The Treasury budget numbers for January were finally released today after being held up by the snow. In January, the Federal government took in $205.24 billion in taxes and other revenues, and spent $247.88 billion, so the red ink for the month came to $42.63 billion. This was better than the $46.0 billion worth of red ink expected by the consensus of economists.
While the level was less than half the $91.41 billion deficit in December, the month-to-month changes in these numbers are not very meaningful as they show extremely high degrees of seasonality and are not adjusted. A more useful comparison is to the level of red ink a year ago. There was good news on that front as well, as in January of 2009, the federal government was running $63.46 billion in the red. In other words, the deficit in January was $20.83 billion lower than it was in January 2009.
The Year-to-Date Perspective
To get an even better picture, let’s look at the fiscal year-to-date picture. The Federal fiscal year runs until September 30th. So far in fiscal year 2010, the government has run up a total of $430.69 billion worth of deficits — running ahead of the $395.94 billion of deficits it ran in the first four months of fiscal 2009.
In other words, year to date, the deficit is up by $34.75 billion. We were already in a recession during the first third of fiscal 2009, and relative to the same period for fiscal 2008, things look scary indeed as the red ink that year had only totaled $88.98 billion by this point.
Relative to a year ago, the overwhelming reason for the higher deficit in the first four months is lower revenues, not higher spending. So far this fiscal year, the government has collected $693.02 billion, or $80.45 billion less than it collected in the first four months of fiscal 2009. Spending is actually down by $47.71 from a year ago.
That’s right, over the last four months, President Obama has actually spent $45.71 billion, or 3.9% less than President G.W. Bush did in his last four months in office. Almost all of that cumulative decline, though, comes from January, as outlays in January of this year were $41.67 billion, or 14.4% lower than they were in January 2009.
Keep in mind that roughly one third of the ARRA, aka the Stimulus Act, was tax cuts, although most of those were sent out right away and did not have a major effect on the numbers in either the first four months of fiscal 2009 (the stimulus bill was signed into law one year ago today) or on the first four months of this year. Mostly it is due to higher unemployment. If you are out of work, you will not be paying as much in income tax as you were when you were employed. Ditto if your hours have been cut back and you are earning substantially less.
Relative to two years ago, before the recession really started to affect things, both higher spending and lower revenues have played a role. In the first four months of fiscal 2008, revenues were $861.43 billion and spending was $950.41 billion. Thus, of the $341.71 billion increase in the deficit relative to two years ago, $168.41 billion, or 49.3% can be laid at the feet of lower revenues, and $173.30 billion, or 50.7% is due to higher spending. The first four months of fiscal 2009 had spending inflated by TARP payments.
Biggest Absolute Decline
Looking at the decline in revenues relative to the first four months of last year, the biggest absolute decline has come from individual income taxes, which totaled $311.25 billion this year, down from $379.76 billion last year, a decline of $68.51 billion, or 18.0%. On a percentage basis, though, the decline in corporate income tax receipts has been much steeper, falling by 32.3% to just $37.16 billion.
While based on the S&P 500 earnings reports so far, earnings are up substantially over a year ago, rising 45.5% for the 374 firms that had reported through last Thursday’s close, the books for the IRS are often substantially different than the books kept for investors. Those two sets of books are perfectly legal, and mostly have to do with things like accelerated depreciation and deferred taxes. Social Security taxes, the bulk of which are off-budget but are included in the figures shown here, were down slightly, falling to $270.32 billion from $276.96 billion a year ago, a decline of just 2.4%.
Biggest Spending Increases
In terms of spending, the biggest increases year to date have been in the interest on the debt, which totaled $164.25 billion this year, up by $25.80 billion from last year. The next largest increase comes from the Department of Labor, where spending is up $24.74 billion; almost all of that increase is due to higher spending for extended unemployment benefits. On a percentage basis, this is by far the biggest increase for any department, up 75.4%.
Spending is also up at the Department of Health and Human Services, with an $18.71 billion increase in spending, though that is only 7.2%. Almost all of that increase is due to higher aid to states to help pay for Medicaid. Over the long run, the increase in the structural deficit is almost entirely due to rising health care costs and the demographics of having more people live longer (and the Baby Boomers about to start using Medicare).
Health Care reform would go a long way towards solving the problem. Even if we just got rid of the Medicare Advantage program, which highly subsidizes firms like Humana (HUM) and WellPoint (WLP), we could reap significant savings.
To put it politely, it is ironic that those who rail the most against the health care reform effort are the same ones who are most likely to be running around saying that the current deficit is an existential crisis for the nation. They are also the ones who demand that we lower projected revenues even further by extending the massive 2001 and 2003 tax cuts which went disproportionately to the very wealthiest in the country. Perhaps some of them would like to take a look at the actual data here: http://www.fms.treas.gov/mts/mts0110.pdf
Yes, over the long term, we can not be running trillion dollar a year deficits. However, when in a deep recession, it does not make a lot of sense to be aggressively trying to reduce the deficit. The only way to do so is to either cut spending or raise taxes, and neither is a very good thing to do when the economy is performing well below its potential. And NO, cutting taxes does not raise more revenue, unless marginal tax rates are at levels far higher than they are now. At this point, we are well on the left hand side of the Laffer Curve.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
