The budget deficit in December was $91.9 billion — up from $51.8 billion a year ago, but down from $120.3 billion in November. These numbers are highly seasonal, so the year-over-year comparison is the more important of the two. In November, the Deficit was actually lower than a year ago when it was $125.2 billion.
We are now three months into the federal government’s 2010 fiscal year, and so far the deficit is $388.5 billion — an increase of $56.0 billion or 16.8% from the budget deficit in the first three months of fiscal 2009.
So government spending is out of control, right? Well, maybe. Government outlays in the first three months of the year were $876.3 billion, which was $16.0 billion less than the government spent in the first three months of fiscal 2009. The problem appears to be much more on the revenue side. Total government revenues so far in fiscal 2010 have been $487.8 billion, down $59.6 billion, or 10.9% from the $547.4 billion it collected last year.
If someone is out of work, they don’t have income, and don’t pay income taxes. Nor do they and their employers pay Social Security and Medicare taxes. If one only looks at December, then yes, government spending did increase — up to $310.8 billion from $289.5 billion in December 2008. Lower revenues were still almost as big a problem, with $218.9 billion collected versus $237.8 billion collected last year. So of the $0.1 billion increase in the monthly deficit, $21.3 billion came from higher spending, and $18.8 billion came from lower revenues.
On a year-to-date basis, though, more than all of the increase in the deficit is due to lower tax collections. If tax collections had remained the same, the deficit would have declined by $16 billion.
The Treasury Budget numbers are to some extent fraudulent, at least if you just look at the headline numbers I just quoted. It is not that they have done anything different this time around; it is always the case. The reason is that they are presented on a combined basis, including both on budget and off-budget items.
The biggest of these off-budget items is Social Security. Ever since the Greenspan Commission of 1982, the reported budget deficit numbers have been badly understated (and the surpluses of the late Clinton Administration overstated). When you think of the budget deficit, you think of the gap between what the government is talking in from income taxes and what it is paying out for, say, the wars in Iraq and Afghanistan, or paying the salaries of your congressman or the gal who works for the Center for Disease Control.
However, Social Security is still running a surplus, and that surplus is helping to hide the full extent of the budget deficit (although less so than in the past). Year to date, the government has taken in $345.0 billion from income taxes and other “normal” on budget sources — down from $403.3 billion last year, a drop of $58.3 or 14.5%.
Off-budget revenues (mostly Social Security taxes) were $142.7 billion in the first three months of the year, down just $1.3 billion or 0.9% from the first three months of last year. However, with the poor economy, more people have decided to take early retirement, so the off-budget outlays have soared. In the first three months of the year, they were $136.5 billion, up from $91.5 billion a year ago, an increase of $44.5 billion, or 49.2%.
On-budget outlays year to date are $739.7 billion, down from $788.4 billion last year — a decline of $48.7 billion, or 6.2%. The year-to-date on-budget deficit (general fund deficit) is $394.7 billion, up 9.6% or 2.5% from a year ago. The off-budget surplus fell from $52.6 billion a year ago, to just $6.2 billion in the first three months of this year — a decline of $46.4 billion, or 88.2%.
Yes, the budget deficit is getting worse, but it is not because of out of control spending on most government activities. It is getting worse because we are getting a much smaller “subsidy” from the Social Security program than we did a year ago, and because revenues are falling due to the weak economy.
The decline in the Social Security “subsidy” is happening faster than expected, but was always going to happen anyway. The idea was to tax working people more than the system was paying out to build up a big cushion that could then be drawn down when the Baby Boomers retire.
This is exactly what happens at the pension funds of firms like General Electric (GE). A well-run pension fund will contribute more early on, especially if they know that there are going to be a surge of people retiring in the future. However, firms like GE or even Ford (F) during the good times did not report the difference between what the pension fund was paying out and the change in the value of the portfolio as income.
The country is soon going to be in the same situation as Ford is, with lots of “legacy costs” from the Baby Boomers retiring. That is starting to happen now, and ahead of schedule due to people taking early retirement in a bad economy.
We built up a surplus to deal with that problem, and we have a massive Social Security trust fund, all in nice, safe government bonds. At the end of the 3rd quarter, there were a total of $4.3 Trillion held by agencies and trusts (mostly the Social Security trust fund) that is up from less than $2 Trillion a decade ago. The growth in that trust fund has masked the real gap between what the government is taking in non non-social security taxes and in non-social security related expenditures.
For the next few years that effect is going to slowly disappear (it is only $6.2 billion so far this year, which is a rounding error in terms of the government debt and budget). Thus for a brief time, the deficit numbers will be fairly honest (not from Obama being more virtuous than Bush, but from the timing of the demographics). Then, in about 5 years or so, the situation will reverse, as we have to draw down the trust fund. This will make the overall budget deficit look worse than it actually is, just as the growth of the trust fund hid just how awful the “real” budget deficit was.
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