U.S. Federal Deficit September 2017

Happy Fiscal New Year! As you are reading this, America has nearly completed its first month of the fiscal year 2018. The nation’s 2017 deficit tally is in; it doesn’t look good. Our country’s shortfall increased 13.7 percent for the year, reaching $666 billion. Making matters worse, items which are not going away soon (interest payments and Social Security obligations) exacerbated the increased deficit.

Both receipts and outlays increased during the period, but spending was the faster growing of the two. In total, revenue to the Federal Government rose just 1.5 percent in the 12-month period. Taxes paid by or for the benefit of individuals, comprising most of the nation’s revenue, increased 3.3 percent, while corporate taxes fell 1.0 percent. On the other side of the ledger, outlays grew 3.3 percent. Here, all five major categories (Defense, Social Security, Medicare, Interest on Debt, and Other) increased during the year.

Deficit projections from the non-partisan Congressional Budget Office made just last year were off by over $100 billion. This group expected the shortfall to be “only” $561 billion during fiscal 2017. Remember, each year’s deficit adds to our nation's stock of debt. Some worry that America’s debt-to-GDP relationship is one of those economic data points now residing in unchartered territory.

According to the World Bank, America’s debt-to-GDP ratio is currently 99.8 percent. For some context, it was just 33.2 percent in 2000. Theories on how this plays out vary widely. One side of the spectrum says this is no problem because America is the preeminent economy with reserve currency status, allowing it to borrow virtually without limit. Others point to nations which have collapsed under the pressures of debt accumulation, especially once borrowing to pay interest begins. Currently, it appears the first group is closer to reality than the second as today's low-interest rates suggest ample demand for American bonds. However, it may be just a matter of time (years/decades) before the vigilantes start selling our debt, growing fearful of our inability to repay. Atlas does not take a position in this debate; we simply watch the indicators and invest accordingly.