In what is admittedly a symbolic gesture….I’m on strike through 10/14.
For details….head on over to the Market Ticker
FY 2013 is now in the bank….racking up a $774B cash deficit, which is still absolutely terrible, but it does mark the fourth year in a row of improvement, and the first sub $1T deficit since 2008. This marks a $318B improvement over FY 2012 which came in at $1092B.
Revenues:
Revenues are pretty much the whole story of FY2013. Driven by tax increases that went into effect in January 1, 2013 and the tax avoidance behavior that preceded it, revenues were up an impressive $346B (13%) for the full FY. Corporate taxes were up $30B (11%), taxes withheld from paychecks were up $201B (11%) and taxes not withheld were up $83B(24%). These results are about $160B higher than I was predicting back in February, so there is no denying it…raising taxes raises revenues…at least in Y1. Of course…$60B of that miss was due to the Fannie Mae payday loan, but a miss is a miss.
Below is a further breakdown of revenues by source(note**they don’t add up because tax refunds offset revenue, but are not included in the table; Deltas compare 2013 to 2012):
All of our major categories have healthy gains, though “Other” includes the $60B from Fannie Mae. Deposits from the states related to unemployment insurance were down 17%…I would guess that the rates were lowered. Deposits from TARP reimbursements were also down big….a trend that will continue as they have pretty much slowed to a trickle in recent months.
I think even a pessimist such as myself has to be impressed by the YOY revenue gains we have seen in 2013, and will likely continue to see through December. The big question in my mind though is what will happen in calendar year 2014. Imagine a steady state country with $1T of annual revenues in Y1. Then, say they decide to raise taxes across the board 10%. It should not be a shock to anyone if at the end of Y2, revenues have grown 10% to $1.1T. But what to expect for Y3? All else equal, we will likely come in right about $1.1T again. Taxes were only raised once, lifting revenues up to a new steady state. Without a second round of new taxes, we have no rational reason to expect another 10% revenue growth right??
And yet…that is more or less what the CBO is projecting for the next 2 years….continued high growth of revenues. I’ve yet to make a FY 2014 forecast, but I’m thinking right now that 5-6% growth for 2014-2015 would be pretty optimistic. If they stick with 10%….we are going to end up pretty far apart. This is the big unknown at this point. If come April 2014, revenues are only marginally up….it is going to be abundantly clear to all that there is no chance of ever “growing out” of this problem. If, on the other hand…2014 does see 10%+ gains for the second year in a row….even I would have to see at least a glimmer of hope 🙂
Stay Tuned for Part 2…Outlays
If you listen to the news or read any article, there is a lot of hype around this 10/17 “default” date. “The US has never defaulted….this would be catastrophic”…they all claim.
So first we need to discuss what we mean by default. As discussed in The Debt Limit Will Be Raised, looking at the first full month…November, the government will still have about $200B of revenues coming in, but about $330B of scheduled cash outflows. So we really aren’t talking about the federal government grinding to a stop…just being forced to live within it’s means. Most (but not all) of the commentators are being careful with their words…saying we would default on out “obligations”…which I suppose means all currently planned government spending (is it a default if I decide to eat in instead of taking the family out to dinner tomorrow night?).
We should be very clear however, that the federal government will have more than enough cash inflows to cover all interest payments and continue to roll current debt as it expires. Over the past 12 months, the government had $3.058T of cash revenues….and only $225B of cash interest payments…a coverage ratio of over 13X.
So…this is extremely clear… any technical default on bona fide on the books debt…will be a completely voluntary event. I have read some articles saying the treasury system simply is not set up to prioritize payments….basically first in, first out. To that I say…BS.
But on the other hand…default on “obligations”…is definitely imminent. In November, there will be a ~$130B cash shortfall if treasury isn’t allowed to issue debt….more than 1/3 of scheduled cash outflows. The only think that even comes close to that is cancelling Social Security, Medicare, and Medicaid….not exactly a solid 2014 election platform….which is why I still expect the debt limit to be raised, probably before it comes an issue, but if not, by early November.
I’ve been saying for nearly a year now that the US will ultimately default on both on and off balance sheet debt. We have reached a point where the promises made for debt and social programs are simply impossible to ever make good on. I still think it is unlikely that October 2013 is the date of that default. (not that it will be one date…probably a long drawn string of broken promises) So to wrap it up…default will happen and default needs to happen…..but what is going on now is just political gamesmanship, so sit back and enjoy the show. Odds are, they will raise the limit, and agree to shave a few billion off the 10 year deficit at some date to be determined….ensuring an even bigger and “badder” default at some point in the future. Note to self…”don’t lend Uncle Sam any money”
I saw a clip of Obama yesterday telling an audience that the reason the Republicans are so hell bent on killing Obamacare is that they are afraid that if they let it through…people will actually like it…..making it impossible to do away with. He’s right you know….just look at Social Security, Medicare, Medicaid, Food Stamps….and dozens of other large federal programs…..How will we ever kill a program that gives free stuff to large voting blocks? We won’t….this, it seems is the Achilles heel of democracy….and will likely be the key to our downfall.
So let’s just admit it… Obamacare is just another government mechanism to give free stuff to a large voting block….probably Obamas voting block. I oppose Obamacare because it’s just another Welfare Program. Republicans, I suspect, oppose it primarily because it is Obama’s welfare program. So Republicans are on the right side of this, but they don’t exactly have the moral high ground.
I don’t know the actual cost…I’ve seen anywhere from $0 to $150B per year. It’s not huge, in a $3.8T budget, but it’s big enough. For about 4 years now, federal outlays have more or less stabilized at around 3.8T. For how long?….probably not much longer, but it’s still a tiny bit encouraging. On the Revenue side, since bottoming out at 2.3T in 2009, annual revenues have risen 30% to $3.0T, including a 12% increase in FY 2013 that just ended.
Four years ago, we were sitting on a 1.8T deficit….it pretty much looked like the end. If you were an optimist….and sat down and penciled out a best case scenario….reality has pretty much followed that script for 4 years now with flat cost and growing revenue. Don’t get me wrong, we aren’t saved….we still have an $800B annual deficit, which is enormous, but an optimist might say hey…if I can keep this streak for another 5 years, who knows, maybe I will actually balance the budget after all(now what to do with this $20T+ debt??).
And then comes Obamacare. After so much progress restraining cost(well…relative progress)…. why come in and create a new entitlement program? Instead of creating feel good programs like this, why not just skip the show, and just write checks to people. Why not give every citizen $50k per year? Or better yet, why not just give everyone a check for $10M and be done with it. Problem solved right? Well…no. You see, if I got a check for $10M tomorrow, I’d quit my job the next day…and so would everyone else, leaving me with the little problem of having $10M in my bank account….but nothing to buy, not even food. That would end quite poorly wouldn’t it?
The bottom line is….despite all of their noble (I assume) intentions, there are problems that government simply can not fix, and their attempts to do so will only make things worse overall. And that’s the problem with Obamacare….sure there are some people who will be better off, but the losses overall will far outweigh the benefits. All government programs are like this…from social security to the Park Service. Taking money from one group and giving it to another will always incur net losses, especially when there is an army of incompetent bureaucrats in the middle.
Honestly, even without Obamacare, the odds of this four year streak continuing were pretty slim. My current forecast is that we are pretty close to a bottom at $700-800B per year deficits for 2014 and 2015 before heading back up as entitlement programs drive outlays to outpace revenue gains. Throw in a recession anywhere in the next 5 years and the numbers get a lot uglier fast…and that’s without any Obamacare costs. I’ll add them to the model once I find a reliable source….(probably actuals sometime next year)
While I suppose it’s all relative, October is kind of a dull month in regards to the deficit. It’s not a quarter, so no revenue surges to predict or Fannie/Freddie payday loans to analyze. We do have the backdrop of the government shutdown and the impending debt limit, but the shutdown probably won’t have a material affect on outlays…maybe a few Billion? The Debt Limit could get interesting, but I have to think it will be resolved by month end, and any federal worker back pay will have been paid in full.
I could be wrong about all of this, in which case so will be my forecast, but honestly, it’s going to be wrong anyway, so why add additional uncertainty? So, I’ll stick with the same ol’ playbook, guessing we see ~10% YOY revenue gains and moderate reductions in cost. For the record, let’s just say $225B of net cash revenues and $316B of outlays, good for a $91B deficit…which would be a material improvement over last year’s $123B October deficit.
Cash in hand as of 9/30 was $88B, so we would normally think there was enough cash on hand to get us to the end of the month, but I recall reading a CBO publication mentioning some intercompany cash true ups that happen in October that may increase intercompany debt by about $80B…which would require a paydown of $80B of external debt to stay under the limit. That would probably be offset by some additional “Extraordinary Measures”…according to the same publication, there were about $90B or so left in that tank. So…You have to believe that there is a good chance we make it to the end of the month, but getting past the heavy outflows of early November might be a challenge. Of course…a higher deficit over the month would pull forward the “default date”, while a lower deficit would push it out a few days. In the long run, it really doesn’t matter. I haven’t put out a FY 2014 forecast yet, but it will probably be in the $700-800B range regardless of whether we run out of cash on 10/17 or 11/3.