with any specific issue. 5) Channel each and every one of those dead congress critters. 6) Take another nap cause it changed. 7) Start it all over.

And now you know why I first insisted on dropping clever.

You are correct, it is a complete mess. Just as are our tax laws. Oops they are related to SS.

[rufus]

Here's a discouraging thought (sorry.)

The 12 month deficit actually got worse between April 30, and Sept 30. We're going backward.

[JorgXMcKie]

rufus, can you say massive payment of unexpected income taxes by the American public in April? I thought you could. Of course, understanding will follow more slowly, if at all.

[rufus]

I can say that; but it has nothing to do with the YOY change from May 1, 06', to Sept 30, 07'.

[Joe Knight]

Well Bush should dig in his heels and stop the SPENDING! Fight the dems in Congress. IF we can contain spending at this years levels with continuing budget resolutions we might just get be succesful. What a feather in Bush's cap if after all we have gone through that we balanced the budget again. Joe Knight

[A Tanatar]

As a fiscal conservative, I have to ask why don't we increase personal income on high brackets (create a 1mm+ bracket) to reduce corporate tax? Why not introduce sales tax in one form or another?

[rufus]

Overall Spending only rose 2.9% last year. A two percent economy just doesn't grow the revenue very fast.

[Boghie]

Rufus,

JorgXMcKie (2007/10/13 @ 16:48) sarcastically asked a simple question:

Why are you measuring from May 1?

That is not a fiscal year, calendar year, any year, or even any standard period of economic measurement.

You are starting your ‘statistical analysis’ after the annual point of greatest revenue.

Again, why start on May 1?

There are lies, Damn lies

And Statistics!!!

[rufus]

No, No, No, Boghie. If you'll go to the treasury website you'll see that the YOY numbers for May to May, June to June, July to July, August to August, and Sept to Sept are pretty dismal for Revenue Growth. I'd have to go look it up again, but they're right at flat.

We had a huge number in April due to a Strong 06', but 07' has been pretty doggy. Look, Domestic Business Profits are DOWN, YOY.

I'm just reporting the "Facts." I'm as unhappy about it as you are.

[rufus]

And, before you jump on me about "Profits," please notice I said, "Domestic" business profits.

Business "Profits" are flat to a little up due to "Exporters."

[Boghie]

Rufus,

The revenue numbers are easy to get to.

Revenue Growth/Shrinkage

October 2007: +12.2% over October 2006
November 2007: +5.1% over November 2006
December 2007: +7.5% over December 2006
January 2007: +13.3% over January 2006
February 2007: +6.6% over February 2006
March 2007: +1.8% over March 2006
April 2007: +21.8% over April 2006
May 2007: -15% from May 2006
June 2007: +4.6% from June 2006
July 2007: +6.7% over July 2006
August 2007: +8.2% over August 2006
September 2007: +0.7% over September 2007
FY2007: +6.7% over FY2006

So, accepting May, every other YOY month during the correction was up. Even September’s YOY would have resulted in a revenue growth rate of 8.4%. Maybe May was an outlier… That one month drove the annual YOY down… The CBO determined that April revenue growth was higher and May lower because the IRS handled more of the April 15th tax transactions in April rather than May. Your government is getting better!!!

Now a question for you…

If the economy tanks – and thus revenues tank – shall we blame it on Congressman Rangle’s (D) talk of a Trillion Dollar tax increase???

That should help the profits you are moaning about!!!

However, my guess is that corporations will adjust their bookkeeping to show less profit and thus pay less tax. You know I will!!! I will add more money to my 401(k), my Flexible Savings Account, and even my Home Equity Line. I will pay less tax under a higher rate than I pay now. Right now I just pay, after Rangle I will squeeze for every deduction – and when I start playing that game I will win!!! Been there, done that!!!

Another question…

Are you assuming that there will never be an economic correction?

That is not how things work. We are not in recession. And, a 3% GDP growth rate is fine and sustainable. Don’t worry. We will be on track again soon enough. With less than a 10% growth rate we will be running a surplus. Here are more numbers (assuming spending grows by 3%):

Revenue: +5%, $116 Billion Deficit
Revenue: +6%, $90 Billion Deficit
Revenue: +7%, $65 Billion Deficit
Revenue: +8%, $39 Billion Deficit
Revenue: +9%, $14 Billion Deficit
Revenue: +10%, $12 Billion Surplus

My money is on a 7% - 8% growth in revenue and continued deadlock in spending.

Not necessarily good for the war effort, but great for deficit reduction.

Try selling a huge tax increase when we are running a $65 Billion deficit.

[rufus]

No, Boghie; 0.7% YOY is 0.7% YOY, NOT 8.4

Jeez, Boghie, You'd think I'd attacked your religion, or something.

Look, Revenues for May - Sept, 06' were $1,053,500,000,000 apprx. I rounded each month of to the closest 100 mil.

Revenues for the same period in 07' were $1,063,000,000,000. I call That, FLAT.

[rufus]

Understand, I'm not predicting, Anything. I, also, think we have a chance of getting back to stronger growth, although the Fed's still about 3/4 point too tough. I hope like the dickens we DO get back to growing revenues at 8 - 10%. I'm just saying the trend of the last few months isn't so hot.

btw, I'll grant you that you could add $15, or $20 Billion back into May as a result of more efficient tax collection in April, but that wouldn't make a very large difference. It would take it from 1% (okay, it WASN'T flat) to 2%, at Max.

[Boghie]

Rufus,

I think I know where you are coming from then. The last five months (including May) were flat. From June through September we are looking at a 4.4% growth. September numbers are not promising for future revenue growth - and corporate tax revenue growth is also not promising.

My interpretation of your use of YOY means comparing September 2006 with September 2007. The 8.4% growth I talked about would occur if the anemic September YOY number of 0.7% growth was duplicated for 12 months. We only had one downturn month.

I am not really too worried about the defiicit anymore. The Republicans cannot kill revenue growth with a silly vote pandering tax cut (unlike 2003 where one was needed) and the Democrats cannot pass Rangel's godzilla tax increase without Bush's signiture.

And, best yet...
Nobody can really agree on how to spend the pork in a serious Ted Stevens or Robert Byrd way!!! The things one party likes to blow their wad on the other detests.

As an example, does the military really need a big increase on a 1/2 Trillion Dollar budget. They cannot even spend what they are allocated.

And, who can win a debate to force everyone into Medicare or whatever.

My money is on the stock market.

[Boghie]

As figured out by Steve,

Two 6% revenue growth years with 3% spending growth equates to a balanced budget. Bush needs just short of a one year 10% growth in revenue to balance the budget. How can he manage that with corporate America adjusting to Democratic power. Soon, they will bookkeep their profit out – or move profit centers off-shore – to keep from Rangle’s Trillion dollar tax increase. Thus, two years are needed.

Too late for Bush.

Probably too late for the Republicans

Maybe too late for a sensible economic plan

But, not too late to enhance the legacy of a President who guided us through a war, a recession, and constant internal strife. We will not know what we had till after he is gone. When we have just another politician in office.