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Goldman Sees A $10.8 Trillion Budget Deficit In Next Decade, Focuses On Subpar Tax Receipts Net Of Refunds
Yesterday Goldman was saying that the quadrillions in soon to be issued Federal debt is nothing to worry about. Today the firm's rapidly self-discrediting economic team shifts its eyes to the deficit, which for the Projected 2010 is now estimated to be a blowout improvement: "$1.575bn (10.7% of GDP) from $1.64bn (11.2%) previously." Well, that's a great comfort. Oh wait, it isn't. "We have not made a formal change to our projection that the deficit will total $10.8 trillion (trn) over the next ten fiscal years given the comparatively small size of the change for FY 2010 and the considerable uncertainty inherent in the longer-term view." $11 trillion deficit. But at least somehow the national debt is nothing to worry about...While we reproduce the full note in its entirety below for those who feel like laughing, we point out Goldman's observations not only on tax receipts, but on tax receipts net of withholdings, a concept which according to some of our colleagues makes no sense. We'll be sure to let Jan Hatzius know asap. "Personal income tax revenues appear to be on the verge of noticeable improvement. Over the first six months of the fiscal year, personal income tax receipts net of refunds are actually down significantly – 8.4% versus our assumption of nearly a 10% decline. Reflecting last year’s sharp drop in personal income, final tax settlements on 2009 returns are running about 11% below year-earlier levels, and refunds (as reported in the Daily Treasury Statement) have been up about 5%. However, withholdings of personal income taxes have improved noticeably in the past two months. [uhm, March yes, April no. see here] While some of this is due to calendar effects (March 2010 had one more business day than March 2009), the underlying trend appears to have moved from deeply negative through January to mildly positive since then [again, no - true for March, false for April]. As the economic recovery continues, we project that this trend will remain positive – between +5% and +10% – over the balance of the fiscal year. This assumption adds $56bn to our estimate for personal income tax receipts, trimming the expected year-to-year setback by nearly two-thirds, to about 3½%." Ah yes, and just as UBS wishes 2011 will be the new "new revenue story" so do 10 million drunk Irishmen see a pot of gold at the end of the rainbow. Goldman - meet Unicorn ranch.
The FY 2010 US Budget Deficit – Modestly Smaller than We Thought, at $1.575 Trillion (McKelvey)
We have modestly reduced our estimate for the FY 2010 federal budget deficit, to $1.575bn (10.7% of GDP) from $1.64bn (11.2%) previously. Better-than-expected revenues more than account for this change, as outlays are slightly higher than we estimated in early February.
We have not made a formal change to our projection that the deficit will total $10.8 trillion (trn) over the next ten fiscal years given the comparatively small size of the change for FY 2010 and the considerable uncertainty inherent in the longer-term view. Absent a major policy surprise, any changes that may be forthcoming will not alter our view that the US fiscal position is still seriously out of balance over the long term.
The FY 2010 revision, while small relative to the overall size of the deficit, underscores the fact that the Treasury’s current issuance of coupon securities is already more than enough to finance these large budget shortfalls. Accordingly, we would not be surprised to see the Treasury begin to reduce auction sizes in coming months. However, we think any such changes will be gradual – on the order of $1bn here and $1bn there.
As the Treasury Department’s mid-quarter refunding cycle gets underway, estimates for the federal deficit in fiscal year (FY) 2010 are coming down, in some cases quite sharply. The main reasons for this appear to be better-than-expected performance of the economy and reductions in estimates of the costs associated with the Troubled Asset Relief Program (TARP).
However, our review of the budget outlook suggests that the federal deficit will be only modestly smaller than we previously thought – $1.575trn versus the $1.64trn we estimated in early February (see “US Budget Deficits: Slightly Larger, Still Unsustainable,” US Economics Analyst, February 5, 2010 https://portal.gs.com/gs/portal/home/fdh/?st=1&d=8554947). The reduction is entirely a reflection of better prospects for federal revenue in coming months; our estimates for outlays have actually increased. The exhibit at the end of this comment summarizes the changes; the key points are as follows:
1. Personal income tax revenues appear to be on the verge of noticeable improvement. Over the first six months of the fiscal year, personal income tax receipts net of refunds are actually down significantly – 8.4% versus our assumption of nearly a 10% decline. Reflecting last year’s sharp drop in personal income, final tax settlements on 2009 returns are running about 11% below year-earlier levels, and refunds (as reported in the Daily Treasury Statement) have been up about 5%. However, withholdings of personal income taxes have improved noticeably in the past two months. While some of this is due to calendar effects (March 2010 had one more business day than March 2009), the underlying trend appears to have moved from deeply negative through January to mildly positive since then. As the economic recovery continues, we project that this trend will remain positive – between +5% and +10% – over the balance of the fiscal year. This assumption adds $56bn to our estimate for personal income tax receipts, trimming the expected year-to-year setback by nearly two-thirds, to about 3½%.
2. Miscellaneous revenue has also been much stronger than we estimated in February. We now expect such revenue to total $212bn, well ahead of the $180bn we assumed in FY 2010. Federal Reserve remittances of earnings to the Treasury, which we had earlier expected to surge, have finally begun to do so just as we pared back our assumption in this area. On a year-to-year basis, these earnings now appear set to double in FY 2010.
3. Corporate tax receipts, on the other hand, have been a bit weaker than expected. In February, we assumed that corporate income tax receipts would rise about 15% despite year-to-year declines during the October-December quarter. This weakness persisted well into the first quarter. Although final settlements on 2009 liabilities are up 25%, this is not enough to offset the earlier setbacks, even if the trend continues through the end of the fiscal year, as we now assume. Accordingly, we have lowered our estimate by $9bn, including $3bn for additional taxes included as part of healthcare reform.
4. Social insurance revenues are essentially in line with expectations. This is the one category of revenues that has largely conformed to our expectations – an underlying trend of -2%. Total revenues will be down about 4%, reflecting the recent extension of COBRA benefits and enactment of the hiring tax credit, both of which have been about in line with our expectation for policy measures.
5. Meanwhile, outlays are slightly higher than we expected. The biggest item is net interest expense, which in the first six months has run much higher than we anticipated as interest rates have also been modestly higher, on average over the Treasury curve. This, coupled with a small addition to outlays due to healthcare reform, overcomes the effect of better than expected economic performance on outlays. Altogether, we expect outlays to be $13bn higher than before. (We have made no changes in our assumptions about TARP, as the latest budget figures appear to put the monthly Treasury figures in line with the OMB assumptions, which are close to those we already assume.)
Exhibit 1: Changes to Our FY 2010 Budget Forecast
(billions of dollars)
Estimated deficit, February 5, 2010: $1,641
Less: Extra revenue $79
Personal income taxes $56
Miscellaneous revenue $32
Corporate income taxes -$9
Plus: Additional outlays $13
Net interest expense $13
Healthcare reform $3
Other (reflecting stronger growth) -$3
Equals: Estimated deficit, April 26, 2010 $1,575
Source: Our estimates. [aka the Unicorn Ranch]In early February, we estimated that the budget deficit would cumulate to $10.8trn over the next ten fiscal years (FY 2011-2020). Although the change to our FY 2010 figure suggests that this outlook could be too pessimistic, we are not making a formal change at this time given the modest size of the adjustment for FY 2010 and the considerable uncertainty that is inherent in such long-term forecasts (especially since formal decisions have yet to be taken on expiring tax cuts at year-end 2010). Even if a reduction appears warranted on further review, it would not change our fundamental concern that the US budget is seriously out of balance over the long term absent major surprises on the policy front. This imbalance is evident in a persistent deficit in the balance excluding net interest.
That said, the Treasury does have flexibility to reduce its issuance of coupon securities. Since late last year, we have noted that the auction schedule for coupon securities – currently about $2.4trn per year – is more than sufficient to cover the budget deficits we anticipate over the next five fiscal years plus the redemption of securities due to mature over that period. A reduced imbalance for FY 2010 obviously reinforces that conclusion, though our current thinking is that officials will proceed gradually given the size of the imbalance and the uncertainties just noted.
Perfect: all we need is for the government to load up on Teaser Reset Loans: in fact, why not have the entire Treasury curve of $7 trillion in marketable debt mature all within 30 days. Now that would rock.
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This is Goldman's way of saying 'if we're going down, you're all going down with us'. Bastards, trying to pop the magic fairy bubble!
Shanghai down 2.4%, way below support and queued for a massive drop. Not a good sign for the rest of the world, hopefully there's no bad news on the horizon, like say a sovereign default.
The ghost of Nicholas Biddle.
The 100-year's war didn't last 100 years... but the Bank War has.
Woo Captain Obvious returns in the form of...Goldman Sachs!?!?
Super duper slow motion train wreck. The politicians won't do anything about it until...ever.
Pssst! I got a cool new drug that helps you dream in V's! Doin a brisk business.
ever notice how everything is "on the verge" here...it never ceases to amaze me how one can turn things like "less worse" and "declining at a slower rate" into positives. In a nutshell, not to be confused with mustard seeds, if it's still going down then, or up with unemployment, it's still bad.
look at the numbers and don't listen to their drivel.
The ability to turn "less worse" and "declining at a slower rate" into positives is a prerequisite for working at cnbc.
"$1.575bn (10.7% of GDP) from $1.64bn (11.2%) previously."
You wish! Change the period to a comma and I will beleive you...
Punctuation aside... 10%+ deficits! We are fucked!
Bah! The first green shoot I can plainly see and you have to go squirt the Roundup on it.
I don't think our good friends at The Squid are in any position to get on the soapbox and rail against "givernment" (and even if they were they would not criticize the portion that goes to them). Their economic reports from now on will be a heartwarming discussion of their wonderful dating relationship with their new love, Rosie Scenario, while guessing at enough of the truth to keep some credibility with the clients. LOL
GS fails to take the demographic time-bomb into full consideration. We have a rapidly aging population that will be pressuring health care and social security - they'll also be trying to cash-out of equities and houses as they downsize and need cash-flow to fund their lives.
Why would anyone believe anything Goldman Sachs says anyway?? It's not like they have told the truth about anything for as many years as I can remember. Why does anyone still have money with these crooks?
It cant possibly keep going on like this can it?
How can the rest of the world be so stupid as to keep accepting our green slips of paper for real goods in hopes to be repaid in the future? Our productive economy has been gutted, how are we going to repay them? And they are going to do it for another 10 years? Somehow i dont think that will fly...
Sorry, i forgot, we are the engine of the world economy...
LOL, have you ever heard of anything so stupid?
OT: Nice lookin' potatoes in your avatar. :-)