Despite Tax Day the Federal Government Runs Another Massive Deficit in May
Typically, the US government runs a budget surplus in the month that tax returns come due. Not this year. Despite a surge in receipts, the federal government ran a $131.95 billion deficit in May, continuing the trend of overspending and ballooning budget shortfalls.
The federal budget deficit for fiscal 2021 now stands at $2.06 trillion with four months left to go. That compares with a $1.9 trillion deficit through the first seven months of fiscal 2020, which included the first round of stimulus checks in April 2020.
Despite the fact that the economy has opened back up and the pandemic seems to be receding into the past, the US government continues to run massive budget deficits month after month.
The media spun the lower May deficit as good news. Reuters proclaimed “US May budget deficit shrinks as revenues rise sharply” and noted that the May 2021 deficit was only about a third of the May 2020 shortfall. But given that the tax filing deadline was in July last year, it makes more sense to compare the May deficit with last July’s. This month’s shortfall was more than double the July 2020 deficit of $63 billion.
The US government spent $595.7 billion in May. That was a 4% increase over May 2020, but down slightly from last month. Even so, the May shortfall still ranks as the third-largest deficit of fiscal 2021. So far in this fiscal year, the federal government has spent a staggaring $4.67 trillion.
The government collected $463.7 billion in May. This was the highest monthly revenue for Uncle Sam this fiscal year; not surprising given the tax deadline falling in May. Many people went ahead and filed in April this year despite the extension, boosting April revenue as well. Revenue collection has given the appearance of shrinking deficits over the last two months.
The national debt stood at $28.2 trillion as of June 11.
According to the National Debt Clock, the debt to GDP ratio is 128.03%. Despite the lack of concern in the mainstream, debt has consequences. Studies have shown that a debt to GDP ratio of over 90% retards economic growth by about 30%. This throws cold water on the conventional “spend now, worry about the debt later” mantra, along with the frequent claim that “we can grow ourselves out of the debt” now popular on both sides of the aisle in DC.
President Biden has pitched a number of corporate and individual tax increases, but he’s already had to back off on some of the taxes due to political pressure. That means most of this borrowing and spending will continue to be paid for through an inflation tax that will hit us as the Federal Reserve monetizes this massive debt. That means more bond purchases and more money printing. In fact, this is already happening.
The Consumer Price Index is exploding. The Federal Reserve continues to insist that inflation is “transitory” and nothing to worry about. Following the Fed’s lead, a lot of people in the mainstream seem to believe the Federal Reserve will tighten monetary policy, raise interest rates, and even taper its bond-buying program to fight inflation. But the question remains: how does the Fed tighten when it has to monetize trillions in debt? How can an economy built on borrowing and spending function if interest rates rise?
Simply put — it can’t.
It seems almost certain the massive budget deficits will continue into the foreseeable future. That means the government will need to continue borrowing and it will need the central bank to keep its thumb on the bond market to make that possible.
The Fed had worked itself between a rock and a hard place. It has to print trillions of dollars to monetize the massive deficits. But that is causing inflation expectations to run hot. That is putting upward pressure on interest rates. But you can’t have rising rates when your entire economy is built on debt. The only way the Fed can hold rates down is to buy more bonds, which means printing more money, which means even more inflation. You can see the vicious cycle. At some point, there is a fork in the road and the Fed will have to choose. Step up and address inflation and let rates rise, which will burst the stock market bubble and collapse the debt-based economy, or just keep printing money and eventually crash the dollar.