Federal Tax Revenues Surge 20% – Will it Last?
The federal government continues to run big budget deficits as spending skyrockets. Increasing tax revenues are the only thing keeping the deficits from blowing up even further. But how long will this tax windfall last?
The federal budget deficit in November was $191 billion, making up 40.5% of total expenditures for the month. Last November’s deficit was $145 billion.
In the trailing twelve months, the deficit was $2.7 trillion, representing 39.4% of total expenditures. The TTM deficit is down 16% vs the $3.2 trillion value as of November 2020, but up 164% vs the $1.02 trillion from November 2019.
Interestingly, TTM Revenues are up 20% compared to 2019 and 2020. This has been driven by a massive increase in both individual and corporate taxes (more on this below).
The two Sankey diagrams below show the monthly and 12-month pictures to depict the size of each revenue and expenditure source.
Figure: 1 Monthly Federal Budget Sankey
Labor and SBA are significantly larger in the 12-month diagram due to the stimulus packages that were distributed earlier this year. The biggest takeaway though: to close the budget deficit either individual taxes would need to more than double or Health and Human Services AND Social Security would have to be eliminated completely!
Figure: 2 TTM Federal Budget Sankey
The next chart looks at each of the last 18 months to show the net shortfall against revenue and expenditures. The MoM change was driven primarily by increased expenditures against relatively flat revenue. Compared to last November, expenses have increased by over $100B from $365B to $473B.
Figure: 3 Monthly Federal Budget
To better understand what is driving the large outlays and receipts, the next two charts break down both sides of the budget into different categories.
Figure: 4 Monthly Receipts
There are a few categories driving expenses higher. For example, HHS saw an increase of $14B MoM.
Figure: 5 Monthly Outlays
The table below goes deeper into the numbers of each category. The key takeaways from the charts and table:
- The spending from “Treasury – Other” (Stimulus checks) has averaged $92B over the last 12 months but has only been around $30B in Oct and Nov.
- The high average was due to large payments in Jan, Mar, and May
- Debt Interest ($412B) is lower than the TTM pre-Covid ($424B)
- Debt Interest makes up 6.2% of total Federal expenditures. This is down from 9.4% in the TTM ending Nov 2019 despite adding $5.7T in debt over that time.
- As discussed in the debt analysis, this is primarily due to the low interest on short term financing
- TTM Individual Taxes ($2.1T) are up nearly 34.5% YoY ($1.58T) and up 23% from the TTM ending 2019 ($1.7T)
- This is mainly driven by top earners where the top 10% pay 70% of income taxes
- TTM Corporate Taxes ($381B) are up a whopping 81% YoY ($210B) and up 65% from the TTM ending 2019 ($231B)
- Corporate taxes are actually higher than where they were before the 2017 tax cuts
- The combo of increased Individual and Corporate taxes has resulted in the biggest revenue surge in 44 years
- Total Receipts are up $750B or 20% compared to the last two years
- Despite a massive surge in receipts, the deficit is $1.7T larger than it was in the TTM ending Nov 2019
Figure: 6 US Budget Detail
It’s hard to pinpoint the exact driver behind the massive surge in revenues. Will this be a one-off year from a roaring stock market, exceptional corporate profits, and a strong job market? Is this driven by inflation?
In his most recent podcast, Peter Schiff explained the many reasons government loves inflation. One example was the higher tax revenue generated. This occurs because tax brackets do not adjust accurately with inflation, and more people find themselves in higher tax brackets over time.
In either case, expenses are set to fall next year even with the Infrastructure Plan and yet to be passed Build Back Better Plan. The revenue surge won’t be nearly enough to cover the full cost of expenditures, but it might bring the Federal deficit back below $1T for the first time since Sept 2019. Below shows a more detailed history.
Zooming out and looking over the history of the budget back to 1980 shows a complete picture and just how extreme the last two years have been. The chart below shows the data on a TTM basis to smooth out the lines.
As can be seen, Expenses have been flat since June of 2021 but Revenues are still moving upwards.
Figure: 7 Trailing 12 Months (TTM)
The next two charts zoom in on the recent periods to show the change when compared to pre-Covid. Once again, the surge in Individual and Corporate Taxes has become very clear.
Figure: 8 Annual Federal Receipts
With no more stimulus checks (for now) and the SBA closing the PPP Loan offering, 2022 should fall back down some. It will most likely not reach pre-pandemic levels, but it should get below $6T.
Figure: 9 Annual Federal Expenses
With surging tax revenues and spending set to fall compared to the last two years, the deficit will shrink. Prior to Covid, the TTM deficit compared to GDP had been trending towards 5% before exploding to 18.6%. It has since come down to 11.6% and will most likely continue falling given the current trends in place.
Note: GDP Axis is set to log scale
Figure: 10 TTM vs GDP
Finally, to compare the calendar year with previous calendar years, the plot below shows the Year to Date (YTD) figures for each year through the current month. The government fiscal year technically ends in September, but that is harder to contextualize (e.g. when did Covid start in relation to October vs January).
Figure: 11 Year to Date
What it means for Gold and Silver
The Budget Deficit matters for gold and silver because it shows how much the US government needs to borrow to make up for the revenue shortfall. More borrowing usually means higher interest rates. As the debt analysis shows, higher interest rates would prove devastating for the federal budget in the medium to long term and also prove devastating on the rest of the economy (corporate debt, mortgage rates, etc.).
The trend does look favorable to see smaller deficits in the years ahead, but it will still be a deficit and it’s not certain to get below $1T much less stay there. Any recession or slowing economy could also crash revenues causing deficits to explode once again. Given the inflation fight the Fed has ahead, it’s likely they will mess something up considering they have no viable options.
Gold and silver will provide insurance against a devalued dollar or an economy and market in turmoil. The current increase in tax revenues will unlikely make a difference over the long run.
Data Source: Monthly Treasury Statement
Data Updated: Monthly on the eighth business day
Last Updated: Period ending Nov 2021