US: Treasury Budget

Thu Jan 11 13:00:00 CST 2018

Consensus Consensus Range Actual Previous
Treasury Budget - Level $-36.0B $-54.0B to $-23.0B $-23.2B $-138.5B

The Treasury's deficit was increasing at the time tax cuts take effect. December's deficit came to $23.2 billion which is lower than expected but still enough to make for a 7.2 percent deepening to $225.0 billion three months into the government's fiscal 2018 year.

The income side of the balance sheet, up a year-to-date 3.9 percent to $769.5 billion, is already showing an 18.1 percent decline in corporate taxes ($62.1 billion vs $75.7 billion) that is an offset to a 10.8 percent increase in individual taxes ($390.8 billion vs $352.8 billion). It will interesting to watch the effect of the tax changes unfold through the year.

The outlays side, up 4.6 percent to $994.5 billion, shows a year-to-date 5.9 percent increase in defense spending ($166.2 billion vs $157.0 billion), a 3.4 percent increase in Social Security ($239.2 billion vs $231.4 billion), and a 15.6 percent increase in net interest ($84.0 billion vs 72.7 billion).

Market Consensus Before Announcement
Two months into fiscal 2018, the Treasury's deficit was $201.8 billion or 10.6 percent deeper than two months into fiscal 2017. The deficit for the month of December is expected to come in at $36.0 billion.

The U.S. Treasury releases a monthly account of the surplus or deficit of the federal government. Changes in the budget balance reflect Federal policy on spending and taxation. The government's fiscal year begins in October.

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.