Treasury Fails to Capitalize on Record Tax Revenues

The Federal Government ran an $89B deficit in June. This was an increase MoM but below the June deficit last year of $174B.

Figure: 1 Monthly Federal Budget

Looking historically, this is definitely a smaller deficit than the last two years during Covid stimulus expenses, but still larger than average. June is typically a surplus month, so the $89B deficit registers as one of the larger June deficits ever run, only behind 2017 and 2009 if the Covid years are excluded.

Figure: 2 Historical Deficit/Surplus for June

Looking at the months historically shows this June is nearly 5 times larger than the historic 10-year average of $18B. This shows that despite record revenues, the government is still spending way too much money.

Figure: 3 Current vs Historical

The Sankey diagram below shows the distribution of spending and revenue. The Deficit represented 16.2% of spending in the most recent month, but this is still below the TTM, where the Deficit represented 17.9% of total spending (Figure 5).

Figure: 4 Monthly Federal Budget Sankey

Despite the somewhat smaller Deficit, the TTM deficit is still over $1T and is larger than every expense category except for social security.

Figure: 5 TTM Federal Budget Sankey

The Treasury does not provide detail on revenue beyond the high-level categories. One component that helped this month when compared to last year was corporate taxes. June of 2021 saw corporate taxes of $5B vs $82B for June 2022. Individual taxes were also significantly higher, $200B vs $92B in 2021.

Figure: 6 Monthly Receipts

The Expense side jumped higher when compared to May, mainly driven by $55B in Education & Social Services. This was similar to the $57B in the same category last June.

Figure: 7 Monthly Outlays

Perhaps the most important expense to take note of is Interest Expense. As explained in the debt analysis, interest costs have been soaring lately. In April 2021, TTM Net Interest hit a near-term low of $312B. That number has exploded 37% to $427B in 14 months.

Even more discouraging is that this does not include the 75bps in June or the upcoming 100bps in July due to sky-high inflation. As 175bps works its way through the debt, interest expenses will start to skyrocket. This is one of the biggest factors that will force the Fed to pivot back to easy money.

Figure: 8 TTM Interest Expense

The table below goes deeper into the numbers of each category. The key takeaways from the charts and table:

Outlays

• • Social Security is up 10% since June 2020 on a TTM basis
  • Monthly Net Interest is 19% higher than the 12-month average

Receipts

• • Social Security Taxes are keeping up with expenses, rising 11.2% since June 2020 TTM
    • • Social Security is still net positive with $1.4T in revenue vs $1.2T in expenses
  • Individual Income Taxes are up 85% since June 2020 TTM. Unfortunately, the CBO does not expect this surge to last

Total

• • The Total Deficit remains above $1T, but is down over 60% since the Covid years

With the economy probably already in recession, it’s very possible that tax revenues could shrink at the same time that government spending starts to increase. This happens in every recession. Starting this recession with a $1.05T means that the deficit is set to get much worse. This will only exacerbate the debt interest problem unless the Fed comes to the rescue. Unfortunately, the Fed’s rescue could prove fatal for the USD.

Figure: 9 US Budget Detail

Historical Perspective

Zooming out and looking over the history of the budget back to 1980 shows a complete picture. It shows how a new level of spending has been reached and is only being somewhat supported by a major surge in tax revenues.

While the deficit has fallen in response, it’s not falling far or fast enough to make a difference.

Figure: 10 Trailing 12 Months (TTM)

The next two charts zoom in on the recent periods to show the change when compared to pre-Covid. The current 12-month period is more than $1.4T bigger than pre-Covid levels of 2019. Individual Taxes make up the vast majority of the difference, with 2022 reaching $2.6T vs $1.7T in 2019.

Figure: 11 Annual Federal Receipts

Once again, the major windfall from this tax revenue surge is being consumed by massive spending. Although TTM spending is below $6T, it is still well above the $4.3T seen in June 2019.

Figure: 12 Annual Federal Expenses

Due to the changing dynamics, TTM Deficit compared to GDP has returned to pre-Covid levels of 4.3%, the lowest value since June 2019.

Note: GDP Axis is set to log scale

Figure: 13 TTM vs GDP

Finally, to compare the calendar year with previous calendar years, the plot below shows the YTD figures through June. Looking at just the annual calendar, this would be the smallest YTD deficit since June 2015, but really since June 2007.

Figure: 14 Year to Date

What it means for Gold and Silver

The Federal government continues to spend far more money than it receives in taxes. Despite record high individual taxes, the government has not been able to capitalize and continues to run massive deficits.

While this has been the case for years, the Treasury is now facing the prospect of higher interest rates. Each move higher brings the Federal treasury one step closer to a debt spiral. By the end of this year, net interest could very well exceed 10% of total expenses (vs 7.3% today). China and Japan are no longer buying and the Fed has stepped away (for now). Once again, the US is lucky the dollar has strengthened and US debt is still in such high demand.

When the Fed starts to signal a pivot, they will conveniently skip over talk about the Federal budget all together. They will provide a reason such as war or recession, but make no mistake, the soaring interest expense poses a direct problem to both the Treasury and Fed. Don’t wait for the market to sense the pivot, move now while prices are still low.

Data Source: Monthly Treasury Statement

Data Updated: Monthly on eighth business day

Last Updated: Period ending Jun 2022

US Debt interactive charts and graphs can always be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/USDebt/