Markets & Finance

An April Shower of Tax Revenue


All the daily data for receipt of tax payments by the U.S. Treasury for the key month of April are now available, and the results speak for themselves: By our estimates at Action Economics, April receipts soared at a 15% year-over-year rate. This is well in excess of the 2% year-over-year growth in outlays, which were depressed by a "pull ahead" of some spending into March because of calendar effects.

The April data signal that the fiscal 2006 U.S. budget deficit is on track to reach the vicinity of our $270 billion forecast, despite official and market forecasts that are all nearly $50 billion to $150 billion higher. A shortfall of this magnitude in the U.S. budget deficit from official forecasts by the Congressional Budget Office (CBO) happens with remarkable consistency in healthy "middle years" of business expansions, and it's happening again.

For those who don't pay U.S. taxes, April is when Americans "settle up" for the previous year, and so receipt data in this volatile month removes most of the uncertainty for each year's budget-deficit forecast. We still don't have the official monthly figures, but the daily data imply that we saw an April Treasury surplus that could reach $100 billion, and that we more conservatively peg at $95 billion.

With only five more months to go in the fiscal year, it will now be hard to reach the CBO's $337 billion figure, and all but impossible to reach the $423 billion gap projected by the Office of Management and Budget (OMB). At this point, if our April projection is correct, the CBO would need to see the U.S. economy hit a brick wall to reach its fiscal 2006 and fiscal 2007 receipt estimates.

NORMAL RANGE. As we frequently note, the U.S. budget deficit is not nearly as large as is perceived by most critics, and the fiscal 2006 figures will make that point particularly clear. Last year's $319 billion budget deficit was 2.6% of GDP, which is fairly normal relative to gyrations in the U.S. budget deficit over the last five decades, and which is small by current international standards.

In fiscal 2006, the gap will fall to 2.1%, and we expect a 1.6% gap next year. Note also that state and local governments in the U.S. run surpluses, so the "combined" budget deficit needed to make international comparisons is even smaller than the above percentages by a few tenths.

The CBO may not fully revise downward the official $337 billion deficit estimate until we get closer to the final fiscal-year month of September, as it seldom shifts its forecast with the April data as much as we think reasonable. The OMB is usually even slower to respond, and will likely stick with its oversized $423 billion forecast through spring.


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