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The U.S. budget deficit is going down…And that seems to be a good thing. Except it's important to look behind the data and see what's causing the current trends. So here are six important facts about the U.S. budget deficit.

  1. Trends in decline are extremely erratic.

Since the 2008 crisis, the deficit deepened but has recently shown a progressive upward trend.

Source: www.whitehouse.gov/omb

But the most interesting news originates from recent trends in changes in the deficit, and changes in the changes in the deficit/GDP ratio. Examining these series gives us an idea of the dynamics of the deficit.

Source: whitehouse.gov/omb

Since 2007, the deficit/GDP ratio has increased, starting to decline only after 2010.

Subsequent to those years, the modest decline in the deficit/GDP ratio has finally reached the levels between 2002-2007. Between 2007-2008, evidently the crisis led to a steep decline in the deficit, and deficit/GDP. But the third graph above delineates the instability in the changes in deficit/GDP, accentuated post-2008. The only time this instability has been echoed after 2000 is right after 2001 and then again between 2004-2006. Markets are well known to be averse to instability of any kind. It is the recent unpredictability in trends in the deficit/GDP ratio that is even worse than the growth in the deficit itself.

2. Receipts have trended up slightly but so have outlays, to reach the levels of the mid-2000s.

The deficit is defined as the gap between receipts and outlays. Recent trends have shown this gap decreasing. Projections forward according to the OMB are likely to show stability. Furthermore, as the graph below suggests, post-2008 trends in receipts are barely catching up with the revenue inflows between 2004-2006.

Source: www.whitehouse.gov/omb.

3. There has been a recent uptick in Social security receipts, the major source of recent revenue increases.

When one analyzes the three major sources of receipts: individual income taxes, corporate taxes and Social security taxes, one notices that of late, receipts of Social security tax has been increasing, especially, paradoxically, right after the 2008 crisis. Receipts from the corporate tax has remained relatively unchanged beginning in 2000. OMB projections have the Social security tax declining post-2013, but one must wonder whether one can rely on these projections.

Source: www.whitehouse.gov/omb.

4. Net interest payments have increased dramatically and are going to increase even further.

Assuming that the projections of the OMB going forward are relatively conservative, one can predict a dramatic growth in net interest payments as a percentage of outlays, the recent declines in the deficit notwithstanding. The good news is that it's only after 2018, according to the OMB that we will reach the levels of the early 2000s. But that is scant consolation to taxpayers, given that between 2007-2012, interest payments gravitated around a relatively modest level of 1% of outlays.

Source: www.whitehouse.gov/omb

5. Increase in net interest payments are scheduled to rise even as the interest to debt ratio has declined recently.

Source: www.whitehouse.gov/omb.

Given the sheer mass of U.S. government debt, the interest to debt ratio has declined. However, that is very deceptive, given that two years ago, the change in the net interest payments increase dramatically, to almost reach 2005 levels. Recent declines in the increase in net interest will only be counterbalanced by future increases post 2013, and especially post 2015, according to OMB projections.

6. The investment savings gap remains wide.

The twin deficits approach relates the U.S. current account deficit and budget deficit via the investment savings gap.

Source: www.whitehouse.gov/omb, www.bea.

While between 2003 and 2007, the fiscal deficit was greater than the current account deficit, meaning that savings exceeded investment, recently that trend has reversed itself, where domestic savings has not been adequate to the needs of domestic investment. While this may seem positive a priori, the net effect has to be crowding out and a long-run secular increase in the real interest rate.

What do we make of all this? It seems clear that there has to be an increase in the real interest rate long term to compensate for the instability in the deficit, the uncertainties regarding the Social Security trust fund and overall political trends. The other conclusion is that, politics aside, recent positive trends in the fiscal deficit are likely not destined to last.

Source: 6 Important Facts About The Deficit