January Tax Withholdings Indicate That The Treasury Is Unjustifiably Optimistic In Its Reduced Funding Need Projections
One of the more notable announcements coming out of the Treasury yesterday was that the Tim Geithner-led institution now expects an $86 billion lower funding need in the Fiscal Q2 quarter (January-March 2010), compared to the prior estimate from November 2009. From the press release:
Washington, D.C. -- The U.S.
Department of the Treasury today announced its current estimates of net
marketable borrowing for the January – March 2010 and the April – June
- During the January – March 2010 quarter, Treasury expects to issue
$392 billion in net marketable debt, assuming an end-of-March cash
balance of $95 billion, which includes $5 billion for the Supplementary
Financing Program (SFP). The borrowing estimate is $86 billion lower than announced in November 2009. The
decrease in borrowing is primarily related to cash balance adjustments
and lower outlays offset partially by lower receipts.
- During the April – June 2010 quarter, Treasury expects to issue
$268 billion in net marketable debt, assuming an end-of-June cash
balance of $85 billion, which includes $5 billion for the SFP.
- These estimates do not include any incremental borrowing needs that
would result from a potential increase in issuance under the SFP.
During the October – December 2009 quarter, Treasury issued $260
billion in net marketable debt, finishing the quarter with a cash
balance of $194 billion, of which $5 billion was attributable to the
SFP. In November, Treasury had estimated $276 billion in
marketable borrowing for the quarter, assuming an end-of-December cash
balance of $85 billion, which included an SFP balance of $15 billion. The decrease in borrowing was primarily related to a lower SFP balance. The
higher end-of-quarter cash balance was primarily related to
greater-than-expected Troubled Asset Relief Program repayments in
Digging through the data (click on the vists link) provides a glimpse into the quarterly cash receipt and cash outlay assumptions that are expected to "validate" this rosy picture. To wit: in fiscal Q2 (Jan-Mar) the Treasury is expected to collect $472 billion on outlays of $812 billion. In Q2 2009, receipts were $374 billion while outlays were $939 billion, for a $565 billion financing need. Fine: maybe there is improvement in the economy. So let's compare actual Q1 F2010 with Q1 F2009: receipts for the Sept-Dec quarter were $493 billion on outlays of $908 billion, a $415 billion funding shortfall. A year ago, receipts were $531 billion on outlays of $1.1 trillion, needed $556 billion in debt financing. And the decline between Q1 and Q2 receipts was a whopping 30%, while cash outlays declined by just 14%. Is it reasonable to expect that receipts will increase this quarter relative to Q2 of last year, and that outlays will be materially lower (the projection estimates a decline from $939 billion to $812 billion)? This data is summarized graphically below:
One can see the dramatic YoY increase in Q2 in the cash receipts side of the Treasury projections.
On the outlays side, we leave it up to our readers to decide if spending will in fact be cut: if one believes that Obama can indeed cut the pork, more power to them. However when it comes to receipts, the main component is tax withholdings, and as January just ended, we are happy to demonstrate just how chimeric any assumption that Q2 of 2010 will be better than Q2 of 2009. As noted above, the Treasury expects a 26% rise in YoY receipts.
We present monthly net Tax Withholdings as reported by the FMS, since August 2008. January individual tax withheld by the Treasury dropped
It doesn't take much to see that any expectations for not only flat, but rebounding Q2 revenues are groundless. Already in the main revenue month of Q2, January, we have seen a 12.4% decline in Individual Tax Withholdings, net of refunds. Corporate tax receipts in January were negligible.
So on one hand the Treasury is expecting a revenue increase of $100 billion in Fiscal Q2 2010 over 2009; on the other hand we know that with one month already done, there is a $10 billion deficit compared to the prior year period. This means that in February and March, traditionally weak receipt months, the Treasury is supposed to collect more than $110 billion compared to last year. This is simply ludicrous. Couple this with the current unemployment rate which for all intents and purposes is the U-6 of mid 17%, which is almost 30% higher than the 13.5% in December of 2008. To assume that all those newly marginal unemployed will have incremental withheld taxes is ludicrous, just as the most recent January data demonstrates.
We are confident that the Treasury will be forced to aggressively revise its funding expectations upward for not only the current quarter but for the April-June period as well. Furthermore, after yesterday's very optimistic projection for funding needs, bond investors likely anticipate that the Treasury supply onslaught will moderate. As the next few months demonstrate, nothing will be farther from the truth.