CBO VS CBO Update 11/5/2013

Well…though it was delayed by a few weeks thanks to the shutdown, Treasury has released the September deficit numbers….capping off fiscal 2013 with a reported 75B (September)surplus. This brings the full year reported deficit to $680B…$38B higher than the $642B they forecasted back in May.

I reported the Cash Deficit for the FY earlier this month, coming in at $774B…$94B higher. So…WTH!!! When I began this CBO vs CBO piece…I unfortunately started with a bad assumption….that the Cash Deficit I was calculating would more or less tie to whatever the annual reported deficit was. I based this on two data points, FY 2011 and FY 2012. FY 2011 had a $7B difference out of a $1.304T deficit and FY 2012 had a $3B difference out of $1.092T. I figured that was close enough for government work.

Unfortunately…it turns out that these two data points for 9/2012 and 9/2013 are actually an anomaly. Historically, there appears to be a $50-$100B difference on average, though it peaked out in 9/2009 at a $402B difference. Since that was bailout mania year, I have to suspect that somehow they are/were excluding some bailout related things, but not others. Who the hell knows how/what they decided, but I think this just goes to further discredit whatever numbers they decide to publish. They are junk…to be discarded completely.

Now…this kind of defeats the purpose of the CBO vs CBO competition….if they can just make up numbers, it’s kind of a silly game right??

Well….Even if we can’t directly compare the Citizens Budget Office vs the Congressional Budget Office…we can at least look at the forecasts of each and compare it to actuals.

So first up….the Congressional Budget Office. At the time I published the initial CBO vs CBO write up, they were forecasting an 845B deficit, subsequently lowered in May to $642B. Actuals came in at $680B…so not that shabby. The initial forecast was high by $165B…and the later forecast ended up being $38B low.

Now…for the Citizens Budget Office…that would be me. My initial forecast was a 1.006T cash deficit revised down to $800B in May. Actuals ended up at $774B, so my initial forecast was $232B high and my second attempt was $26B high. Now…a  $26B miss from 5 months out….not too shabby if you ask me.

The initial miss, however, can be broken down into a few categories. Of the $232B miss, 85B was due to sequestration…I assumed incorrectly that it wouldn’t happen. Second, I did not forecast the $60B Fannie Mae Payday Loan. The rest was primarily and underestimate of revenues. I did expect higher revenues due to the tax hike (primarily on workers) but month after month they came in higher than expected in my initial forecast. That’s a good thing…unless you pay taxes I suppose.

So in conclusion, I will grudgingly give round 1 to the pros at the Congressional Budget Office. I’m not sure if they just got lucky, or if they really are better than me. But all is not lost. In the initial forecast, I framed this not as a single year competition, but as a 10 year long challenge. So…I’m working up my year two projections and should have them out in a few weeks. Round 2 coming up….may the best organization win.


Fannie Mae Payday Loan: Revenue Or Reduction In Cost??

Back in May, the CBO released an updated forecast of FY2013 that was a $200B improvement over the forecast they had released in February…basically on a $100B decrease in outlays and a $100B increase in revenues.

In my review here, the reduction in outlays was quite puzzling For a few years now, we have been running more or less flat costs as increases in Social Security and Medicare quickly gobbled up whatever tiny cuts were actually made. So…I thought it was very odd that with only 5 months remaining, they would predict…all of a sudden a $100B reduction, or $20B per month remaining in the FY.

After comparing the Monthly Treasury Statement (MTS) with the  Daily Treasury Statement (DTS) for June… I have a much better understanding now. It seems that rather than categorizing the Fannie Mae special dividend as revenue…like I have, they instead classified it as a reduction in outlays. From a deficit perspective…it really makes no difference. From an accounting perspective, well, I can see it going either way, so I don’t think there is anything shady afoot…. well, there is a lot shady about the payment, but I don’t have any vehement objections to this classification of outlay reduction instead of revenues 🙂

At the time, I suspected that the revenue increase was primarily the Fannie Mae payment and the cost reductions were somehow related to extraordinary measures pushing cost out of FY 2013 and into early FY 2014, so maybe I got that part all wrong….maybe:)

So, lets look at revenue…which I had just assumed was Fannie Mae. Since it wasn’t, they must have expected a bona fide $+100B in revenue. With 9 months of MTS data in the bank, we are $726B under the CBO’s may outlook of $2.813T. Looking at year ago numbers, we see that July to Sep netted $625B in revenues…so a 16% YOY improvement should get them there.  But…with July currently at 7%….and looking to end ~%10 without any surprises…we are going to need a very solid September to pick up the slack. unfortunately, we seem to be seeing a slowdown in revenue growth that could make this difficult. The Jan-April period saw 15.5% YOY increases….the May-July period looks to have slowed to right around 10%…more or less as predicted.

Now…a final note on the MTS…I don’t like it and I don’t trust it. You may be tempted to assume that the MTS is just a summary of the DTS…it’s not, in fact several attempts by me to reconcile the two reports have failed miserably. Treasury informed me a while ago that in fact, they are pulled from completely different source data. Furthermore. The MTS data is presented using a “modified cash basis…vs. the DTS, which is cash…period. Personally, I don’t really know what “modified cash basis” means, but I trust it just about as far as I can throw Chris Christie :). All that said…the MTS deficit numbers are the ones you are going to hear any time someone refers to the official deficit. keep that in mind in a few months when they start braying about how great a job the government has done at cutting cost….Once you back out the “cost reduction” associated with the Fannie Mae payday loan, it’s unlikely to be nearly as impressive.

CBO vs CBO Update

Back in March, I posted a piece I called Congressional Budget Office vs Citizens Budget office, or CBO vs. CBO. The premise was to compare the CBO’s 10 year forecast to my own rather primitive trend based forecast. In the end, I forecasted a 10 year deficit of $12.7T to the CBO’s $6.8T forecast, with the primary difference being revenues. To me, their revenue forecasts were wildly optimistic, predicting 11-12% YOY growth between 2013 and 2015, before tapering off to 5%-6% in the out years. I could buy 2013 at over 10% due to the tax hikes, but two more years of 10%?…not buying it.
While I didn’t post projections for specific years, after blowout revenues in April, and a rumored $59B “special” Fannie Mae payment in a few months….it is starting to look like round 1 (Year 1) is going to go to the experts at the CBO. At publication, I had pegged the FY 2013 deficit at $1006B vs the CBO’s forecast of $845B. While I haven’t done a full refresh of my forecast, I have tweaked it a bit, bumping up expected growth in withheld taxes to 12% from 10%, as well as made some downward adjustments to outlays to account for the sequester. With an additional 2 months of data in the bank, I now have the FY 2013 deficit forecasted at $866B….not including the rumored $59B from Fannie Mae. (regular payments from Fannie/Freddie are included) So if we back out the Fannie payment, $800B founds like a fairly reasonable preliminary forecast for FY 2013…..which would be a pretty decisive round one victory for the CBO.
Understanding my miss was pretty simple…I didn’t forecast the April Surge, I didn’t forecast the $59B Fannie Mae payment, and I was over a bit on outlays because I thought sequestration would be avoided or mitigated one way or another. Of course….there are still 5 months left..a lot of ball left to play, so who knows where we will end up.
As it turns out, the CBO has also revised their forecast…which is actually what prompted me to write this…I had planned on waiting until May actuals were in. Not content with coasting to a round one victory over their rival Citizens Budget Office….the CBO has actually revised down their deficit forecast even further from $845B to $642B. Do they know something I don’t? Well…let’s hope so, but I suspect it is actually something else.
The reduction is pretty evenly split…about $100B is increased revenue, and $100B is decreased outlays. The revenue I get…$59B from Fannie, plus an upward tweak to account for stronger than expected inflows for the remainder of the FY. Outlays however presents a different issue I suspect completely related to the impending debt limit fight.
First…some methodology review. My forecast of the deficit is strictly cash based….cash in, less cash out, adjusted for debt issuance and debt repayment. Changes in internal debt have no bearing on this calculation at all because as I have discussed at length, all it represents is cash taken from social security and other similar programs and already spent….pretending you owe yourself money does not affect cash.
Second, the cash deficit includes things almost certainly not included in the official deficit. the most prominent example is the post office. I’m not sure why, but all of the post office’s revenues and costs are run through treasury’s bank accounts, contributing about $88B in cash to the coffers in the last 12 months, about $7.3B per month. On the other side, we can see about $40B of outlays related to Postal Money Orders. So the post office ran a $48B surplus right??? Nope…employee costs, and probably other costs as well are lumped together with Federal Salaries, and elsewhere to (probably intentionally) muddy the water. More or less, it’s a wash, though with the PO, one would expect some cash deficit impact, nothing material to the Federal deficit. There are a handful of other smaller categories as well.
Still, despite the differences in methodology and accounting definitions, for FY 2012, the official deficit came in at $1089B compared to the cash deficit at $1092….suggesting that most of the items that affect cash, but are excluded from the official revenue and outlays are deficit neutral….cash inflows = cash outflows.
I am afraid that this correlation is about to get broken by the “extraordinary measures”…which may explain the desire of some to push the debt limit into early October…just into FY 2014. The effect will be to shift $100B of cost out of FY 2013…and into FY2014. Bottom line…it is more malarkey. Shifting $100B of cost from 2013 to 2014 and having Fannie Mae borrow $59B just to pay a large dividend based on phantom income very well may get the official deficit down to $642B in FY2013, but in all honesty it does absolutely nothing to the long term picture. That $100B will come right back at us in 2014, and Fannie, forced to issue $59B in debt, will contribute that much less to the treasury in the future those revenue streams will be diverted to interest and principal payments, or maybe even defaulted on.
Finally…just want to emphasize that this is exactly why I use the Daily Treasury Statement (DTS), and only the DTS in calculating the true (cash) deficit. Any other series provided by the government is at risk for accounting shenanigans….but the DTS absolutely has to tie out by every single business day at 3PM. Your beginning cash + cash in less cash out better equal your ending balance….and the changes in public debt better be pretty darn close to the debt to the penny…separately published every day (discounts and premiums on bonds cause small differences). Sure…shenanigans are theoretically possible, but they would have to be systematically accomplished in less than 24 hours….every single day in perpetuity. Anything is possible, but the risk of this series is materially less than any other government generated reports, as we are about to find out come the end of the FY when Obama trots out a bogus deficit of ~$650B..and proceeds to beat the Republicans with it.
**update** just a note that previous “extraordinary measures” were initiated and resolved in the same fiscal year….probably causing shifts between months, but not between FY. This time….though anything could happen, it seems like with the FY ending 9/30, putting off resolution until October would result in a ~$100B shift from FY 2013 to FY 2014. Of course, we don’t know when this will actually be resolved. it could be tomorrow, or it could drag on well into FY 2014 (but I doubt it)

Congressional Budget Office vs. Citizens Budget Office

CBO vs. CBO Round 1

As required by law, the Congressional Budget Office released their semi-annual 10 year budget forecast last month, projecting a $6.825T deficit between FY 2013 and 2022. Over that period, debt held by the public (excluding Intragovernmental debt) is projected to increase $7.6T from $11.3T to $18.9T to end FY 2012. On its face, that sounds pretty terrible, though it is a marginal improvement over the last 10 year period where debt increased $7.7T from $3.6T at the end of FY 2002 to $11.3 at the end of FY 2012 according to the US Treasuries Debt To The Penny web site.
That the CBO has a spotty record is no secret, including their famous projection in 2000 that the debt would be eliminated by 2010, missing that one by about $7.5T. To be fair, it’s not all the CBO’s fault. Their masters in congress dictate that they use predetermined assumptions…regardless of how unlikely those assumptions are. In any case, while this forecast is definitely an improvement over the August-2012 release which forecasted a mere $2.3T deficit between 2013 and 2022, it still struck me as wildly optimistic, particularly on the revenue side, where they have revenues increasing 93% from 2012 to 2022, despite the last 10 year period only increasing 46% from 2002 to 2012.
All of this got me to thinking…could I, a simple citizen-accountant with a small deficit blog, do a better job forecasting the 10 year deficit than the mighty CBO, with their legions of TPS processing bureaucrats? We won’t know for 10 years, but below is my personal Budget Outlook for 2013-2012.

Methodology:

My preferred source of historical data is the Daily Treasury Statement (DTS) which provides a daily snapshot of cash inflows and outflows, uncorrupted by the so called “principles” of government accounting. From the DTS, I have identified 19 cash revenue streams and 35 categories of cash outlays. For each, I have created an interactive forecast of the next 10 years by month, taking into account seasonal patterns and historical rates of growth. One key assumption is that interest paid on public debt stays around 2%. For more on methodology see related posts on my blog USDailyDeficit.com here

Revenues:

2013-03-28 CBO vs CBO Revenue This chart gives us 2013-2022 projected revenues as a percentage of 2012 actuals. The Congressional Budget Office projects revenues to grow at 11%-12% per year from 2013 to 2015, before tapering down to a 4%-6% for the rest of the forecast period. I think this is quite optimistic, especially for 2015. 2013 does get a one-time bump due to actual tax hikes on income and payroll. However, I have a hard time seeing this repeat for 2014 and 2015 without significant additional tax hikes in the $200B per year range, or $2T for those who prefer their tax hikes presented in decades rather than annualized. At this time, that just doesn’t seem realistic to me at all. Over the forecast period, the Congressional Budget Office forecasts revenues to increase 93% from $2.449T in 2012 to $4.734T in 2022. My forecast comes in at 55% growth over the same period. For reference, over the prior 10 year period, 2002 to 2012, revenues increased by 46%.

Outlays:

2013-03-28 CBO vs CBO Outlays

The Outlays chart is presented again with 2012 as a base and the forecast years as a percentage of the base. While the forecasts look surprisingly similar, the internals reveal some big differences. The key difference is the expected interest rate. I keep interest rates constant at 2% over the forecast period, while the CBO keeps rates at 2% through 2015, before gradually increasing to 4.2% by 2022. The result is that while I forecast public debt at the end of 2022 a full $5T higher than the CBO, they have 2022 interest expense at $795B vs. my forecast $452B. On the other hand, for the remaing outlay categories, I am projecting a growth rate that exceeds the CBO’s forecast, coincidentally just about completely offsetting the lower interest expense I am forecasting.

Deficit:

2013-03-28 CBO vs CBO Deficit

 Once you have revenues and outlays forecast, the rest is pretty simple math. The CBO has the deficit decreasing from $1.089T in 2012 down to a low of $430B in 2015 before picking back up as the pace of outlays increases faster than revenues, ending 2022 back neat $1T. Over the 10 year period, the total deficit forecasted is $6.825T. My forecast shows slight deficit improvements in 2013 and 2014 before swinging back in 2015 and accelerating to $1.788T by 2022, for a 10 year deficit of $12.7T, $5.875T worse than the CBO’s forecast.

Debt:

2013-03-28 CBO vs CBO Debt

Since we come to very different conclusions on the 10 year deficit, it should be no surprise that we also come to different conclusions about debt outstanding. While the CBO forecasts public debt outstanding to be $18.902T, I forecast it will be $23.972, a more than $5T difference. For me, this is where the rubber meets the road. Even today, US treasuries are seen as the gold standard of bonds, being priced as if they were nearly risk free. As an investor,I think you have to ask yourself “For how long?” When does the market start to question the ability of the US to repay her debts? Is it when we hit $20T in May of 2020? Five years later in October of 2025 when we smash through$30T?  Or is it sooner, perhaps this summer when the debt limit battle resumes after a brief hiatus? If we happen to make it to 2022, whether our debt is at $19T or $24T, the reality is, it only gets worse from there.  Even if you missed Greece, Italy, Spain and Cyprus, for the US, the writing is on the wall.

Conclusions:

Congress is stuck between the proverbial rock and hard place. In The Spending Problem I compared 2007, the last year we came close to running a surplus, to 2011, when we ran a $1.3T deficit. Over that period, while population increased about 5% and revenues were nearly flat, outlays increased 36%. This created a new and unsustainable baseline that we will never “grow” our way out of. It is quite clear that spending is the problem and that cutting spending is the solution. However, those trillion dollar deficits, going on five straight years, are literally the only thing keeping GDP positive and “official” unemployment in the single digits. Pulling $1T of government spending out of the economy now, or ever, is almost guaranteed to reduce GDP by more than $1T, maybe by a lot more. So, politicians have two choices.
1)      Fix it now. Cut spending by around $1T per year to get it back in line with the pre-2007 baseline. This will pre-empt the impending debt crisis, however,it would immidiately tank the economy, putting countless people out of work, infuriate huge voting blocks, and it only gets worse from there. With some really good luck, in five years or so, the economy recalibrates itself, finds a new equalibrium, and we all go on our merry way, though this is in no way a sure thing.
2)      The second option is to stay on the current path, borrowing more and more each year just to keep GDP in place. Public debt outstanding surpasses $15T, 20T, 25T. Nobody knows where, but somewhere along the line, the house of cards simply falls apart. When that happens, and it will, lookout because the market is going to do a nosedive that makes 2008 feel like a pillowfight.After that, we pick up the pieces and more or less start over from scratch, hopefully.
Given that the time to really fix anything probably passed a few years ago, and recent squables have only led to inconsequential cuts and revenue increases, The likely outcome is clear. We will kick the can until it is no longer possible. In the meantime, you can be assured that I will not be loaning Uncle Sam any money.
I have one more interesting conclusion related to interest rates that should interest everyone. The Federal Reserve’s storyline for quite a few years now has been that they are keeping interest rates low to help stimulate a recovering economy, lower unemployment, encourage lending, ect. I’ve suspected this for a while, but after completing this analysis, I am convinced that all of that is just a cover story. The truth is, they have no choice to keep interest rates low because if they don’t, the federal budget would instantly come apart at its seams.

2013-03-28 CBO vs CBO Interest

In 2012, the US paid $223B in interest on $11.28T of public debt, for an effective rate of 2%. If that doubled overnight to a very historically reasonable 4%, and we applied it to our model it would have added an additional $4.5T to the debt  in just our ten year forecast. This is due to the additional outlays, which are of course financed, which pushes up interest expense, which increases outlays, and the cycle repeats itself. Albert Einstein is rumored to have once said that compound interest was the most powerful force in the universe. This may be true for savers, but for debtors, quite the opposite is true. As the example above illustrates, the inverse is that compound debt can be one of the most destructive forces in the universe.
I have to assume that somewhere at the federal reserve is an accountant just like me, but with better data and a lot more time cranking out “real” budget forecasts that give Ben Bernanke and President Obama nightmares. If I am correct, it means that interest rates are never going to increase so long as the Federal Reserve has control of the market. They can’t do it now with $11.9T of external debt, and they surely won’t be able to do it in the summer of 2016 as we are cruising past $15T and the presidential campaigns are in full swing. Since they can’t voluntarily raise rates, I will be watching this chart as an indicator of when they start to get raised involuntarily.