White House Reveals Budget Deficit Will Be $250 Billion Greater Due To "Mistake"

On Thursday, we first discussed that in its latest monthly budget report for the month of June, the US Treasury reported a massive outlier that has largely been ignored by the general press: in June total US government spending hit $429 billion, the biggest one-month outlay on record, and 33% higher than the $323 billion spent a year ago.

As explained,  the main reason for the outlier print was that 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. And, as we further noted, 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."

This was troubling: as we stated "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."

There was more: while outlays surged, revenue growth failed to keep up...

...which taken together led to our conclusion that "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."

As it turns out we were right, because just one day later, the Director of the Office of Management and Budget, Mick Mulvaney, warned that the budget deficit for Trump"s first two years in office will be nearly $250 billion higher than initially estimated "due to a shortfall in tax collections and a mistake in projecting military healthcare costs," according to Reuters.

The problem first emerged in late May, when Mulvaney submitted the OMB"s first spending plan to Congress. It now appears that, as Thursday"s data confirmed, the projections were overly optimistic and on Friday Mulvaney said the deficit projected for the current fiscal year has increased by $99 billion, or 16.4 percent, to $702 billion, a miss which was virtually in line with what we calculated two days ago. It doesn"t stop there, however, and Mulvaney said that for 2018, the deficit will be $149 billion more than first expected, increasing by 33 percent to $589 billion.

In other words, a budgeting "mistake" just shy of $250 billion.

In an amusing twist, AP added that the White House kept its budget report to a bare-bones minimum and cast blame on "the failed policies of the previous administration" although whether this gambit of "blaming Obama" for budget errors, even as the president is all too happy to take credit for the market"s all time highs, will work remains to be seen. 

As Reuters further adds, the figures come as the administration is facing "widespread doubts among economists and analysts that it can erase government deficits largely by boosting economic growth and changing laws like the Affordable Care Act. ACA reform is facing a difficult path in Congress, and the Congressional Budget Office on Thursday said the administration"s growth and deficit reduction plans were optimistic."

Worse, it means that far from balancing the budget, as the Trump administration had hoped to do over the next decade, the budget will drift well wide of even the latest "optimistic" CBO projections, which saw Trump"s proposed budget cutting on the baseline number by a cumulative 33% over the next ten years.

And while spending took a back seat in Mulvaney"s letter, he blamed the bulk of the budget shortfall this year and next on lower-than-expected tax collections. Specifically, individual and corporate income taxes and other collections for this year are expected to be $116 billion less than the administration anticipated in May. Tax receipts in 2018 are expected to be $140 billion less than initially estimated.

We also touched on this two days ago when we said that "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" however as we cautioned, this may be an overly optimistic scenario, and the underlying reality may be that tax receipts are set for a structural decline as US workers and corporations earn less, and as a result, remit less in the form of taxes. According to the Mulvaney letter, it was this more adverse case, that is emerging as the likely explanation.

The OMG chief did touch on spending, which he said in 2017 would be $17 billion less than expected, and would have been even lower if not for the use of "erroneous outlay rates" used in estimating costs of health programs for the U.S. military, i.e., another mistake, and one which did not take into account the surge in subsidy costs for student loans, i.e., the marking-to-market of student loan writeoffs and discharges which the government will be forced to do over the coming years as the student loan bubble bursts.  Furthermore, costs for the defense health program will be $19 billion higher in 2017 and $9 billion higher in 2018 than initially expected. As a result, overall spending in 2018 will rise by $10 billion; our calculations suggest the final number will be substantially greater.

There is still a chance that the latest budget "mistake" will be rectified: the latest estimates are "based on existing law and do not include any proposed changes to health, welfare or other programs" however with virtually all policies proposed by Trump halted by the gridlock in Congress, it is unlikely that many, if any, proposed changes will be implemented.

The Striking Reason Why The US Just Spent A Record $429 Billion In One Month

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.

h/t @SMRA

Trump Seeks "Historic" $54 Billion Increase To Defense Spending

As observed earlier in the day, as part of the leaked preliminary Trump budget, the president was set to unveil major spending increases for US defense offset by cuts to federal agencies, and other non-defense sectors. And on Monday morning, the first details emerged, including that the boost to defense spending is expected to be about 10%, or some $54 billion, and will be revenue neutral, offset by cuts in non-defense areas, and will not "add a dime to the deficit." As Trump said, he is seeking a "historic increase" in military spending.

"This budget will be a public safety and national security budget," Trump told state governors at the White House. "It will include an historic increase in defense spending to rebuild the depleted military of the United States of America at a time we most need it," he said.

One of the officials cited by Reuters said Trump"s request for the Pentagon included more money for shipbuilding, military aircraft and establishing "a more robust presence in key international waterways and chokepoints" such as the Strait of Hormuz and South China Sea.

A second official said the State Department"s budget could be cut by as much as 30 percent, which would force a major restructuring of the department and elimination of programs.  Some defense experts have questioned the need for a large increase in U.S. military spending, which already stands at roughly $600 billion annually. By contrast, the United States spends about $50 billion annually on the State Department and foreign assistance.

The White House will send federal agencies their proposed 2018 budget allocations at noon Monday, according to an Office of Management and Budget official. The official provided no specific details during a call with reporters about the rest of the budget, including the baseline figure being used for the cuts or over what period they would be made. The initial blueprint of the president’s budget will be released in mid-March, and the administration’s entire fiscal proposal is expected later in the spring.

The outline due next month will include only targets for discretionary spending programs, which represent around one-third of total federal spending. The blueprint won’t include proposed changes on tax policy or mandatory spending.

To offset the defense spending increase, the White House is seeking corresponding cuts of $54 billion in non-defense categories, including "large spending cuts" to foreign aid, the EPA, the State Department and safety programs. The official also added that most agencies would see funding reductions.

“Most federal agencies will see a reduction as a result," the official said, with cuts falling most heavily on “lower priority” programs as well as foreign aid. When asked where the extra $54 billion will be spent, the official said “predominantly it will go to the Pentagon,” but declined to name specific offices.

According to The Hill, the budget will fundamentally alter the spending rules known as the sequester brokered in a 2013 deal between President Obama and Congress. That agreement set a cap on discretionary spending across the federal government, which affected defense and non-defense spending equally.

The punchline: according to the White House, the budget, at least as it stands right now, won"t add a dime to the deficit, suggesting that if only for the time being, the dramatic debt-funded spending spree remains on hold.

According to the WSJ, the Trump administration said the funding request will show that Mr. Trump is following through on promises he made during his campaign to boost military spending and put “America First,” a campaign theme he sounded in his inaugural address last month. It isn’t clear how the offsetting cuts will allow him to also make good on promises to ramp up funds for border security, infrastructure and veterans’ health care.

For now we await more details. As the NY Times reported ovenright, Trump"s plan which is a collaboration between budget director, Mick Mulvaney; NEC director Gary Cohn; and Steve Bannon, is meant to make a "big splash" and has been carefully timed to come the day before the president"s address to Congress.