US: Treasury Budget

Wed Apr 11 13:00:00 CDT 2018

Consensus Consensus Range Actual Previous
Treasury Budget - Level $-$186.0B $-$207.0B to $-$180.0B $-208.7B $-215.2B

Corporate income taxes are falling at the same time that spending is going up. The result? A rising government deficit that in March just exceeded Econoday's deepest estimate, at $208.7 billion.

Looking at the 6 months so far in fiscal year 2018, the government's deficit continues to get deeper, at $599.7 billion which is 13.8 percent more severe than this time last year and is up from 11.5 percent in the February data.

Total receipts are up 1.6 percent over those six months with individual income taxes holding in the plus column, at a year-to-date 5.9 percent and offsetting a 22 percent decline in corporate taxes.

Total spending is up 4.8 percent led by 4.1 percent increases for both defense and Social Security and a 14 percent jump in net interest reflecting rising debt service expenses.

The monthly Treasury statement looks to be of increasing note this year, offering the first look at tax-cut effects and fiscal stimulus. Note that deepening in the debt can be offset by a narrowing in the trade deficit as well as by further increases in foreign investment inflow.

Market Consensus Before Announcement
The Treasury budget for March will update the effects of this year's tax cut which lowered both individual and corporate receipts in the first two months of the year. At $391 billion from October to February, the government's fiscal year-to-date deficit was running 11.5 percent deeper than the prior year. Econoday's consensus for March is calling for a large deficit of $186.0 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.