On Thursday morning the CBO released a surprisingly upbeat assessment of Donald Trump’s proposed budget, calculating that it would cut the cumulative US deficit by 30% over the next decade, preventing the US debt from spiraling out of control (even further).
That however. may be an overly optimistic assessment, especially following the release of the latest monthly budget data, which showed that not only did the US deficit surge to $90 billion, far above the $38 billion consensus estimate, and a “NM” compared to the $6.3 billion budget surplus in June of last year, but the US also saw the biggest one month outlay on record, at $429 billion, 33% higher than the $323 billion in outlays one years ago.
What prompted this massive surge in outlays?
The biggest reason for the outlier print is that according to Stone McCarthy, 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.
Here is the CBO explanation:
Outlays for the Department of Education rose by $31 billion (or 51 percent), because the department revised upward, by roughly $39 billion, the estimated net subsidy costs of loans and loan guarantees issued in prior years—a change much larger than last year’s $7 billion upward revision. If the effects of those revisions were excluded, outlays for the department for the first nine months of fiscal year 2017 would have fallen by $2 billion (or 3 percent).
Outlays for the Department of Housing and Urban Development rose by $29 billion, primarily because the department made upward revisions in June 2017, but downward revisions in April 2016, to the estimated net subsidy costs of loans and loan guarantees issued in prior years.
The cost of those loans is treated in the budget on a present value basis, not a cash basis and the Treasury periodically revises these costs. (It should be noted that the associated increase in outlays doesn’t impact Treasury borrowing or debt under the debt limit.) If not for these special factors, Treasury would have reported another small surplus for June… however it did not.
On the revenue side, things were just as bad with the US Treasury collecting only $338.7BN, just 9% higher than the $330BN in June of 2016.
What makes the surge in the deficit especially surprising is that June is often a surplus month, as the Treasury receives large corporate and non-withheld individual tax payments in that month.
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. About a third of the revision was on the outlay size, with a large chunk due to changes in the estimated subsidy costs described above. 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.
Combining these two means that YTD, the deficit jumped to $523.1BN vs $399.2BN last year. 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.
To summarize: 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.
Finally, since the $1.4 trillion and rising student debt bubble is expected to end up with discharges of 35% if not higher, it means that over the next several years, the budget deficit will be incrementally boosted by approximately $500 billion as America’s taxpayers are once again taken to the cleaners, this time to bail out millions of liberal arts majors who for one reason or another just can’t pay back their student loans.
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