US Government Runs Biggest May Budget Deficit in History

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by Peter Schiff, Schiff Gold:

If you were thinking federal government spending might slow down a bit after the national debt crossed the $22 trillion mark – well, it didn’t.

Last month, the federal budget deficit came in at $208 billion, according to Treasury Department data. It was the largest May deficit in history.

Uncle Sam spent $440 billion last month, up 21% year-on-year. Receipts increased to $232 billion, up 7% from May 2018.

There were some calendar effects that shifted about $50 billion in payments from June into May. Even so, the May deficit reflects a broader trend. The deficit for the fiscal year to date stands at $739 billion. That compares with $532 billion through the same period in fiscal 2018 — a 38.8% increase.

The current budget deficit is well ahead of Congressional Budget Office projections. The CBO estimated the 2019 budget deficit (government spending over revenue) would come in at $897 billion. That would be a 15.1% increase over the 2018 deficit of $779 billion.  (If you’re wondering how the debt can grow by a larger number than the annual deficit, economist Mark Brandly explains here.) According to the CBO, the deficit will hit $1 trillion by 2022 and remain at that level or higher through 2029. Keep in mind, the CBO tends toward conservative projections. At the current rate, the federal government may well run a $1 trillion deficit this year. In fact, the Treasury Department’s deficit projection for fiscal 2019 was higher than the CBO’s, coming in at $1.085 trillion.

Commentators tend to place the blame for surging deficits on Trump tax cuts, but spending is the biggest factor. For the first time in US history, the federal government spent more than $3 trillion in the first eight months of the fiscal year. Spending is up 9.3% on the year so far.

Although the economy is supposedly in the midst of a boom, US government borrowing looks more like we’re in the midst of a deep recession. The only other time the federal government has run deficits this high was during the four years from 2009 through 2012 when the Obama administration boosted spending to grapple with the 2008 financial crisis.

Meanwhile, revenues have risen modestly by 2.3%.

The boost in receipts last month came primarily from Trump’s tariffs. Gross tax revenues from corporations fell to $6 billion in May from $7 billion a year earlier.

As the debt spirals upward, the cost of servicing that debt goes up as well. Interest on the $22 trillion-plus national debt ranks as one of the fastest growing budget items.  Net interest payments totaled $268.3 billion last month, up 15.6% from a year ago.

Growing debt coupled with soaring interest payments creates a vicious upwardly spiraling cycle. As debt grows, it costs more money to service it. That requires more borrowing, which adds to the debt, which increases the interest payments — and on and on it goes. At the current trajectory, the cost of paying the annual interest on the US debt will equal the annual cost of Social Security within 30 years, according to a report released by the Congressional Budget Office last year.

The enormous US debt is an underlying reason why the Federal Reserve cannot normalize interest rates.

Republicans insist that tax cuts will eventually pay for themselves by generating faster economic growth But as we have said repeatedly, high levels of debt retard economic growth. Several studies estimate that economic growth slows by about 30% when the debt to GDP ratio rises to about 90%. The CBO projects the US will hit 106% debt to GDP ratio in the next decade, but many analysts say the US economy is already in the 105% range. Ever since the US national debt exceeded 90% of GDP in 2010, inflation-adjusted average GDP growth has been 33% below the average from 1960–2009, a period that included eight recessions.

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