US Budget Deficit Hits $530 Billion In 8 Months, As Spending On Interest Explodes

The US is starting to admit that it has a spending problem.

According to the latest Monthly Treasury Statement, in May, the US collected $217BN in receipts - consisting of $93BN in individual income tax, $103BN in social security and payroll tax, $3BN in corporate tax and $18BN in other taxes and duties- a drop of 9.7% from the $240.4BN collected last March and a clear reversal from the recent increasing trend...

... even as Federal spending surged, rising 10.7% from $328.8BN last March to $363.9BN last month.

... where the money was spent on social security ($83BN), defense ($56BN), Medicare ($53BN), Interest on Debt ($32BN), and Other ($141BN).

The surge in spending led to a May budget deficit of $146.8 billion, above the consensus estimate of $144BN, a swing from a surplus of $214.3 billion in April and far larger than the deficit of $88.4 billion recorded in May of 2017. This was the biggest March budget deficit since the financial crisis.

The May deficit brought the cumulative 2018F budget deficit to over $531bn during the first eight month of the fiscal year; as a reminder the deficit is expect to increase further amid the tax and spending measures, and rise above $1 trillion.

The red ink for May deficit brought the deficit for the year to-date to $532.2 billion. Most Wall Street firms forecast a deficit for fiscal 2018 of about $850 billion, at which point things get... worse. As we showed In a recent report, CBO has also significantly raised its deficit projection over the 2018-2028 period.

But while out of control government spending is clearly a concern, an even bigger problem is what happens to not only the US debt, which recently surpassed $21 trillion, but to the interest on that debt, in a time of rising interest rates.

As the following chart shows, US government Interest Payments are already rising rapidly, and just hit an all time high in Q1 2018. 

Interest costs are increasing due to three factors: an increase in the amount of outstanding debt, higher interest rates and higher inflation. A rise in the inflation rate boosts the upward adjustment to the principal of TIPS, increasing the amount of debt on which the Treasury pays interest. For fiscal 2018 to-date, TIPS’ principal has been increased by boosted by $25.8 billion, an increase of 54.9% over the comparable period in 2017.

The bigger question is with short-term rates still in the mid-1% range, what happens when they reach 3% as the Fed's dot plot suggests it will?

* * *

In a note released by Goldman after the blowout in the deficit was revealed, the bank once again revised its 2018 deficit forecast higher, and now expect the federal deficit to reach $825bn (4.1% of GDP) in FY2018 and to continue to rise, reaching $1050bn (5.0%) in FY2019, $1125bn (5.4%) in FY2020, and $1250bn (5.5%) in FY2021.

Goldman also notes that it expects that on its current financing schedule the Treasury still faces a financing gap of around $300bn in FY2019, rising to around $750bn by FY2021, and will thus need to raise auction sizes substantially over the next couple of years to accommodate higher deficits.

What does this mean for interest rates? The bank's economic team explains:

The increase in Treasury issuance and the ongoing unwind of QE should put upward pressure on long-term interest rates. On issuance, the economic research literature suggests as a rule-of-thumb that a 1pp increase in the deficit/GDP ratio raises 10-year Treasury yields by 10-25bp. Multiplying the midpoint of this range by the roughly 1.5pp increase in the deficit due to the recent tax and spending bills implies a 25bp increase in the 10-year yield. On the Fed’s balance sheet reduction, our estimates suggest that about 40-45bp of upward pressure on the 10-year term premium remains.

And here a problem emerges, because while Goldman claims that "the deficit path is known to markets, but academic research suggests these effects might not be fully priced immediately... the balance sheet normalization plan is known too, but portfolio balance effect models imply that its impact should be gradual" the bank also admits that "the precise timing of these effects is uncertain."

What this means is that it is quite likely that Treasurys fail to slide until well after they should only to plunge orders of magnitude more than they are expected to, in the process launching the biggest VaR shock in world history, because as a reminder, as of mid-2016, a 1% increase in rates would result in a $2.1 trillion loss to government bond P&L.

Meanwhile, as rates blow out, US debt is expected to keep rising, and  somehow hit $30 trillion by 2028...

... without launching a debt crisis in the process.


Four Star Yukon Cornholius Tue, 06/12/2018 - 15:47 Permalink

The interest expense on the national debt is more than the combined amount spent on food stamps plus the departments of: Homeland Security, Housing and Human Development, Energy, Justice, the State Department, NASA, Agriculture, Transportation, the Interior, and the EPA:…


In reply to by Yukon Cornholius

slightlyskeptical COSMOS Tue, 06/12/2018 - 17:43 Permalink

How about issuing our money without interest attached? Then deficits wouldn't matter if used productively. And for the record welfare and entitlement payments run through the economy several times faster than other type of government spending and as such are more productive. Bombs not so much, most spending ends up as profit and graft and just sits on the pile of money built by prior profit and graft.

In reply to by COSMOS

Deep Snorkeler Jtrillian Tue, 06/12/2018 - 15:46 Permalink

This is Where Trump's Bankruptcy Experience Pays Off

I knew America hired him for a reason:

  • Trump's goodplusplenty economy will pay for the tax cuts
  • working people will gladly sacrifice for deficit reduction
  • Wall Street will transform itself into an integrity-based system
  • loot and slaves from foreign wars will stream into our cities
  • the Fed will wash the deficit away with digital Tide Pods

patriotic Americans will rejoice under warplane flyovers

In reply to by Jtrillian

lester1 Tue, 06/12/2018 - 15:37 Permalink

I wonder if the Federal Reserve is doing currency swaps and using dark pools to buy US Treasuries to keep everything propped up? 


This is why we need to do a full audit of the Federal Reserve. Their wizardry is distorting the free market!

silverwolf888 Tue, 06/12/2018 - 15:43 Permalink

The corporate taxes paid,  if these numbers are correct, and I think they are, are very low.  This should give us an advantage over Europe, especially with a proamerican President looking to bring jobs home.  

mad mad world Tue, 06/12/2018 - 15:46 Permalink

Ok Trump bashers this is just a reminder that Trump didn't put us into this much debt. I am sure you don't need me to tell you who were the bastards in office before him.

gatorengineer mad mad world Tue, 06/12/2018 - 15:51 Permalink

He didn't dig the hole nobody is saying he did.  The first rule of when you are in a hole is to stop digging.  Instead he is tripling down on digging faster.....

-- Bring ALL of the boys home thats at least 500B a year

-- Enact Welfare reform thats another 100B a year, fed state and local

-- Do Away with Obowel Care another, and cut medicaid fraud 100B a year

Before you know it you are talking real money....

All abandoned campaign promises....

In reply to by mad mad world

abgary1 Tue, 06/12/2018 - 15:53 Permalink

Automate (blockchain) the public sector, increase efficiency, slash spending and taxes.

Ban automation of the private sector, put people back to work and let them keep their money.


Our government has a spending problem not a revenue problem.

Government spending does not drive the economy for one simple reason, government revenues comes the private sector which is the economy.


Automation of the public sector means higher efficiency, lower expenditures and taxes.

Automaton of the private sector means we all become wards of the state. Socialism does not work.

Automation of both means the end of civilization as we know it.

gatorengineer abgary1 Tue, 06/12/2018 - 16:00 Permalink

You got a bunch of that wrong.  The Economy is now more dependent on giverment spending than on the private sector, its the taxes that the goverment worker pays that keeps the thing going $10 wallyworld employees arent floating the boat, 100k a year teachers and 150k professors are.....

Blockchain tax and track every transaction, would be the end. 

I would guess 30-50% of the private sector economy is in the shadows of people working for all cash, selling drugs etc.  Else there is no other way to explain 93 million out of the workforce.....

Checkout Shadowstats website...

In reply to by abgary1