Yesterday’s release of the Congressional Budget Office’s “Monthly Budget Review” covering the first eleven months of Uncle Sam’s current budget year is an ideal time to preview what I expect will be the Obama administration’s and the establishment business press’s three big fiscal fables going into this fall’s elections.
Fable 1. The annual budget deficit is down.
This is true only if one ignores the impact of a mighty convenient $115 billion non-cash accounting entry made back in March. There’s more background here for those who are interested in the nitty-gritty, but my in-a-nutshell, plain-English assessment made at the time it was disclosed will suffice for now:
… the administration pushed as much “bad news” (TARP asset writedowns) as it could into last year’s financial reporting, since last year (fiscal 2009) was going to be a disaster no matter what. But since they overdid it with the writedowns last year (“Gosh, how did that happen?”), they can make this year (fiscal 2010) look better than it really has been.
That the entry had to be made in fiscal 2010 essentially proved that fiscal 2009 outlays were overstated by $115 billion. At the same time, the entry worked to reduce current year outlays by the same amount.
Here is how the first eleven months of fiscal 2009 and 2010 would have looked if TARP asset writedowns had been properly estimated last year and had not required offsetting correction this year:
After adjustment, the administration’s claimed spending and deficit reductions turn into increases of roughly 5% and 10%, respectively. Imagine that.
Fable 2. The increase in federal receipts reflects a recovering economy.
Yes, receipts are up, but as seen here from the CBO’s report, they don’t reflect improved tax collections:
The only reason receipts are up is because of the red-boxed item labeled “Federal Reserve.” Through August, CBO estimates that the Fed remitted $40 billion more to the Treasury than it did through August of last year. Meanwhile, its estimate of combined tax collections in the three named categories above were down by $15 billion.
A supposedly improving economy has not led to increased tax collections. One could argue that the continued decline in overall tax collections demonstrates that the economy isn’t really recovering.
Fable 3. Year-over-year spending is down.
That’s way wrong, as seen in the graphic that follows, after adjusting for the $115 billion item noted earlier:
Federal spending is way up across the board. One of the biggest offenders (not visible in the graphic) is the Department of Education. Through July (final August details aren’t available, and won’t be until Monday), DOE spent over $80 billion, up from “only” $42 billion through July of 2009.
Beyond that, there is the red-boxed line item labeled “Payments to GSEs.” This represents payments to insolvent Fannie Mae and Freddie Mac (Fan and Fred), which are down $42 billion from last year. Though quarterly losses at Fan and Fred have narrowed, it’s a little hard to believe that these in-essence bankrupt behemoths aren’t in need of a lot more cash than has been disbursed to keep their doors open, especially given that foreclosures are still rising.
The administration may be holding back on payments to Fan and Fred to make this year look less bad. This suspicion will become the default assumption if especially large payments go out to these entities in October or November after the 2010 fiscal year ends.
Beginning in October, the question will then be: “How will this administration play around with the numbers to make fiscal 2011 look better, or worse, depending on perceived political advantage?”