Casey Files:
Tax Revenues Tanking
David Galland
Managing Editor, The
Casey Report
May 21, 2009
While everyone else has been
focused on the banks' stress tests and how much government is
spending to bail out troubled "too big to fails," a
disturbing trend on the other side of the equation is now emerging:
how much (or rather, how little) the U.S. government is receiving
in tax revenues.
After combing through the past
25 editions of the "Monthly Treasury Statement of Receipts
and Outlays of the United States Government," which is compiled
and published by the Treasury Department's Financial Management
Service, we created the following chart:-
Here's what's going on:
- In 2007 and 2008, government
tax revenues averaged about $633.15 billion per quarter. For
the first quarter of 2009, however, the numbers just in tell
us that tax receipts totaled only about $442.39 billion - a decline
of 30%.
.
- Looking to confirm the trend,
we compared the data for April - the big kahuna of tax collection
months - to the 2007-2008 average, and found that individual
income taxes this year were down more than 40%. The situation
is even worse for corporate income taxes, which were down a stunning
67%!
.
- When you add in all revenue
from all sources (including Social Security revenue, government
fees, etc.), the fiscal year-to-date - October through April
- revenue shortfall comes to 19%, vs. the 14.6% projected in
Obama's budget. If, however, the accelerating shortfall apparent
year-to-date, and in April in particular, continues, the spread
between projected and actual tax receipts will widen considerably.
Tellingly, for the first time
since 1983, the U.S. government posted a deficit in April.
That's a big swing in the wrong direction, as the bump in personal
tax collections in April historically results in a big surplus
- on average about $68 billion.
What are the implications of
this tanking tax revenue?
For starters, it means the
federal government deficit is going be as bad or worse than the
$2.5 trillion Bud Conrad, chief economist of Casey Research,
projected it to be last year.
If the shortfall in individual
and corporate tax revenue persists - and we expect it will -
then the deep hole the government is already digging for itself
will be that much deeper.
Using the government's own
expense projections, the revenue shortfall, even if it doesn't
worsen further, would push the fiscal 2009 budget deficit up
to about $1.958 trillion. For reasons we've discussed at some
length in The
Casey Report, those expense projections are likely to be
significantly understated.
Case in point, in January the
government projected a $1.2 trillion deficit for fiscal year
2009 in March, just three months later, they upped the projection
to $1.8 trillion. That $600 billion "adjustment" alone
totaled more than any full-year budget deficit in the nation's
history.
Yet, the real fly in the ointment
is that the actual borrowing by the Treasury is likely to be
at least half a trillion dollars more than the deficit.
That's because the Treasury
is buying toxic paper (mortgage, credit card loans, etc.) and
putting them on the books with a higher value than the market
is willing to assign. While that makes the budget deficit appear
smaller, it doesn't negate the fact that the government still
must borrow the money needed to buy the toxic paper in the first
place. The additional revenue shortfall means they have to raise
that much more money. Based on the struggle they had pushing
the $14 billion in long-term notes at the latest auction, it
becomes increasingly apparent that when push comes to shove,
the only way the government is going to come up with the money
needed to meet its aggressive spending is to print it up.
In other words, events are
rolling out almost exactly as we have been anticipating. Below,
for example, are some useful excerpts from an April 3 article
titled "Widening
Deficits" by Casey Research CEO Olivier Garret. To quote:
In the midst of the Great Depression,
the 1931 federal tax revenues had fallen by 52% from their 1929
highs. While we do not expect anything that dramatic in 2009,
it would not be unrealistic to see a 20% to 25% reduction in
cash flow from tax collections this tax season. Such a drop would
pose significant challenges given that spending commitments are
off the charts and climbing.
Later in that same article,
Olivier continued,
In the absence of sizeable
increases in tax revenues, it is quite clear that the lion's
share of the planned sales of Treasuries in 2009 cannot be met
by demand from the market. Either the Treasury will have to raise
interest rates significantly, or the Fed will need to step in
very aggressively to support the planned auctions. Our expectation
is that both will happen. Auctions will fail and the Fed will
step in. The market will react to more printing by anticipating
inflation and demanding higher interest rates. Once the cycle
starts, it will be very hard to pull interest rates back.
We continue to stand by our
December forecast that the 2009 budget deficit is more likely
to widen to levels between $2.5 and $3 trillion rather than the
CBO's $1.8 trillion forecast. We also believe that inflation
could start setting in as early as Q3 of 2009 and will accelerate
sharply by 2010. Treasury Rates will start climbing and the era
of cheap money will end, making it harder for overleveraged consumers,
businesses, and governments to service their debt.
Olivier's forecast of failed
auctions and rising interest rates on Treasuries proved more
prophetic as a May 7th story from Bloomberg reported:
Treasury 30-year bonds fell
the most in four months as investors demanded higher-than-forecasted
yields at today's auction of $14 billion of the securities with
the U.S. slated to sell a record amount of debt this year.
"This is a problem,"
said Chris Ahrens, head interest-rate strategist at UBS AG in
Stamford, Connecticut, one of 16 primary dealers required to
bid in Treasury auctions. "The market required a fairly
significant discount to buy the bonds."
Thirty-year bonds have lost
investors 20.9 percent this year, Merrill Lynch & Co. indexes
show, as the Treasury increases securities sales to help fund
a swelling budget deficit. Yields climbed to a six-month high
today as the auction drew a yield of 4.288 percent, higher than
the 4.192 percent average forecast in a Bloomberg News survey
of seven primary dealers. Demand was below average, judging by
total bids.
The benchmark 30-year bond
yield climbed 23 basis points, or 0.23 percentage points, the
most since Jan. 5, to 4.316 percent, at 5:25 p.m. in New York,
according to BGCantor Market data. It was the highest yield since
Nov. 14. The 3.5 percent security due in February 2039 dropped
3 15/32, or $34.69 per $1,000 face amount, to 86 3/8.
The 10-year note yield increased
16 basis points to 3.345 percent, the highest since Nov. 24.
Two-year notes yielded 1 percent
for the first time since March 18, while the rate on the three-month
Treasury bill was 0.18 percent.
So, what does all this mean?
As per above, the rock-and-the-hard-place
scenario we have been predicting is unfolding before our eyes.
At this point, other than sharply-changing course and letting
the free market cope with the crisis through a brutal "survival
of the fittest" scenario, the government is left with no
other option than to accelerate its buying up of its own debt.
Which is to say, it must push
even harder on the levers of its printing presses, further setting
the stage for the massive period of inflation we continue to
see as inevitable and for the stunning rise in interest rates
we are now positioning ourselves for in The Casey Report
(and, you can too... learn
more).
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