2013 Federal Budget Deficit Plunges – How, Why?
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
1. Congressional Budget Office Slashes 2013 Deficit Forecast
2. Smaller Deficits Short-term, but Larger Deficits Long-term
3. So-Called “Debt Held by the Public” is Very Misleading
4. US “Unfunded Liabilities” Top a Staggering $123 Trillion
5. Federal Tax Revenue to Hit a Record This Year, But Why?
6. YCG Investments WEBINAR is Now Available Online
It was so tempting to devote today’s E-Letter to a discussion about all of the scandals plaguing the Obama adminstration in recent weeks. In fact, some of my staff were very disappointed that I chose not to go there. My feeling was that the airwaves are so saturated with coverage of the Obama scandals, you might not want to see even more piling on from me, as much as I would like to. (There are some very good stories on the latest scandals in SPECIAL ARTICLES below.)
All that I will say about the Obama scandals is that it’s good to see even the mainstream media having to admit that their “Annointed One” and his close advisers are capable of making serious mistakes (if not criminal activities). And it appears that there are even more scandals coming. I suspect, however, that the news focus on these scandals will dissipate before long, unfortunately, and the media’s love affair with Obama will return.
Today, we’ll focus on the latest news that this year’s federal budget deficit will likely be significantly lower than previously estimated by the Congressional Budget Office, and the reasons why that is. But let us not be fooled into thinking that falling deficits are a permanent thing. No, in fact, the deficits and the national debt will continue a troubling increase over the next decade and even longer.
We’ll also discuss the subject of our nation’s “unfunded liabilities” which now stand at a staggering $123 trillion, which is rarely ever mentioned by the media. And there are several other interesting points I will touch on today, but I don’t want to give everything away in this introduction. So please read on.
Congressional Budget Office Slashes 2013 Deficit Forecast
The Congressional Budget Office announced last Tuesday that the federal deficit is expected to shrink to $642 billion in the 2013 fiscal year that ends on September 30. That’s down sharply from the CBO’s previous estimate of $845 billion three months ago, and sharply lower than last year’s deficit of $1.087 trillion.
The agency attributed the significant reduction to higher-than-expected individual and corporate tax payments, due in part to higher tax rates that kicked in at the beginning of the year, and large dividend payments that mortgage-finance companies Fannie Mae and Freddie Mac plan to make to the government this year.
After four straight years of $1 trillion deficits, the country’s fiscal picture is changing, or so the media would have us believe. A slowly recovering economy, cuts in government spending driven by periodic budget clashes and higher taxes have narrowed the gap between what the government brings in and what it spends.
Unfortunately, these developments have virtually halted deficit-reduction talks in Washington. Politicians suddenly find they have breathing room before the next debt ceiling deadline requiring negotiations between political parties that have been locked in disagreement over vastly different budget priorities.
For example, lawmakers now won’t face a decision over whether to raise the nation’s borrowing limit until October or November, the CBO said Tuesday, much later than the summer deadline that was projected several months ago.
The White House and Republicans have been locked in a budget fight since 2011, leading to a number of piecemeal deals that have reduced the deficit by both raising taxes and cutting spending. White House officials have said they want more tax increases while Republicans have called for structural changes to Medicare and Medicaid, the two sprawling government health-care programs, while saying they won’t back new tax increases.
Earlier this year, a bipartisan effort was under way to lock in more spending cuts, particularly later in the decade, but those talks have stalled in recent weeks, in part because of the shrinking deficit.
Smaller Deficits Short-term, but Larger Deficits Long-term
The CBO said the improving deficit picture would continue for a couple more years but would reverse course in 2016, when spending picks up as a share of the economy and revenue levels off. It said Medicare and Social Security would begin to consume an even larger share of the budget. By 2023, Social Security and government healthcare spending are expected to hit $3 trillion annually, or half the federal budget.
After running $1+ trillion budget deficits for the last four years, the CBO projects that the deficit will shrink to below $500 billion in 2015, 2016 and 2017. But after hitting its lowest point in 2015, the deficit is expected to trend higher at least through 2023, due in large part to the needs of our aging population.
While the deficit is projected to shrink over the next three fiscal years, the CBO said the federal debt – all the borrowing accumulated by the government over the years – is expected to climb to 70% of GDP by 2019. Over the past 40 years, debt as a share of GDP has averaged 39%. (See more on this just below.)
The CBO now estimates that the total gap between government spending and revenue from 2014 until 2023 would be $6.3 trillion, down $618 billion from what it projected in February. That means the national debt currently at $16.8 trillion will be at least $23 trillion by 2023.
In case any of my readers haven’t seen it, go to the USDebtClock at http://www.usdebtclock.org/ to see our national debt piling up in real time. There’s a ton of interesting numbers there.
So-Called “Debt Held by the Public” is Very Misleading
The percentage numbers cited above on the debt-to-GDP ratio are wildly misleading. Why? Because they only represent the outstanding government debt that is “held by the public.” They do not include trillions of dollars of outstanding Treasury debt held by various government agencies.
Currently, the debt held by the public – primarily those US government securities that are owned by individuals, corporations, and other entities outside the federal government itself – is apprx. $11.6 trillion. An additional apprx. $5.2 trillion is held by government agencies and is generally referred to as “intra-governmental debt.”
Intra-governmental debt consists of the debts that the federal government owes to itself through more than 100 government trust funds, revolving accounts, and special accounts, such as the Social Security and Medicare Trust Funds (worth over $2.7 trillion and $344 billion respectively).
All of the Treasury securities held by the various government trust funds and other accounts will have to be redeemed at some point, just as if intra-governmental debt is debt held by the public. Thus, no matter how one treats intra-governmental debt, it must be repaid and should be included in any projection of future government spending.
The combination of debt held by the public and intra-governmental debt yields our current $16.8 trillion in total national debt. The Commerce Department estimates that our annual gross domestic product – the value of all goods and services produced – was $16.01 trillion as of the 1Q. Thus, our national debt is 105% of GDP, not the 70% figure as suggested by the CBO last week.
$16.8 trillion amounts to:
*This does not include unfunded liabilities.
US “Unfunded Liabilities” Top a Staggering $123 Trillion
While most Americans are aware that our national debt is now north of $16 trillion, most do not have any idea that the US has unfunded liabilities of more than $123 trillion. Unfunded liabilities include future government obligations for Social Security, Medicare, and federal employees’ future retirement benefits.
Estimates of these future unfunded liabilities vary greatly, ranging from around $94 trillion to $140 trillion or even higher depending on which estimates and time-frames are used. The most common estimate is the $123 trillion figure displayed in the chart below.
Source: USADebtClock.com (This site is different from USDebtClock.org referenced above.)
As you can see, at that level of unfunded liabilities, every person in the US would owe close to $400,000. Each household would owe just over $1 million.
Why haven’t Americans heard about these gigantic liabilities from these social programs? One reason: The actual figures do not appear in black and white on any balance sheet, but it is possible to discover them. Included in the annual Medicare Trustees’ report are separate actuarial estimates of the unfunded liability for Medicare Part A (the hospital portion), Part B (medical insurance) and Part D (prescription drug coverage).
Were American policy makers to have the benefit of transparent financial statements prepared the way public companies must report their pension liabilities, they would see clearly the magnitude of the future borrowing that these liabilities will require. Borrowing on this scale could eclipse the capacity of global capital markets – and bankrupt not only the programs themselves but the entire federal government.
These real-world impacts will be felt when current unfunded liabilities need to be paid. In theory, the Medicare and Social Security trust funds have at least some money to pay a portion of the bills that are coming due. In actuality, the cupboard is bare: 100% of the payroll taxes for these programs were spent in the same year they were collected.
In exchange for the payroll taxes that aren’t paid out in benefits to current retirees in any given year, the trust funds got non-marketable Treasury debt. Now, as the Baby Boomers’ promised benefits swamp the payroll-tax collections from today's workers, the government has to swap the trust funds’ non-marketable securities for marketable Treasury debt. The Treasury will then have to sell not only this debt, but far more, in order to pay the benefits as they come due.
When combined with funding the general budget deficits, these multi-trillion-dollar Treasury operations will dominate the capital markets in the years ahead, particularly given China’s de-emphasis of new investment in US Treasuries in favor of increasing foreign direct investment, and Japan’s and Europe’s own sovereign-debt challenges.
When the accrued expenses of the government’s entitlement programs are counted, it becomes clear that to collect enough tax revenue just to avoid going deeper into debt would require over $8 trillion in tax collections annually. That is the total of the average annual accrued liabilities of just the two largest entitlement programs, plus the annual budget deficit.
There is nothing like $8 trillion a year available for the IRS to target. According to 2011 tax data, all individuals filing tax returns in America and earning more than $66,193 per year have a total adjusted gross income of $5.1 trillion. In 2006, when corporate taxable income peaked before the recession, all corporations in the US had total income for tax purposes of $1.6 trillion. If the government were to tax 100% of adjusted gross income, that only comes to $6.7 trillion available to tax from these individuals and corporations.
In short, if the government confiscated the entire adjusted gross income of these American taxpayers, plus all of the corporate taxable income in the year before the recession, it wouldn't be nearly enough to fund the over $8 trillion per year in the growth of US liabilities.
Some public officials and pundits claim we can dig our way out through tax increases on upper-income earners, or even all taxpayers. In reality, that would amount to bailing out the Pacific Ocean with a teaspoon. Only by addressing these unsustainable spending commitments can the nation’s debt and deficit problems be solved – if they can still be solved at all.
Yet no one in Congress, and certainly not this president, is talking seriously about this crisis.
Federal Tax Revenue to Hit a Record This Year, But Why?
On Friday, May 10, the Treasury Department announced that individual income-tax receipts surged to $240 billion in April, taking the total for 2013 to $483 billion. This is far greater than the $393 billion in tax revenues the federal government collected for the first four months of 2012. The increase far surpassed the Congressional Budget Office projections in February.
Federal tax revenue is forecast to hit a record $2.7 trillion this year, according to the CBO. If $2.7 trillion in tax revenue materializes this year, it would surpass the prior peak of $2.6 trillion, set back in fiscal year 2007 before the recession began. But that doesn’t mean federal tax receipts are fully back to normal.
If $2.7 trillion in tax revenues is received in FY2013, it will total 16.9% of gross domestic product, the CBO predicts, compared with 18.5% of GDP in 2007. It looks as if it will take at least another year, until 2014, for tax revenue to get back to 18% of GDP, which has been the average level since 1973.
But the big question is, why have tax revenues suddenly surged so much since last year? It’s certainly not the struggling economy. It’s certainly not consumer confidence that plunged late last year and in January. It’s not because President Obama was re-elected. Or is it?
Much of the increase in 2013 receipts is due to final tax payments for 2012 deriving from a rush to realize long-term capital gains before the 15% “Bush” tax rate on such gains expired at the end of 2012 – and before Obama’s new 23.8% rate on long-term capital gains for higher-income taxpayers took effect on January 1.
Virtually the same tax shift occurred during the Reagan years, when the long-term capital gains tax rate jumped eight points, to 28% in 1987, when the Tax Reform Act took effect, from 20% in 1986. The pattern is repeating itself today. Late last year, fear of a virtually certain steep impending tax increase gave investors every incentive to realize all available gains in 2012.
But if 2012 resembles 1986 as a banner year for capital gains, then 2013 may look a lot like 1987, when there were hardly any to be had. Of course, the longer-term horizon depends on the performance of the stock market. It’s hitting new all-time highs just now, just as it was in 1987 before the famous crash.
The danger, as always, is that lawmakers and planners on federal and state levels will mistake the current tax revenue surge as a shift to a new, long-lasting plateau. It isn't.
Our Latest YCG Investment WEBINAR is Now Online
Last Thursday, we interviewed YCG Investments’ portfolio managers Brian Yacktman and Will Kruger about their value-style strategy and how they select stocks to own with the market at record highs. This was a very interesting discussion, especially for those who are still on the sidelines or are not fully invested. CLICK HERE to view our latest webinar with YCG Investments.
Welcome John Mauldin Subscribers
In my March 26 E-Letter, I wrote about how the Consumer Price Index actually understates the true rate of inflation in the US. On March 29, John Mauldin reprinted that article in his weekly “Outside The Box” e-letter. Since then, we have had many new subscribers to my weekly E-Letter. I welcome all of our new Mauldin readers.
John and I have been close friends for over 30 years. We were business partners in the 1990s. Back when John’s kids were young, the Mauldins made an annual summer pilgrimage to spend a few fun days at our guest house next to our home on beautiful Lake Travis just outside of Austin. Those are some fond memories.
Since the 1990s, John has gone on to become a best-selling author and highly sought-after speaker and hosts his own very successful investment conference each year. His weekly “Thoughts from the Frontline” e-letter is one of the most interesting out there. My congratulations to John for all his success!
All the best,
Gary D. Halbert
Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.