On Thursday, we first discussed that in its latest monthly budget report for the month of June, the US Treasury reported a massive outlier that has largely been ignored by the general press: in June total US government spending hit $429 billion, the biggest one-month outlay on record, and 33% higher than the $323 billion spent a year ago.
As explained, the main reason for the outlier print was that outlays increased by roughly $60 billion in "other" items relative to baseline because the Treasury revised up its estimates of the subsidy cost of student loans, and to a lesser extent housing, it guarantees. And, as we further noted, based on the CBO revisions, "it appears that the deficit for the fiscal year, which has three months left, will be in the $650 billion to $700 billion range, if not even higher, mostly due to the surge in "subsidy costs of housing and student loans" guaranteed by the Treasury."
This was troubling: as we stated "what the unexpected surge in government spending means is that quietly and mostly behind the scenes, the student debt bubble has begun to burst, and the Treasury is "provisioning" for it in real time, with all US taxpayers once again on the hook."
There was more: while outlays surged, revenue growth failed to keep up...
...which taken together led to our conclusion that "while many analysts had a deficit base case for fiscal 2017 at roughly $575BN (the year ends on Sept 30), the CBO recently revised its projection for the fiscal 2017 up by $134 billion to $693 billion. Most of the CBO revision reflects weaker than expected revenues, which means it will be even more surprised when it finds out what is going on with outlays."
As it turns out we were right, because just one day later, the Director of the Office of Management and Budget, Mick Mulvaney, warned that the budget deficit for Trump's first two years in office will be nearly $250 billion higher than initially estimated "due to a shortfall in tax collections and a mistake in projecting military healthcare costs," according to Reuters.
The problem first emerged in late May, when Mulvaney submitted the OMB's first spending plan to Congress. It now appears that, as Thursday's data confirmed, the projections were overly optimistic and on Friday Mulvaney said the deficit projected for the current fiscal year has increased by $99 billion, or 16.4 percent, to $702 billion, a miss which was virtually in line with what we calculated two days ago. It doesn't stop there, however, and Mulvaney said that for 2018, the deficit will be $149 billion more than first expected, increasing by 33 percent to $589 billion.
In other words, a budgeting "mistake" just shy of $250 billion.
In an amusing twist, AP added that the White House kept its budget report to a bare-bones minimum and cast blame on "the failed policies of the previous administration" although whether this gambit of "blaming Obama" for budget errors, even as the president is all too happy to take credit for the market's all time highs, will work remains to be seen.
As Reuters further adds, the figures come as the administration is facing "widespread doubts among economists and analysts that it can erase government deficits largely by boosting economic growth and changing laws like the Affordable Care Act. ACA reform is facing a difficult path in Congress, and the Congressional Budget Office on Thursday said the administration's growth and deficit reduction plans were optimistic."
Worse, it means that far from balancing the budget, as the Trump administration had hoped to do over the next decade, the budget will drift well wide of even the latest "optimistic" CBO projections, which saw Trump's proposed budget cutting on the baseline number by a cumulative 33% over the next ten years.
And while spending took a back seat in Mulvaney's letter, he blamed the bulk of the budget shortfall this year and next on lower-than-expected tax collections. Specifically, individual and corporate income taxes and other collections for this year are expected to be $116 billion less than the administration anticipated in May. Tax receipts in 2018 are expected to be $140 billion less than initially estimated.
We also touched on this two days ago when we said that "one theory explaining the shortfall in revenues reflects taxpayers delaying the recognition of income in 2016, anticipating tax cuts this year. That revenue should eventually be recovered" however as we cautioned, this may be an overly optimistic scenario, and the underlying reality may be that tax receipts are set for a structural decline as US workers and corporations earn less, and as a result, remit less in the form of taxes. According to the Mulvaney letter, it was this more adverse case, that is emerging as the likely explanation.
The OMG chief did touch on spending, which he said in 2017 would be $17 billion less than expected, and would have been even lower if not for the use of "erroneous outlay rates" used in estimating costs of health programs for the U.S. military, i.e., another mistake, and one which did not take into account the surge in subsidy costs for student loans, i.e., the marking-to-market of student loan writeoffs and discharges which the government will be forced to do over the coming years as the student loan bubble bursts. Furthermore, costs for the defense health program will be $19 billion higher in 2017 and $9 billion higher in 2018 than initially expected. As a result, overall spending in 2018 will rise by $10 billion; our calculations suggest the final number will be substantially greater.
There is still a chance that the latest budget "mistake" will be rectified: the latest estimates are "based on existing law and do not include any proposed changes to health, welfare or other programs" however with virtually all policies proposed by Trump halted by the gridlock in Congress, it is unlikely that many, if any, proposed changes will be implemented.