Less jobs + lots more spending = massive May budget deficit

We're seeing just how big an effect the COVID-19 breakout and shutdowns are having on a US budget deficit that was already set to be huge. That was reiterated in the CBO budget review for May, which came out yesterday.

To no surprise, the tens of millions of job losses and reduced hours for employees means that less money went to Uncle Sam from (fewer) workers' paychecks.

Individual income and payroll (social insurance) taxes together decreased by $51 billion (or 24 percent). Most of that decline is attributable to a decrease in the amounts withheld from workers’ paychecks.

o Amounts withheld fell by $31 billion (or 15 percent) as a result of a decline in wages and because of recently enacted legislation. The CARES Act allows most employers to defer payment of their portion of the Social Security payroll tax and certain Railroad Retirement taxes on wages paid from March 27, 2020, through December 31, 2020. In addition, FFCRA provides refundable credits against payroll taxes to compensate employers for paid sick leave and for family and medical leave, and the CARES Act provides a refundable credit against payroll taxes for employee retention.

o Individual income tax refunds increased by $21 billion (or 140 percent), further reducing net individual income tax receipts. That increase probably reflects refunds that would have been paid in April if the Administration had not delayed the tax-filing deadline until July 15, 2020.

Corporate income taxes fell by $2 billion, reflecting a decline of $4 billion (or 60 percent) in corporate income tax payments, partially offset by a decrease of $2 billion (or 34 percent) in corporate refunds. CBO anticipates an increase in corporate tax refunds over the remainder of the year, resulting from the CARES Act’s temporary modifications to the treatment of net operating losses.

That’s a nice little back-door tax break for corporations to go along with the major drop in their tax rate due to 2017’s GOP Tax Scam ( it basically speeds up the ability to write off losses from past years). Let’s check back in a couple of months to see how much they’re cashing in from that provision.

The revenue loss accounted for around 22% of the increase in the adjusted budget deficit for May 2020 vs May 2019. The rest came from increased spending to combat all of these job losses to try to keep those millions of Americans (and the rest of the economy) afloat.

Outlays for unemployment compensation increased from $2 billion in May 2019 to $93 billion this year. More than half of that rise stems from a $600 increase in the weekly benefit amount provided under the CARES Act. Benefits for regular unemployment compensation rose as well.

Payments for refundable tax credits were $53 billion (compared with $3 billion in May 2019). That difference is attributable primarily to the CARES Act’s recovery rebates, which began to be paid in April and continued in May.

Outlays by the Small Business Administration increased from $98 million to $35 billion, primarily because of loans and loan guarantees to small businesses through the Paycheck Protection Program authorized by the CARES Act and PPPHCEA. (CBO estimates that payments for the program will total $670 billion during this fiscal year.)

Outlays for the Public Health Social Services Emergency Fund totaled $27 billion this May, compared with $250 million last May. Funding was increased by recent legislation to reimburse health care providers (such as hospitals) for health care costs or lost revenues resulting from the pandemic. The remaining amounts are available to develop countermeasures, vaccines, and technologies and to develop, purchase, administer, process, and analyze tests for COVID-19, the disease caused by the coronavirus.

As a result of all of these new moves over the last 2 months, we've seen the deficit blow up into record numbers, now exceeding $1.9 trillion year-to-date compared to $739 billion at the end of May in 2019.

Some of this gap is due to the fact that people had paid their taxes by May 2019, but don't have to do so until July 15 this year. But most of it is due to the stimulus checks, unemployment benefits and new programs in CARES and other programs to fight COVID-19 spending. This has resulted in spending nearly doubling over the last 2 months compared to April and May in 2019.

Lastly, there CBO budget report said May also had $5 billion sent out in grants to state and local governments to deal with the pandemic, $5 billion to bail out workers in the aviation industry, and $4 billion to pay for “equity investments in certain Federal Reserve facilities, which provide liquidity for a wide range of economic activities.”

That last item grabbed my interest. Put it together with the CARES stimulus checks, enhanced unemployment compensation, and all of the extra funding that was pumped out from the Fed itself, and there was a lot of extra money floating around in May. It seems logical that quite a bit of that funny money flowed into the stock market and other Bubbly assets, but let's see if the stimulus checks and unemployment benefits did the same to maintain consumer spending. In April that was not the case.

Now maybe reopening the economy induces a major increase in demand and we start seeing consumer spending resume near the levels we had in early 2020, but I wouldn’t bet on it. And I gotta wonder what happens when the spending faucet from DC gets cut off in the coming weeks, because there likely will still be millions of Americans who are not back at the income levels they have been accustomed to.