US Debt Limit

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)