It has been an interesting start to 2018 for America’s finances. The United States government is cutting taxes without cutting spending, and the Federal Reserve is unwinding its $4.5 trillion balance sheet. Because of this, Washington’s borrowing habits have become fierce in just the last few months alone.
According to the U.S. Treasury Department, the federal government borrowed $488 billion in the quarter ending March 31, which is $47 billion more than it had originally forecast in January. This is the most Washington has borrowed in a quarter since the economic collapse, when it took out $569 billion in the fourth quarter of 2008.
Under President Donald Trump, the government’s finances are getting worse.
We recently reported that the federal budget deficit spiked $600 billion in the first half of the fiscal year, ballooning the monthly interest to $33 billion.
What’s even more interesting is that these trends are happening without a recession or any financial calamity. The gross domestic product edged 2.3 percent higher in the last quarter, consumer spending is up, wages are higher, and the central bank is raising interest rates.
Moving forward, the Treasury is projecting to borrow $75 billion in the second quarter, which is approximately $100 billion below the last forecast.
It’s going to be a bloodbath for Uncle Sam.
As regards the deficits, there is cause for concern. The Federal government is well on the way to its first $2 trillion deficit, as is described more fully in the article “A Reality Check On The Budget Outlook” https://seekingalpha.com/article/4163940 :
The latest Congressional Budget Office budget outlook shows the deficit reaching $1.5 trillion by 2028.
That deficit projection is unrealistic because it is made using “current law” assumptions, which assume that personal tax cuts will expire in 2025 and that discretionary spending will be constrained.
It is highly unlikely that the personal tax cuts will be allowed to expire in 2025, or that discretionary spending will be constrained by sequestration pursuant current law after 2019.
Making adjustments for what is likely from a realistic political perspective results in the deficit reaching $2 trillion by 2028.
These adjustments would bring the projected treasury debt held by the public to 107% of GDP.
Even though the deficit looks bad, there are some mitigating factors relating to the supply and demand for fixed-income securities. The recently enacted tax law, which certainly exacerbated the deficit and debt problems, is not as inflationary as compared to other fiscal policy that might have resulted in similar increases in deficits. Borrowing money to fund tax cuts for the rich is not as inflationary as borrowing the same amount of money to fund additional social welfare spending.
The new tax law further shifts the tax burden away from the rich and onto the middle class. The rich have a much lower propensity to consume and thus a much higher propensity to save and invest. Whatever one’s opinion on the widening inequality that the tax bill will cause, it is certain that the first order effect of shifting the tax burden away from the rich and onto the middle class is an increase in the amount of funds available to purchase securities. This can offset some of the increased borrowing by the Federal government…”
https://seekingalpha.com/article/4164735
Lance, I do not agree that taxes are being shifted to the middle class. The top 20% paid 87% of the Federal Income Tax bill this year. This may drop some next year, but almost everyone’s tax bill will be lower from 2019 to 2025. I do think the Congress will let the tax cuts for individuals go back to 2017 levels and they will have the increased deficits to justify, doing so.
The major driver of future deficits is Social Security and Medicare. With 10,000 baby boomers retiring every day for the next 15 years, the government will be adding 6 trillion or more to the debt, to cover these 2 programs.
There are other problems with boomers in retirement. Spending drops 37% in retirement. Given that consumption accounts for 70% of US economic activity, this is a major deflationary force.
This will affect the corporations bottom line, profits will suffer. Also, Due to IRS mandatory minimum drawdown laws for retirement plans like IRAs and 401(k)s, when you turn 70 ½, you are forced to withdraw at least 5% of the value of the plan each year. Billions of dollars in stock and bond redemptions will flood the market driving down the value and growth rates of investments for the next generation.
The next 40 years may be very hard on the Gen Xers and Millennials as their investments do not grow as much as the Boomer Generation investments did.