CBO finalizes the numbers for 2019, showing how GOP stimulus pumped up our deficit

Wanted to do a brief rundown of the CBO review of the numbers from the recently-completed 2019 Federal Fiscal Year, which came out this week.

Much of this we kind of knew before, but it’s nice to see the CBO put it in this detail. For example, the CBO shows how the US budget deficit has sprouted up since 2015 (the same year that Republicans took over both houses of Congress), and now takes up nearly twice the percentage of GDP as it did 4 years ago.

Moving into those receipt figures, individual income taxes were up for Fiscal Year 2019. But it didn’t have a lot to do with higher salaries leading to more being taken out of paychecks.

Change in individual income tax FY 2018 vs FY 2019
Withheld from paychecks +$3 billion
Payments of income tax to IRS +$8 billion
Reduction of tax refunds +$23 billion
TOTAL +$34 BILLION

That’s not a breakdown that’ll make the average American happy, and it means that a lot of people that might have had increased take-home pay in calendar year 2018 weren’t getting it back (or worse, paying it back) as they did their taxes in calendar year 2019. It’ll be intriguing to see what happens over these next 6 months to see if people adjusted to that new reality under the Tax Scam.

On the corporate side, the CBO said corporate taxes increased in 2019, but are still well below the levels that existed before the Tax Scam became law.

Receipts from corporate income taxes, the third-largest source of revenues, increased by $26 billion (or 12 percent) in 2019, rising from 1.0 percent of GDP to 1.1 percent. Those revenues as a percentage of GDP remain among the lowest recorded since 2009 and below the 50-year average of 1.9 percent of GDP. Those receipts include payments for activity in both the 2018 and the 2019 tax years.

In other words, you could nearly double the $230 billion in corporate taxes paid last year, and you’d be back to the normal level for the modern economy. Seems worthy to remember as elections loom next year.

The largest increase in federal receipts didn’t come from either type of income tax, but instead from payroll taxes that pay for items such as Social Security, Medicare and unemployment.

Receipts from payroll (social insurance) taxes, the second-largest revenue source, increased by $72 billion (or 6 percent), and increased as a share of the economy from 5.8 percent in 2018 to 5.9 percent in 2019, climbing just above the 50-year average of 5.9 percent. The increase in payroll tax receipts reflects higher wages and salaries and the reallocations made between payroll and individual income taxes described above, which reduced payroll taxes reported for 2018 and increased payroll taxes reported for 2019.

That being said, even with the slight increase in taxes compared to 2018, we actually had total federal revenues fall as a %of GDP to a multi-year low at 16.3%. On the flip side, spending is now at a multi-year high of 21.0% of GDP, and jumped above the long-run average.

On the spending side, the number leaped by more than 7% from FY 2018 (+$296 billion). This has been a contributor to higher GDP growth, one that “small government” Republicans don’t seem to want to talk too much about, as it’s helped to continue our current economic expansion into year 11.

The “Big 3” entitlement programs continued to play a role in this rise in spending, partly due to more Boomers getting Social Security, and because costs continue to go up for the medical programs.

Spending for the three largest entitlement programs—Social Security, Medicare, and Medicaid—rose by $56 billion (or 6 percent), $39 billion (or 6 percent), and $20 billion (or 5 percent), respectively. Social Security outlays grew because of increases both in the number of beneficiaries (1.7 percent) and in the average benefit payment (4.0 percent). Spending for the retirement portion of Social Security grew by 6.6 percent; in contrast, spending for the disability component grew by less than 1 percent. Medicare spending increased in part because of increased payment rates for beneficiaries enrolled in Medicare Advantage plans. Medicaid outlays have risen by 36 percent over the past five years, largely because new enrollees were added through expansions of coverage authorized by the Affordable Care Act. The annual rate of growth in Medicaid spending, however, has fallen sharply since 2015, when it was 16 percent. Combined outlays for the three programs exceeded $2 trillion for the first time, equal to 47 percent of federal spending and 9.9 percent of GDP in 2019.

But the entitlements weren’t the only areas of spending increases. In fact, the 53% of federal spending that is NOT related to those entitlements had a larger increase in spending ($199 billion vs $139 billion).

Out of that $199 billion spending increase, the rising deficits and debts in this country also played a role, and a decent chunk came from a Trumpian military buildup.

Given that another federal budget year needs to be hammered out (with a shutdown looming in less than 2 weeks), will those increases in non-entitlement spending continue? It seems likely, as higher spending was part of the budget outline that was agreed to in the Summer between the Dem-controlled House and GOP-controlled Senate, and Republicans do not want to put more brakes on an already-slowing economy.

Even without the added budget authority, the budget situation wasn’t great for the first month of FY 2020.

The government recorded a deficit of $133 billion in October, CBO estimates, about $33 billion more than the shortfall recorded in the same month last year.

And longer-term interest rates have notably jumped in the last month. Rising deficits and higher rates are not often a good combination for economic health. Stay tuned.