US: Treasury Budget

Tue May 12 13:00:00 CDT 2015

Consensus Consensus Range Actual Previous
Treasury Budget - Level $153B $138B to $155B $156.7B $-52.9B

The Treasury's surplus in April, the biggest tax month of the year, came in slightly higher than expectations, at $156.7 billion vs the Econoday consensus for $153 billion. By comparison, last year's April surplus was much smaller at $106.9 billion.

Individual income taxes, which make up 49 percent of the government's receipts, are up a year-on-year 12.9 percent now 7 months into fiscal 2015. Corporate taxes, which make up only 9.3 percent of receipts, are up 11.8 percent. Driven by strong tax receipts, total receipts are up 8.9 percent.

But the gain is offset in part by a 6.4 percent gain in spending which is the larger side of the ledger. Medicare, up 8.2 percent, is rising the most sharply followed by net interest payments. Defense spending is down 3.0 percent year-on-year.

The gain in April tax receipts has pulled the Treasury's gap lower relative to fiscal 2014, at minus 7.7 percent vs plus 6.3 percent in the March comparison.

Market Consensus Before Announcement
The Treasury budget for April, the biggest tax month on the calendar, is expected to show a surplus of $153 billion, which would be well up from $107 billion last April. Higher tax receipts, however, are being offset by higher spending on Medicare. The government's budget gap for March, 6 months into the fiscal year, was 6.3 percent higher than a year ago.

The U.S. Treasury releases a monthly account of the surplus or deficit of the federal government. Changes in the budget balance of the annual fiscal year (which begins in October) are followed as an indicator of budgetary trends and the thrust of fiscal policy.

The budget data have several direct and indirect meanings for the financial markets. The most direct relationship lies between the size of the budget deficit and the supply of Treasury securities. The higher the deficit, the more Treasury notes and bonds the government must sell to finance its operation. From there it's simple supply and demand -- if demand is constant but the supply of bonds goes up, the price goes down. The same is true if the deficit falls or is eliminated altogether -- the government needs to sell fewer Treasury bonds, so the supply drops and the price of T-bonds rises. In the past few years, the budget deficit has increased dramatically, and this has put more Treasury securities into the market place.

The Federal government borrows money through the issuance of Treasury securities; so higher deficits mean a larger supply of securities and (again, assuming constant demand) lower prices. With notes and bonds, lower prices are equated with higher yields, so in this example, the government borrows money at higher interest rates. That impact ripples across all other interest rate-bearing securities and creates a higher interest-rate environment for stocks, which is bearish.

In addition to following the trend in the budget deficit or surplus, investors can gain valuable insight to the state of the economy by looking at the government's tax receipts. Higher tax receipts lead to an improved deficit situation when economic conditions are strong; conversely, lower tax receipts reflect a sluggish economic environment.