There has been a lot of talk about the projected 2013 Federal deficit being *only* $642 billion. Allow me to straighten a few things out.
First of all…seriously? We are supposed to celebrate spending more than a half of a trillion dollars than we take in? This excludes $100 trillion in unfunded liabilities, of course, such as Social Security and Medicare, because God forbid that we look at America’s entire financial picture all at once.
Some background is in order.
Some people confuse deficit and debt. Deficit is money spent beyond the income received by the federal government from taxes. So if the federal government took in $3 trillion in 2012 in taxes, but spends $4 trillion, the government has a deficit of $1 trillion in 2012.
Where is the difference made up? Debt.
The federal government will borrow the $1 trillion “difference” between the money it took in from tax revenue, and the money it spends during the course of the fiscal year. The debt is auctioned off in the form of United States Treasury bonds at a certain interest rate, depending on the length of the bond payments (month, three month, year, two year, five year, ten year, thirty year, etc.). Some of the bonds are bought by the Federal Reserve. When you hear pundits complaining about the federal government “printing money,” that’s what they are talking about.
When the federal government borrows money to fund the deficit, the amount funded (plus the interest) is added to the national debt, which currently stands at approximately $16.7 trillion. As of March 1, 2013, Mark Knoller reported that the national debt has increased by $6 trillion under Obama’s presidency.
I can’t tell you how many on the left confuse “debt” and “deficit.” Deficit adds to the national debt. “Cutting the deficit” is a somewhat dubious achievement, because unless the deficit is cut to zero, we are still adding to the debt — albeit at a slower rate.
For example, many on the left want to throw a ticker-tape parade because the current projection for the 2013 deficit is $642 billion, rather than the original prediction of $845 billion. Sure, spending $200 billion less than originally projected is good. But spending $642 billion more than the federal government takes in is terrible.
The irony of these numbers is that Candidate Obama routinely criticized then-President Bush for spending too much (which Bush did). What now-President Obama neglects to note is that the Bush deficits, as large as they were, actually were smaller than the projected deficit that we are cheering for in 2013 by over $200 billion.
Candidate Obama also said this about Bush in 2008:
The problem is, is that the way Bush has done it over the last eight years is to take out a credit card from the Bank of China in the name of our children, driving up our national debt from $5 trillion for the first 42 presidents — #43 added $4 trillion by his lonesome, so that we now have over $9 trillion of debt that we are going to have to pay back — $30,000 for every man, woman and child. That’s irresponsible. It’s unpatriotic.
A $6 trillion increase in debt must be uber-patriotic, or something.
I would not get the champagne out just yet to celebrate the $642 billion dollar deficit for 2013 just yet. First of all, government projections are notoriously inaccurate, especially when looking forward five years (as opposed to one year). The St. Louis Fed discusses that in this presentation which is really illuminating.
More importantly, the “Honey, I shrunk the deficit” camp neglects to note what I think is the real reason for the shrinking 2013 deficit: increased tax receipts from 2012.
The increase in tax receipts in 2012 is not from an improving economy, but actually from people selling stock and taking other capital gains prior to the fiscal cliff.
Remember, in late 2012, we still did not know if Congress and the President would get their act together and fix the hike in personal income tax, as well as capital gains taxes, which were scheduled to take place in 2013. Accordingly, people likely sold stock and performed other transactions which resulted in payment of lower capital gains rates by December 31, 2012. These taxes would be paid to the government in the first quarter of 2013, which likely explains increased tax receipts:
For clients who were already planning on selling a stock next year, however, Levin said he may advise them to do it this year instead, in order to take advantage of the lower capital gains tax rate.
Also, the additional 3.8% capital gains tax is now levied on capital gains for those making $250,000, thanks to Obamacare. This began in 2013 — another reason for people who make $250,000 or more to have sold stocks in 2012 rather than 2013.
If the economy begins to improve at a more rapid rate than it has been, the federal government will see increased income tax payments over the next few quarters. If not, then it is entirely possible that the $642 billion deficit projection will fall short of the actual deficit. What will these cheerleaders say then?
Gosh, people changing behavior in response to stupid government policies. Who would have thought?
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This week kicks of Earnings Season, with Alcoa ($AA) announcing earnings after the closing bell on Monday, July 7.
Consumer credit for May, 2013 will be announced on Monday as well.
On Wednesday, we can look forward to market swoons as people interpret the minutes of the Federal Reserve Open Market Committee meeting from June, which will be released at 2:00 p.m. EDT. Ben Bernanke will be giving a speech on Wednesday, too.
On Thursday, we will see how jobless claims did last week. I’d expect them to be low, due to the holiday.
On Friday, producer price index and consumer sentiment will be noteworthy financial and potentially market-moving events.
As always, free markets are better markets.