Conclusion: U.S. Federal budget deficit numbers continue to be alarming with expenses running up more than 10% on a normalized basis year-over-year. Suffice it say, we remain short the U.S. dollar via the UUP.
The U.S. Treasury Department reported budget deficit numbers for July and year-to-date earlier today. We’ve outlined the trend in the chart below, but we now have our 22nd consecutive month of running a deficit as nation. On a reported basis, the July 2010 deficit came in at $165 billion, which is an improvement on a reported basis versus July 2009. The story, as always, is in the fine print.
In the table immediately below we have normalized numbers for the fiscal year-to-date (July is the 10th month in the government’s fiscal year), so we excluded TARP and payments to GSE, and added back a 1-time FDIC payment. To say the results are scary is an understatement. For the first ten months of the fiscal year, government spending is up 10.4% on a year-over-year basis, or $288 billion.
As the table above shows, every single line item is up on year-over-year basis!
On the revenue side of the ledger, the results are equally discouraging with revenue up an anemic 0.8% on a year-over-year basis. The notable detractor was personal income tax receipts (41% of total government revenue), which were down 4% year-over-year.
In aggregate, the deficit was up 27% after normalizing for TARP and payments to GSEs. Needless to say, so much for a better economy benefitting deficit reduction.
As we contemplate this release and think about the coming fiscal year, we are beginning to believe that we are too low on our deficit projections for fiscal 2011E, which we have growing to 10.6% of GDP in 2011E from our 2010E of 10.4%. Given that we believe GDP growth in 2011 will be in a best case scenario 1.7%, the denominator will not move much (which will also negatively impact tax revenues). So, the outstanding question is on the numerator.
Obviously, if deficit growth were to stay on the same trajectory it is on now, of 27% growth, it would be an unmitigated disaster and come in well above our projection of 10.6% as a percentage of GDP. In fact, we could be looking at a number closer to 13%.
The wild card will be taxes and what happens with the Bush tax cuts. Do they expire, or do they get extended? Obviously, if they expire tax revenue will go up dramatically. The larger problem though is the growth trajectory of spending.
In a scenario where the Bush taxes cuts expire and taxes for corporations and individuals go up 30% in aggregate, but expenditures grow at the same rate, the deficit would still grow on a year-over-year basis. (The 30% growth in tax revenues is a plug number, which represents an aggressive scenario in our opinion. It is likely that aggregate tax revenue does not increase nearly that much.)
The simple conclusion from the report today is that absent a dramatic policy shift in terms of spending, our deficit projections will be going up, and with that the U.S. balance sheet will continue to degrade.
We remain short the U.S. dollar via the UUP.
Daryl G. Jones