2023 Theme - US Budget Crunch - Our French Moment Finally Arrives
In an earlier edition of this newsletter, we explored the fiery and fierce French protests against the government's plan to tepidly raise the retirement age. We discussed whether these types of nasty tradeoffs between taxes, welfare states and, most especially, different generations could be our future here in America.
We will return to these questions a few times in the coming editions. The battle between generations in particular has some rather large and difficult implications.
For now, however, we thought we should start with the simple question that rarely gets asked:
How much is the US deficit currently?
(there is a great resource at the link above that tracks the monthly deficit and allows simple comparisons to other years)
We suspect that nearly everyone reading this newsletter would struggle to get close to the correct figure. Most would probably admit to being either clueless (we didn't do great either) or way off with their guesstimate.
From one perspective, it is sort of interesting to ponder why so few Americans have even a rough handle of such an important number. Is this lack of "deficit awareness" another remnant of the "low interest rates forever" environment that prevailed for decades? Could it change in the years ahead?
Regardless, here is the current figure:
The budget deficit for the first seven months (the US Government's fiscal year starts in October) is already $928 billion. That is 236% higher than in 2022.
To give you a sense of how large that number is it can be helpful to look just at the last two months:
During March 2023 the US Federal budget deficit was $378 Billion. In March 2022 was $198 billion.
In April 2023, the deficit came down because of all the tax revenue that flows in but, unfortunately, this budget surplus was $135 billion less than its equivalent in 2022.
So, overall, the US budget deficit is not just high, it is far higher than any non-pandemic year and problematically still, it is rising, not falling.
Ouch.
Why is this occurring? The US economy is still growing after all and we have moved away from the extraordinary measures undertaken during the pandemic.
In one word it is happening because of spending.
The US is spending, even compared to its historical profligacy, at an incredible high level and an equally high rate of increase.
Taking just the first seven months of fiscal 2023, it is stunning to find out that we have spent 12% more than we did in 2022. That is quite something since 2022 was hardly austere and, in general, the last 12 months have seen lower spending on a host of outlays like the gradual end of extra unemployment and other Covid-19 related stimulus measures.
The reasons spending is so high aren't too complicated and no, they do not yet have much to do the Chips Act, the Inflation Reduction Act or the Infrastructure Bill that the Biden administration has legislatively passed. That spending is massive and it has begun but it is spread over many years and will take some time to properly ramp up.
On that subject however, it is worth keeping in mind that, while not yet occurring, none of this new legislative spending is "priced in" to the current spending figures above and yet it will of course happen sooner rather than later.
Or put differently, regardless of whether we change a thing, our spending is going to rise in the quarters and years ahead.
At the time of writing, our increased outlay stems from spending on major entitlement programs, namely, healthcare and retirement. A lot of this increase comes from rising prices and government programs like Social Security that must keep pace with official inflation. Sharply rising prices have other side effects besides eating into your paycheck and eroding you standard of living. Inflation also has implications for the government's budget.
It is also worth remembering that, in same way that your salary doesn't keep up, neither does the government tax take. In a way that will all too familiar for many of our readers, if your salary doesn't rise then neither does the government's tax revenues but their costs keep increasing as well. Social Security payments are higher, healthcare spending is higher etc. The key difference being that typically the US government can just borrow more and at a lower interest rate than most US citizens.
But once again, that is changing. The cost of servicing US debt is also spiraling higher alongside rising interest rates and more spending. We are not just borrowing more. We are paying more for each dollar borrowed as well.
That is a tough 1-2 punch for anyone to take let alone an economy that is struggling to grow.
In any event, the major entitlement programs account for over 11% of that 12% spending increase and the rest is largely made up of our expanded (and unconstitutional?) efforts to forgive student loans for some borrowers by re-imaging the rules.
One wonders whether we, as a country, will be able to re-imagine the rules for our 31.7+ trillion (and growing!) national debt pile?
(watching the clock at that link is a very sobering experience. The debt has grown over 1.7B+ since we began writing this article)
In case you were wondering, the aid for Ukraine - military and non - is a rounding error and is likely great value for money. It isn't often you get to subsidize the bravery of others, gain strategic strength and humiliate a major geopolitical rival all for less than what we spend on interest on our national debt over a single month.
The other problem we have is that, as we mentioned above, our revenues (especially taxes) are plummeting in real and nominal terms. It turns out that all those high dollar technology jobs that have been lost actually pay a lot of taxes, state and federal.
Even more important perhaps is that our capital gains revenue is falling off a cliff. We say perhaps because the tax deadline was less than a month ago and monies are still rolling in and being counted but it is safe to say that, after the bruising year that was 2022 in financial markets, we are going to make far less in capital gains than in 2020 or 2021.
So, spending up, revenue down. Got it.
This will have profound impact sooner rather than later. Like the French, we are going to have make some changes. The big question is what they are? Will it be mostly reduced spending or finding more revenue? i.e.: austerity or tax hikes? Or a combination of both?
It will likely be a mix but it is worth reflecting on how that key question shakes out will be very influential for the future of the country. Is our government going to invest in innovation or simply support an ever larger welfare state? That is a big question and very uncertain for now. But regardless of the precise breakdown, over the short term these changes will have a predictable consequence.
As Warren Buffett suggested last week, the long boom for the American economy is likely coming to an end. It is simply difficult to believe that the US economy will grow strongly with some many forces acting as head- and not tail- winds.
For instance, as we have mentioned before, both US fiscal and monetary policy have flipped in the last 18 months from stimulating the economy to acting as a drag. That is a major, major change and will show up in the economy (for instance, helping the battle with inflation) as well as financial markets (keeping a lid on asset appreciation).
The government doesn't say this out loud of course but this policy shift hurts rather helps our economy grow. And now, though once again they don't say it explicitly, the coming effort to make more revenue or spend less will only add to this trend.
Tax hikes just aren't a great recipe for a more vibrant economy.
And that is the rub. We would all love the economy to be doing better but there are two additional problems besides the fiscal and monetary drag:
Achieving more top line growth is a difficult trick to pull off, let alone pull off quickly. We disagree with plenty of the Biden administration's policies but it is unrealistic to think they can change our growth trajectory very quickly. The US economy is a very large and very slow moving juggernaut.
The second is less discussed and more important: we struggle to come up with good ideas to achieve more growth that don't involve spending a lot of money.
The issue isn't the tired old argument about government waste and out of control entitlement spending though there is most certainly plenty of that.
Rather, we are spending money unproductively. A lot of our spending is on our welfare state or to pay the rising cost of our debt. The welfare state is important but it won't be delivering a rabbit out of the hat of more productive growth.
The big question is whether the Chips Act, the Inflation Reduction Act and the Infrastructure Act will deliver it. The hope is they will. In theory, they could especially where the case for government intervention is best, around public goods like the environment, infrastructure and national security. But the track record for huge government stimulus programs is frankly terrible. The fear is therefore that a lot of this money will be wasted and also, of course, only increase the importance of the pressing question.
Are we going to cut spending or raise more revenue and, whatever we choose, how are we going to do it?
It is a big question and, helpfully or unpleasantly depending on how you look at it, we have a forcing mechanism looming on the horizon.
Our French moment may have, indeed, finally arrived.
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