Analysis and
Implications of U.S. Budget Deficit at $1 Trillion
By the
Curmudgeon
Executive Summary:
The U.S. government's budget deficit ballooned to nearly $1 trillion in fiscal year 2019, a $205
billion increase from a year earlier and its highest level in seven years. The
deficit grew $205 billion, or 26 percent, in the past year and is up nearly 50
percent since Trump took office.
The actual deficit number was $984 billion but wouldve been
OVER $1 trillion had it not been for the additional revenue from President
Trumps tariffs on trading partners like China, which brought in more than $70
billion into the government coffers. For
comparison, the U.S. budget deficit was $665 billion in fiscal 2017.
As a share of economic output, the budget deficit was 4.6% in
fiscal 2019, up from 3.8% in 2018, the U.S. Treasury said. Revenues as a share
of gross domestic product fell last year, to 16.3% from 16.4% in the previous
fiscal year, while federal outlays surged, to 20.9% of GDP from 20.2% the
previous year.
Years of sustained budget deficits have led the U.S. Treasury
to steeply increase borrowing in recent years. The government has said it
expects to borrow more than $1 trillion for the second year in a row in
2019. See below for the impact of U.S. interest payments on the exponentially
increasing national debt.
The annual federal budget shortfall is the largest since
2012, when the unemployment rate was twice as high - topping 7 percent - and
the economy was emerging from the worst financial crisis since the Great
Depression. America's fiscal imbalance
has increased for four consecutive years despite a sustained period of economic
growth during that time.
Analysis:
So how did the U.S. budget deficit increase so much with no
recession? Blame it on federal
government spending and, to a much lesser extent, the 2017 GOP tax bill!
President Trump has endorsed big spending increases and
steered most Republicans to abandon the deficit obsession they held during the
Obama administration. For example,
military spending has risen dramatically under Trump, from about $550 billion
annually to more than $700 billion in 2019, and Democrats successfully pushed
for increases to other parts of the budget in exchange for their support to
boost money for defense.
Victor and I touched upon this astonishing dynamic of the budget deficit increasing during an
economic expansion. In a post
titled, Bond Vigilantes
and Deficit Hawks are Extinct; Stocks love DEBT! we wrote: Deficit
hawks would not have tolerated the budget busting GOP tax bill in late 2017
that has produced a budget deficit this fiscal year that will approach or
slightly exceed $1 trillion!
Budget deficits typically decrease a lot during economic
expansions as tax revenue increased since households earn more money and
corporations make higher profits. Also,
fewer people use safety net programs like unemployment benefits and food stamps
so government welfare payments decrease. The United States entered its longest
expansion on record in July and the jobless rate is at a 50-year low, yet the budget deficit has continued to widen.
Republicans, who in years past have shut down the federal
government in their quest to cut spending, have enabled the increases that are
exacerbating the deficit. In August, the
Republican controlled Senate gave final approval to a two-year budget deal that
raised federal spending by hundreds of billions of dollars and allowed the
government to keep borrowing money. Democrats reluctantly agreed to President
Trumps demands on military spending in order to satisfy their desire to
bolster spending on social programs. Twenty-eight Republicans joined with
Democrats to send the bill to Trumps desk where he signed it into law.
Former fiscal policy/deficit hawks such as Mick Mulvaney, Mr.
Trumps acting chief of staff, quietly lamented that agreement as a fact of
life in a divided government. What a contrast! During the Obama administration
Mulvaney held Spending, Debt and Deficit town hall meetings and repeatedly
criticized lawmakers of both parties for increasing the deficit, including
through funding relief for Hurricane Sandy (the strongest, deadliest and most
destructive hurricane of the 2012 Atlantic hurricane season. Inflicting nearly
$70 billion of damages).
Since becoming President, Trump has endorsed big spending
increases and steered most Republicans to abandon the deficit obsession they
held during the Obama administration.
That is why we wrote (in the above referenced Curmudgeon post) that deficit
hawks are extinct!
Trump administration officials did not defend the steep
increase in the budget deficit. Instead,
they cast blame on Congress for not doing more to reduce expenditures. Treasury
Secretary Steven Mnuchin called on lawmakers to cut wasteful and irresponsible
spending. But neither Trump nor Congress has done much to cut spending in
recent years, with Trump repeatedly backing away from his own budget proposals.
Trump has also demanded new spending on the military and for a border wall. He
has recently told aides that he will focus on cutting spending if he is elected
to a second term next year.
Budget experts also say the 2017 GOP tax bill (a tax cut for business, but a huge tax increase
for people living in high tax states like CA or NY) has led revenue to come in
lower than they normally would during an economic expansion. Tax revenue remained roughly flat the first year
the law was in effect, despite economic growth of nearly 3 percent. Tax revenue
was modestly higher in fiscal 2019, aided in part by a 70 percent increase in
tariff revenue as noted above.
Most alarming is that non-controllable government outlays are
increasing at a relatively fast pace. Mandatory allocations, which include
Medicare and social security payments, are growing amid an aging population and
with one of the worlds least efficient health-care systems. Interest payments
are also adding up, now comprising about 8.4% of total outlays.
Americas expanding federal deficit is an anomaly among
developed nations around the world. Nearly all other advanced-economy countries
are on track to see their debt shrink as a share of their economy over the next
five years, according to the International Monetary Fund.
Other Voices:
The mounting red ink has raised a new round of alarm bells
from deficit watchdog groups and politicians, whose warnings have long gone
unheeded in Washington. Here are a few
quotes:
This administration came into office talking about reducing
deficits, and the results have been the exact opposite. The current levels of
debt are unprecedented in peacetime during a growing economy, and the
consequences of this irresponsible spending are unknown, said G. William
Hoagland, senior vice president at the Bipartisan Policy Center.
This is the first time in our history that we are seeing a
boom in the economy at the same time deficits are rapidly rising. Its
alarming, said Marc Goldwein, senior policy director of the Committee for a
Responsible Federal Budget, which supports reducing the deficit.
Our nations leaders are in debt denial, running up red ink
all while ignoring trillions of dollars in shortfalls for Social Security,
Medicare, and other programs that many millions of Americans rely upon,"
said Mitch Daniels, co-chairman of the Center for a Responsible Federal Budget.
We are at a turning point without action now to phase in reforms over the
coming years, Americans will face a much different future than the one that was
promised.
Leon Panetta, a former budget director under President Bill
Clinton and CIA Director under President Obama, said in a statement issued by
the Committee for a Responsible Federal Budget (where he is co-chair): Instead
of getting our fiscal house in order and preparing for the next downturn, our
leaders continue to binge on debt-fueled tax cuts and spending hikes rather
than showing the leadership necessary to set our fiscal path.
There is very little discussion among Republicans about the
deficit and virtually no serious outreach to Democrats for any sort of
bipartisan deal, said Brian Riedl, a budget expert at the Manhattan Institute,
a libertarian-leaning think tank, and former chief economist for Sen. Rob
Portman (R-Ohio). The parties are not talking on this issue.
Wyoming Senator Mike Enzi (a Republican) who leads the budget
committee, called the countrys fiscal path unsustainable and said spending
must come down. He said in a statement: While the federal governments revenue
continues to grow, spending is growing twice as fast. We simply cannot afford
to continue ignoring the fiscal challenges our nation faces.
In order to truly put America on a sustainable financial
path, we must enact proposalslike the presidents 2020 budget planto cut
wasteful and irresponsible spending, Mr. Mnuchin said in a statement. Does
anyone believe that will really happen?
Whats Next?
The 2017 tax legislation is projected to increase the annual
deficit by about $200 billion, or close to $2 trillion over 10 years when
factoring in interest payments, according to the nonpartisan Congressional
Budget Office. The GOP tax-cut package
is estimated to cost $1.5 trillion over a decade, with few economists outside the
administration expect it will continue to fuel growth. The budget deficit --
which has little precedent at these super high levels outside recessions or
wartime -- is set to widen further as spending increases for mandatory programs
and interest payments.
Overall spending is projected to rise by about 16 percent
between 2017 and 2020, largely because of bipartisan deals struck by Congress,
including a 2018 law that lifted spending limits and disaster relief funding,
according to the Committee for a Responsible Federal Budget.
By 2029, the national
debt is projected to reach its highest level as a share of the economy since
the immediate aftermath of World War II.
.
Fears of trillion-dollar deficits could renew the desire of
Republicans in Congress to propose cuts to social programs, like food stamps,
Social Security and other safety net benefits. Republicans have long pointed to
swelling deficits as a reason to pursue their long-held vision of smaller
government, including undoing many of the programs ushered in during the New
Deal and Great Society to help the most disadvantaged Americans.
Budget experts have warned that a lack of focus on reducing
the budget deficit could make it much harder for the U.S. government to respond
to the next economic crisis. Thats because policymakers will have less
flexibility to enact new spending programs if they are devoting hundreds of billions
of dollars to interest payments on the
national debt. The federal
government spent approximately $380 billion in interest payments on its debt
last year, almost as much as the entire federal government contribution to
Medicaid. Interest payments on the debt will be much larger this year with
the higher deficit and will truly explode
higher if interest rates rise to just the average level of the past 50 years.
Federal Reserve Chairman
Jerome Powell is concerned about the
ballooning amount of U.S. debt. At a
January 2019 speech at The Economic Club of Washington, D.C. he said, Im very
worried about it. Its a long-run issue
that we definitely need to face, and ultimately, will have no choice but to
face.
Powell told the Senate Banking Committee in testimony this
February, "The U.S. federal government is on an unsustainable fiscal
path. He then noted that debt as a percentage of GDP is growing, and now
growing sharply... And that is unsustainable by definition. We need to
stabilize debt to GDP (ratio). The timing the doing that, the ways of doing it
through revenue, through spending all of those things are not for the Fed to
decide.
Conclusions:
At some point this author believes unchecked budget deficits
will become a big problem, because the national debt will reach a tipping point
where it cant be easily financed. That will cause much higher interest rates,
which will crowd out borrowing by consumers and businesses and that could lead
to a severe recession. At the same time,
foreigners will be wary of U.S. government debt and go on a buyers
strike. They could even sell their
massive holdings of U.S. debt which would cause a crash in the U.S. dollar and
potentially end its role as the worlds reserve currency.
Its hard to believe I still cling to this view which was
mainstream in 1981-1982 when budget deficits started to increase rapidly under
President Reagan. The day of reckoning
has not yet come yet, but it will sometime in the future.
Closing Quote:
In the previously referenced Curmudgeon post, Victor
concluded as follows:
All the empirical experience points to the long run (5-10
years) as the debt timeframe to worry about. In the short run, debt and
deficits apparently do not matter but it certainly looks like a ticking time
bomb!
..
Good luck and till
next time
The Curmudgeon
ajwdct@gmail.com
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the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has
been involved in financial markets since 1968 (yes, he cut his teeth on the
1968-1974 bear market), became an SEC Registered Investment Advisor in 1995,
and received the Chartered Financial Analyst designation from AIMR (now CFA
Institute) in 1996. He managed hedged equity and alternative
(non-correlated) investment accounts for clients from 1992-2005.
Victor
Sperandeo is a historian, economist and financial innovator who
has re-invented himself and the companies he's owned (since 1971) to profit in
the ever changing and arcane world of markets, economies and government
policies. Victor started his Wall Street
career in 1966 and began trading for a living in 1968. As President and CEO of
Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and
development platform, which is used to create innovative solutions for
different futures markets, risk parameters and other factors.
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