Just last month, this commentator opined that the federal budget deficit had reached an uneasy accommodation with the $500 billion per year mark. However, June put paid to that notion by going $100 billion in the red (versus a slight gain in 2016.) Although CBO estimates that about $44 billion of that swing was due to calendar effects, the remainder represents a whopping deterioration in the revenue/outlay balance. When a mere thirty days pass before a thesis appears to be proven wrong, it occurs to me that some explanation should be in the offing.
In my younger days as an impressionable sports fan, I occasionally would come across a team that seemed stronger on paper than on the court or field. These clubs would have an impressive collection of headline talent—big stars who were individually having great years—but the results in the win/loss columns were disappointing. Often times the local press would turn on the stars and blame them for the team’s failures—suggesting that the big guns weren’t providing “leadership” or they were selfishly focused on their individual stats rather than the good of the team. (To put this in a Philadelphia context, think of Mike Schmidt or Steve Carlton and the Phillies of the 70’s, or Allen Iverson and the Sixers of the late 90’s/early 2000’s.) And yet in the few years that those Hall-of-Famers were surrounded by adequate talent, the squads won titles or reached the playoff finals; when the quality of the supporting cast spoiled, the results were less satisfactory.
This phenomenon of blaming the stars for not being better rather than focusing on the weak players for their failings is on display in current discussions of the budget. You may have seen articles in the financial press suggesting that tax receipts are weak, but in reality payroll tax income is up a respectable 5%.year-over-year. What is hurting revenues are the negative year-over-year take from non-withheld and corporate income taxes as well as the lack of some one-time wonders like the accumulated Federal Reserve interest earnings which swelled the coffers in FY 2015-16. To use our sports analogy, the heavy hitter of federal revenue—payroll taxes—is having a solid year while the other team members aren’t putting their weight.
As a reminder, the vast majority of federal revenues come from individual taxes.
While revenues have been mildly disappointing, the real jump in the deficit is due to increases in outlays. The steady and predictable rises in Social Security, Medicare, and Medicaid have come in at a tame 3% for the fiscal year; the real delta in June was in interest costs and estimated spending revisions. The slight rise in measured inflation led to a $30 billion adjustment to the Treasury’s inflation-protected bonds, commonly known as TIP’s. (The cost of higher inflation and interest rates has been discussed previously in this commentary. Suffice it to say that with an accumulated debt of $20 trillion, a 1% rise in interest rates will cost an extra $200 billion per year.) The estimate revisions (from the Education and Housing and Urban Development departments) totaled $60 billion, reflecting the additional net subsidy costs of the student loan and housing guarantees issued in prior years. Why these charges both hit in June is beyond my expertise, but they made a bad month worse.
To return to the sports analogy, payroll taxes are being blamed for the expanding deficit but the 2016-17 season is being lost elsewhere.
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