Kelly Evans
I am tickled that so many people enjoyed the math behind higher interest rates. So let's press on, shall we? Why not tackle the deficit?
This becomes especially important amid novel, but probably futile, efforts by the Department of Government Efficiency to cut $2 trillion from the federal budget. And here's why.
Federal net outlays totaled $6.75 trillion this past fiscal year, which ended September 30th. Receipts from taxes and so forth only totaled $4.9 trillion. The result? A $1.8 trillion deficit.
To put this in context, we often compare the size of the deficit to the size of the total economy. As the Congressional Budget Office points out, last year's deficit rose to 6.4% of GDP, which is "greater than the 50-year average of 3.8%, and has been exceeded only six times since 1946."
And the problem is that every time we run deficits, we have to borrow (issue Treasury debt) to cover the shortfall. When we do that, the total amount of debt rises. We've now hit $35 trillion in government debt, compared with $20 trillion when Trump first took office in 2017. A bigger debt pile then means it costs us more each year to pay interest, which then further increases the deficit.
Conservatives argue for cuts to government spending in order to close the deficit. They have a point; government spending as a percent of GDP has risen from 17% in the late 1990s to 23% as of the last fiscal year. Democrats are more in favor of tax hikes to raise revenues, and they also have a point; federal receipts as a percent of GDP were nearly 19% in the late '90s, and only 16% last year (which they blame on Trump's tax cuts).
Voters chose a GOP sweep, which means spending cuts are likely to remain the focus for closing the deficit (along with hopes that a stronger economy will raise tax revenues). But just look at this breakdown of government spending, and you'll see the challenge. Here are the big four (or five, if you separate Medicare from "Health") line items in the federal budget. We'll go off the freshest data we have from the new fiscal year that began on October 1.
Money Report
1) Medicare (itself 13%) plus Health (Medicaid, CHIP, and, to a lesser extent, Obamacare subsidies), for a combined 28% of expenditures;
2) Social Security, 21%;
3) Defense, 18%; and
4) Net interest payments, 14%.
That's 81% of government spending, right there. Or nearly $5.5 trillion annualized of a $6.75 trillion budget. So even if you cut all of the rest of the major line items--Veterans benefits, Transportation, Agriculture, Unemployment and Housing aid, and so forth--you would still only save $1.25 trillion.
And even if you interpreted Elon Musk and Vivek Ramaswamy's hopes in terms of $2 trillion in cuts over a ten-year period, it's still hard to see how you cut $200 billion a year from this budget. Although Medicaid could be one such target, Evercore's Sarah Bianchi told us yesterday. And shares of the biggest publicly traded player, Centene, hit a 52-week low on Wednesday.
The defense contractors, like Lockheed, are also trading a bit cautiously. And shares of other big government contractors, like Booz Allen, have slumped 16% post-election. But I talked to a friend who works at Booz, and she noted that past efforts to slash government spending have actually resulted in more outside contractors, to keep people off the federal payroll.
So, you see the difficulty. How do you cut Medicare without raising the eligibility age, or raising taxes? One proposal is to stop paying hospitals more than other providers for services, which CRFB says could help save around $150 billion (and just seems to make sense). Shares of the biggest publicly traded system, HCA, are down about 10% post-election.
As for Social Security, that's kind of its own animal. It appears as government spending, although much of the disbursement is from taxes that workers have paid in over the years. It's not exactly "cuttable" as a line item, although it would shrink if benefits shrank in future years. The most relevant point here is that its shortfall contributes to higher government debt, and its budget drain could accelerate when its accumulated trust fund runs out next decade.
So who knows? Maybe with AI, we can simply save 10% across the board! But even that only gets you to $675 billion a year, and wouldn't close the deficit. You can see why this remains a top concern in markets, as long-term yields remain elevated--and why it's a mission that perhaps only the man who can land a rocket between "chopsticks" can even hope to accomplish.
See you at 1 p.m!
Kelly
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