The Congressional Budget Office issued its estimate for the deficit created in the federal government’s fiscal first half, which ended on March 31. The number was $953 billion. Depending on how the TARP outlays are accounted for, the number could be less.
While most experts expected outlays for the period to be higher, what was an unpleasant surprise is that receipts to the Treasury fell $160 billion from the same period a year ago. Receipts from individuals were off by $76 billion and income from corporations was down $73 billion. Miscellaneous fees made up the balance.
The concern that springs from the numbers is not so much that spending will continue to increase because that will be a product of the new budget and stimulus packages and any additional TARP funds which Congress might approve. The really massive damage to the deficit will likely come on the income side of the ledger and that draws into question, once again, how much money the government can borrow.
At the current rate of attrition, income to the government will be off more than $300 billion in the fiscal period that ends in September. But, the effects of unemployment being close to 10% by then and corporate earnings continuing to fall could push that number up toward $500 billion or more and that can only be remedied if the economy turns on a dime in the next few weeks and begins a nearly miraculous recovery.
If the data continue to point to a ballooning deficit based on falling collections at the IRS, the need for the Treasury to accelerate borrowing becomes acute and interest rates almost certainly rise in concert with that. Of course, that forces almost all other borrowers whether they are sovereign nations, corporations, or individual consumers to pay higher rates for access to capital, which likely undermines any recovery.
The circle becomes more vicious if the falloff in Federal receipts continues to accelerate, but there does not appear to be much if any way around that.
Douglas A. McIntyre
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