The Congressional Budget Office (CBO) reported a June budget surplus for the federal government, which is typically a positive month. Here are a few points from the release:
- Federal receipts rose 8.8% y/y led by a pickup in individual income tax receipts.
- Federal outlays rose a smaller 4.4% y/y. Spending on national defense and income security continue to contract. Additionally, net interest payments declined 1.2% y/y, partly because low inflation reduced the principal of TIPS.
- Fiscal year-to-date, the deficit totaled $313.4 billion, down 14.3% from the same period a year ago. The CBO projects a deficit of $468 billion this fiscal year.
A couple of key takeaways:
- Tax increases have been a big hit for the federal government. We would question why additional increases are needed when the growth rate is this high.
- Interest rates won’t stay low forever. Our debt has mushroomed in the last 7 years, but yet our interest debt service has declined. This has been a huge positive for the federal government and will not be repeated going forward.
In summary, the risks in our fiscal house have declined significantly thanks in large part to a substantial tax increase. The CBO still forecasts deficits into the foreseeable future, which is not good or sustainable. In effect, our politicians have borrowed some time to make some tough decisions. If they elect to go the easy route of increased taxes again to solve the problem this could spell trouble. A mix of controlling/constraining/cutting entitlements will be needed in our opinion.
One lesson from the Greek drama of the last few weeks…. debt works until it doesn’t.