Tag Archives: Budget Deficit

US Budget Deficit Hits $530 Billion In 8 Months, As Spending On Interest Explodes

The US is starting to admit that it has a spending problem.

According to the latest Monthly Treasury Statement, in May, the US collected $217BN in receipts – consisting of $93BN in individual income tax, $103BN in social security and payroll tax, $3BN in corporate tax and $18BN in other taxes and duties- a drop of 9.7% from the $240.4BN collected last March and a clear reversal from the recent increasing trend…

https://www.zerohedge.com/sites/default/files/inline-images/receipts%20may%202018.jpg?itok=rEuJVtdq

… even as Federal spending surged, rising 10.7% from $328.8BN last March to $363.9BN last month.

https://www.zerohedge.com/sites/default/files/inline-images/outlays%20may%202018.jpg?itok=HWulNcBr

… where the money was spent on social security ($83BN), defense ($56BN), Medicare ($53BN), Interest on Debt ($32BN), and Other ($141BN).

https://www.zerohedge.com/sites/default/files/inline-images/MTS%20may%202018.jpg?itok=hsSikeNj(click here for larger image)

The surge in spending led to a May budget deficit of $146.8 billion, above the consensus estimate of $144BN, a swing from a surplus of $214.3 billion in April and far larger than the deficit of $88.4 billion recorded in May of 2017. This was the biggest March budget deficit since the financial crisis.

https://www.zerohedge.com/sites/default/files/inline-images/us%20budget%20deficit%20may%202018.jpg?itok=8rJNKZPj

The May deficit brought the cumulative 2018F budget deficit to over $531bn during the first eight month of the fiscal year; as a reminder the deficit is expect to increase further amid the tax and spending measures, and rise above $1 trillion.

https://www.zerohedge.com/sites/default/files/inline-images/budget%20deficit%206.12.jpg?itok=cziKJhqI

The red ink for May deficit brought the deficit for the year to-date to $532.2 billion. Most Wall Street firms forecast a deficit for fiscal 2018 of about $850 billion, at which point things get… worse. As we showed In a recent report, CBO has also significantly raised its deficit projection over the 2018-2028 period.

https://www.zerohedge.com/sites/default/files/inline-images/2018-04-09_11-13-25.jpg

But while out of control government spending is clearly a concern, an even bigger problem is what happens to not only the US debt, which recently surpassed $21 trillion, but to the interest on that debt, in a time of rising interest rates.

As the following chart shows, US government Interest Payments are already rising rapidly, and just hit an all time high in Q1 2018. 

https://www.zerohedge.com/sites/default/files/inline-images/interest%20expenditures.jpg?itok=BuGbNIs6

Interest costs are increasing due to three factors: an increase in the amount of outstanding debt, higher interest rates and higher inflation. A rise in the inflation rate boosts the upward adjustment to the principal of TIPS, increasing the amount of debt on which the Treasury pays interest. For fiscal 2018 to-date, TIPS’ principal has been increased by boosted by $25.8 billion, an increase of 54.9% over the comparable period in 2017.

The bigger question is with short-term rates still in the mid-1% range, what happens when they reach 3% as the Fed’s dot plot suggests it will?

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In a note released by Goldman after the blowout in the deficit was revealed, the bank once again revised its 2018 deficit forecast higher, and now expect the federal deficit to reach $825bn (4.1% of GDP) in FY2018 and to continue to rise, reaching $1050bn (5.0%) in FY2019, $1125bn (5.4%) in FY2020, and $1250bn (5.5%) in FY2021.

https://www.zerohedge.com/sites/default/files/inline-images/exhibit_1.img%20%284%29.png

Goldman also notes that it expects that on its current financing schedule the Treasury still faces a financing gap of around $300bn in FY2019, rising to around $750bn by FY2021, and will thus need to raise auction sizes substantially over the next couple of years to accommodate higher deficits.

https://www.zerohedge.com/sites/default/files/inline-images/exhibit_3.img%20%283%29.png

What does this mean for interest rates? The bank’s economic team explains:

The increase in Treasury issuance and the ongoing unwind of QE should put upward pressure on long-term interest rates. On issuance, the economic research literature suggests as a rule-of-thumb that a 1pp increase in the deficit/GDP ratio raises 10-year Treasury yields by 10-25bp. Multiplying the midpoint of this range by the roughly 1.5pp increase in the deficit due to the recent tax and spending bills implies a 25bp increase in the 10-year yield. On the Fed’s balance sheet reduction, our estimates suggest that about 40-45bp of upward pressure on the 10-year term premium remains.

And here a problem emerges, because while Goldman claims that “the deficit path is known to markets, but academic research suggests these effects might not be fully priced immediately… the balance sheet normalization plan is known too, but portfolio balance effect models imply that its impact should be gradual” the bank also admits that “the precise timing of these effects is uncertain.”

What this means is that it is quite likely that Treasurys fail to slide until well after they should only to plunge orders of magnitude more than they are expected to, in the process launching the biggest VaR shock in world history, because as a reminder, as of mid-2016, a 1% increase in rates would result in a $2.1 trillion loss to government bond P&L.

https://www.zerohedge.com/sites/default/files/images/user5/imageroot/2016/06/04/bond%20market%20exposure_0.png

Meanwhile, as rates blow out, US debt is expected to keep rising, and somehow hit $30 trillion by 2028

https://www.zerohedge.com/sites/default/files/inline-images/debt%20budget%20trump%202019.jpg

… without launching a debt crisis in the process.

Source: ZeroHedge

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US Budget Deficit Hits $600 Billion In 6 Months, As .Gov Spending On Interest Explodes

The US is starting to admit they have a terminal spending problem.

According to the latest Monthly Treasury Statement, in March, the US collected $210.8BN in receipts – consisting of $88BN in individual income tax, $98BN in social security and payroll tax, $5BN in corporate tax and $20BN in other taxes and duties- a drop of 2.7% from the $216.6BN collected last March and a clear reversal from the recent increasing trend…

https://www.zerohedge.com/sites/default/files/inline-images/receipts.jpg?itok=wXopHgAK

… even as Federal spending surged, rising 7% from $392.8BN last March to $420BN last month, the second highest monthly government outlay on record

https://www.zerohedge.com/sites/default/files/inline-images/outlays.jpg?itok=k4bcxNEK

… where the money was spent on social security ($85BN), defense ($58BN), Medicare ($75BN), Interest on Debt ($33BN), and Other ($170BN).

https://www.zerohedge.com/sites/default/files/inline-images/govt%20spending%20outlays.jpg?itok=Ki61K6ob(click for larger image)

The resulting surge in spending led to a March budget deficit of $208.7 billion, far above the consensus estimate of $186BN, and over 18% higher than $176.2BN deficit recorded a year ago. This was the biggest March budget deficit in US history.

https://www.zerohedge.com/sites/default/files/inline-images/budget%20deficit%20march%202018.jpg?itok=dnX_MyMQ

The March deficit brought the cumulative 2018F budget deficit to over $600bn during the first six month of the fiscal year, or roughly $100 billion per month; as a reminder the deficit is expect to rise further amid the tax and spending measures, and rise above $1 trillion, although at the current run rate it is expected to hit $1.2 trillion. As we showed In a recent report, CBO has also significantly raised its deficit projection over the 2018-2028 period.

https://www.zerohedge.com/sites/default/files/inline-images/2018-04-09_11-13-25.jpg

But while out of control government spending is clearly a concern, an even bigger problem is what happens to not only the US debt, which recently surpassed $21 trillion, but to the interest on that debt, in a time of rising interest rates.

As the following chart shows, US government Interest Payments are already rising rapidly, and just hit an all time high in Q4 2017. That’s when Fed Funds was still in the low 1%’s. What happens when it reaches 3% as the Fed’s dot plot suggests it will?

https://www.zerohedge.com/sites/default/files/inline-images/interest%20payments.jpg?itok=eiIWpM6S

In a note released by Goldman after the blowout in the deficit was revealed, the bank once again revised its 2018 deficit forecast higher, and now expect the federal deficit to reach $825bn (4.1% of GDP) in FY2018 and to continue to rise, reaching $1050bn (5.0%) in FY2019, $1125bn (5.4%) in FY2020, and $1250bn (5.5%) in FY2021.

Revising Our Deficit and Debt Forecasts

https://www.zerohedge.com/sites/default/files/inline-images/exhibit_1.img%20%284%29.png?itok=IJpTHVaa

Goldman also notes that it expects that on its current financing schedule the Treasury still faces a financing gap of around $300bn in FY2019, rising to around $750bn by FY2021, and will thus need to raise auction sizes substantially over the next couple of years to accommodate higher deficits.

https://www.zerohedge.com/sites/default/files/inline-images/exhibit_3.img%20%283%29.png?itok=8PKwva3S

What does this mean for interest rates? The bank’s economic team explains:

The increase in Treasury issuance and the ongoing unwind of QE should put upward pressure on long-term interest rates. On issuance, the economic research literature suggests as a rule-of-thumb that a 1pp increase in the deficit/GDP ratio raises 10-year Treasury yields by 10-25bp. Multiplying the midpoint of this range by the roughly 1.5pp increase in the deficit due to the recent tax and spending bills implies a 25bp increase in the 10-year yield. On the Fed’s balance sheet reduction, our estimates suggest that about 40-45bp of upward pressure on the 10-year term premium remains.

And here a problem emerges, because while Goldman claims that “the deficit path is known to markets, but academic research suggests these effects might not be fully priced immediately… the balance sheet normalization plan is known too, but portfolio balance effect models imply that its impact should be gradual” the bank also admits that “the precise timing of these effects is uncertain.”

What this means is that it is quite likely that Treasurys fail to slide until well after they should only to plunge orders of magnitude more than they are expected to, in the process launching the biggest VaR shock in world history, because as a reminder, as of mid-2016, a 1% increase in rates would result in an estimated $2.1 trillion loss to government bond P&L.

https://www.zerohedge.com/sites/default/files/images/user5/imageroot/2016/06/04/bond%20market%20exposure_0.png

Meanwhile, as rates blow out, US debt is expected to keep rising, and somehow hit $30 trillion by 2028

https://www.zerohedge.com/sites/default/files/inline-images/debt%20budget%20trump%202019.jpg

… all without launching a debt crisis in the process.

Source: ZeroHedge

Budget Deficit Surges As Interest On US Debt Hits All Time High

February is traditionally not a good month for the US government income statement: that’s when it usually runs a steep monthly deficit as tax returns drain the Treasury’s coffers. However, this February was worse than usual, because as spending rose and tax receipts slumped, the US deficit jumped to $215 billion, the biggest February deficit since 2012.

https://www.zerohedge.com/sites/default/files/inline-images/US%20deficit%20february.jpg?itok=ooSwHJ2S

According to the CBO, receipts declined by 9.4% from last year as tax refunds rose and the new withholding tables went into effect. On a rolling 12 month basis, government receipts rose only 2.1%, a clear slowdown after rising 3.1% in December after contracting as recently as March 2017. At this rate of decline, the US will post a decline in Federal Receipts by mid-2018.

https://www.zerohedge.com/sites/default/files/inline-images/federal%20receipts%20yoy.jpg?itok=f43sRIib

Outlays meanwhile rose by 2% due to higher Social Security and Medicare benefits rose and additional funds were released for disaster relief.

Putting these two in context, in Fiscal 2000, Treasury receipts in the Oct-Feb period were $741.8 bn, nearly matching outlays of $741.6 bn. In Fiscal 2018 meanwhile, receipts in the Oct-Feb period are $1.286 tn while outlays are $1.677 tn. Receipts are growing an average 4% per year, while outlays are rising an average 7%.

https://www.zerohedge.com/sites/default/files/inline-images/tsy%20receipts%20months.jpg?itok=yIZ8tAG3

Here is a snapshot of February and Fiscal YTD receipts and outlays.

https://www.zerohedge.com/sites/default/files/inline-images/monthly%20budget%20march%202018.jpg?itok=VHiRArSG

But most troubling was the jump in interest on the public debt, which in the month of February jumped to $28.434 billion, up 10.6% from last February and the most for any February on record. In the first five months of this fiscal year, that interest is $203.234 bn, up 8.0% y/y and the most on record for any Oct-Feb period. The sharp increase comes as the US public debt rapidly approaches $21 trillion. And with the effective interest rate now rising with every passing month, it is virtually assured that this number will keep rising for the months ahead.

https://www.zerohedge.com/sites/default/files/inline-images/feb%20debt%20interest.jpg?itok=mB5LmJvl

Source: ZeroHedge

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Dollar Dumps, Treasury Yields Erase Post-Payrolls Spike

https://www.zerohedge.com/sites/default/files/styles/inline_image_desktop/public/inline-images/2018-03-12_11-32-27.png?itok=jF791WCK

Fed Admits ‘Yield Curve Collapse Matters’

https://www.zerohedge.com/sites/default/files/inline-images/2018-03-12_9-31-33.png?itok=69-Q3Eqm