US Budget Deficit Hits $607 Billion In 9 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 June, the US collected $316BN in receipts - consisting of $162BN in individual income tax, $94BN in social security and payroll tax, $3BN in corporate tax and $22BN in other taxes and duties- a drop of 6.6% from the $338.7BN collected last June and a reversal from the recent increasing trend...

... even as Federal spending also dipped, down 8.8% from $428.9BN last June to $391.1BN last month.

... where the money was spent on social security ($88BN), defense ($65BN), Medicare ($79BN), Interest on Debt ($32BN), and Other ($126BN).

This resulted in a June budget deficit of $75 billion, better than the consensus estimate of $98BN, and an improvement from the $147 billion deficit in May and as well as slightly less than the deficit of $90.2 billion recorded in June of 2017. This was the second biggest June budget deficit since the financial crisis.

The June deficit brought the cumulative 2018F budget deficit to over $607BN during the first nine month of the fiscal year, up 16% over the past year; as a reminder the deficit is expect to increase further amid the tax and spending measures, and rise above $1 trillion.

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.

Comments

Free This directaction Thu, 07/12/2018 - 15:39 Permalink

We're having a LARK! Thanks to all the previous socialist presidunces and CON-gress'! They lied and did dirty tricks, done cheap!

tic toc tic toc

Nah, we'll just default and the world will be holding a big giant fart. Simple. We will all have our fair share of abuse, you can't always get what you want!

 

EDIT - do try to keep up Mittens and company, you are late with the down arrows. You get a F-, try harder, LOL, my snail trail is needing more motivation.

In reply to by directaction

bshirley1968 asteroids Thu, 07/12/2018 - 18:19 Permalink

I know the problem(s) are bigger than this, but did anyone else notice a problem with this statement. ....

"......consisting of $162BN in individual income tax, $94BN in social security and payroll tax, $3BN in corporate tax and $22BN in other taxes and duties......."

What is Wall Street going to post as profit for this earnings season.....to keep their stocks pumped up? Oh, I'm sure we are going to hear plenty about "record profits". 3 billion dollars? And yet individual income tax was 162 billion?

In reply to by asteroids

new game Free This Thu, 07/12/2018 - 16:06 Permalink

all roads to bankruptcy are paved with unlimited spending with reckless abandon.

just look at where it goes, but now the interest is starting to get alarming-lol.

maff baby maff. it really is hopeless. just saying. grim outlook and sumtin is gonna give.

the given won't come easy as all this gov.org will be able to give is a payload to further misery.

sorry for the grim outlook, reality is bitch, bitcheez(had to say it-bitcheez)...

In reply to by Free This

opport.knocks Boing_Snap Thu, 07/12/2018 - 15:58 Permalink

Garbage and further distraction from the DNC email leak which was a Mossad operation. Israel and Trump's conservative Zionist financial backers (Adelson, Mercer, etc.) were the biggest beneficiaries of Trump's election.

I will wager that Rich's death was faked by Mossad to save him from Arkancide, once it was revealed that his account was used to access the DNC network.

In reply to by Boing_Snap

lnardozi FreeShitter Thu, 07/12/2018 - 15:43 Permalink

That's my plan to raise money for our new start. Feed bankers and FED governors into a chipper shredder on Pay-Per-View. Shit I'd drop $100 on that and I HATE Pay-Per-View! Oh, and here's my plan:

 

  • Repudiate all federal debt
  • Banker/FED Pay-Per-View shred out!
  • Revaluation of dollar to match current money supply based on
  • Audited Contents of Ft. Knox and other publicly owned gold
  • Constitutional Amendment prohibiting deficit spending

In reply to by FreeShitter

Uranium Mountain lnardozi Thu, 07/12/2018 - 16:16 Permalink

Sell more Bonds to cover.  Watch the rates sore.   Sell even more Bonds to cover to the lowest bidder.  Rinse and repeat.   Print you Fiat Whores.  Print!!!!!  The shit is easy.  No labor required.   All the wealth destruction and deaths you will cause.  Thank you Federal Reserve.   Your Master the Devil will be proud of you! 

In reply to by lnardozi

June 12 1776 Thu, 07/12/2018 - 15:34 Permalink

Ut oh! No duh! The mathematically perfected, wealth transfer and the People's wages & Treasury plunder of the Olde World Order, American Globalist World Reserve Paper Debt system. MAFFA! Make American Fiat Fraud Free Again! 1694-1776-1913