Digging a Deeper Budgetary Hole

Most Americans dread April 15. That’s when we all have to pay the fiddler — or more specifically, Uncle Sam. If you don’t get your tax check in on time, you may get a knock on your door someday from the IRS.

In Washington, though, April is a time to break out the champagne. It’s usually a windfall month for the Federal Treasury, with big budget surpluses the norm as money floods in.

But a strange thing happened this year. For the first time since 1983, the Treasury ran a DEFICIT in April. It racked up $20.9 billion in red ink. That was worse than economists were expecting … worse than the Congressional Budget Office had forecast … and a huge, huge shift from a year earlier, when Treasury recorded a SURPLUS of $159.3 billion.

Borrow, Spend,
Borrow, Spend …

What happened? Simple. Uncle Sam spent money he didn’t have!

There wasn’t any champagne popping in Washington on April 15 as Treasury officials saw the first deficit since 1983.

Government spending surged 17.5 percent year-over-year, while revenue plunged 34.1 percent. You don’t need a Ph.D. in economics to know that’s a recipe for disaster.

The budget deficit for the current fiscal year is now running at $802.3 billion. That compares to $153.5 billion this time last year. In other words, we’ve ALREADY dug a budget hole that’s more than five times as deep as the one in 2008!

The Obama administration and many economists say we have no other choice. They say the $184 billion in TARP money we’ve already shoveled into the banking system this year was money well spent. And they say that the $787 billion economic stimulus package was absolutely essential to keep the recession from getting even worse.

But let me ask you two simple questions:

1. Do you really think we can keep this up forever?

2. Does it really make sense that foreign lenders will continue to underwrite this borrowing and spending bonanza?

What’s more, does Washington really expect us to keep buying the story that budget conditions will get better soon? I sure hope not, because the latest numbers show the exact OPPOSITE is happening.

The administration was just forced to raise its 2009 budget deficit estimate to $1.84 trillion, up 5 percent from the outlook it shared just two months earlier. And the 2010 deficit estimate jumped 7.4 percent to $1.26 trillion. This means we’re running a deficit equal to a whopping 12.9 percent of the U.S. economy … the highest in 64 years!

And more red ink lurks on the horizon as …

Medicare and Social Security
Pressures Continue to Build

Even if you discount the recession … even if you take Treasury and the Fed at face value and assume they’re right about an economic recovery … our long-term budget challenges just continue to grow. Heck, look at the news on Medicare and Social Security that hit the tape this week.

The latest annual report from the programs’ trustees forecasts that Medicare’s hospital insurance trust fund will run out of money in 2017. That’s two years earlier than they had estimated just a year ago. Social Security reserves could run out by 2037, earlier than last year’s projection of 2041.

This week, seniors were told that Social Security and Medicare will run out of money sooner than expected.

The problem, of course, is that we have fewer people working and paying taxes while the cost of providing benefits is skyrocketing. Meanwhile, politicians keep TALKING about solving this problem somehow. Yet they aren’t actually DOING anything. Republicans. Democrats. It doesn’t matter. They’re all complicit!

I keep harping on these budget points because I’m convinced they have longer-term implications for the economy and interest rates. Investors may already be starting to rebel, in fact. The latest $14-billion auction of 30-year bonds bombed. Bidding was relatively weak and the Treasury had to offer much higher-than-expected interest rates to get buyers to step up to the plate.

Hopefully some semblance of budgeting sanity will return to Washington … before it’s too late.

Until next time,

Mike

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