Fiscal 2019 Deficit Through October

The U.S. government started a new fiscal year on October 1, 2018, which will end on September 30, 2019. The federal government overspent by $98 billion in October. The chart below compares the monthly deficit or surplus for the current fiscal year with Fiscal 2018.

Congress has yet to agree on a budget for Fiscal 2019, nor have they passed all of the required spending bills. To keep the government operating until after the November election, Congress passed a Continuing Resolution (CR), which temporarily funded the government until December. The CR effectively puts the government on autopilot until Congress can pass the necessary fiscal legislation.

The preliminary estimate is the U.S. government will overspend by nearly $1 trillion this year. The deficit may be higher or lower, depending upon the final agreement reached by Congress and the President. Since fiscal issues were not a major campaign issue during the 2018 election cycle, don’t expect Congress to make any significant changes that will reduce the deficit.

How concerned are you that the U.S. government will overspend by nearly $1 trillion this year?

Broken Process = Bad Results

If you’re concerned about the continued rise in the federal debt, you’re probably not very pleased with the spending bill that recently passed Congress. The $1.3 trillion spending plan, only covers about 25% of total federal spending. The U.S. government spends another $3 trillion for what is classified as mandatory spending (e.g. Social Security, Medicare, Medicaid, interest on the debt). 

Although there are a lot of aspects to increased spending, the process is a contributing factor. As one Representative opined, “Nothing good comes from legislation passed at the deadline.” Members of Congress know that last-minute, must-pass legislation is an opportunity for a lot of pork-barrel spending.

Congress has a budget and spending process but hasn’t followed it for years. The process begins with a proposed budget by the President in February. Congress then passes it’s own Budget Resolution by May, followed by 12 different Appropriations (spending) bills, that can be enacted before the beginning of the fiscal year on October 1.

For the current fiscal year, Congress didn’t pass its Budget Resolution until November and just passed the spending bill in March; nearly 6 months after the fiscal started. Instead of passing 12 different spending bills, everything was rolled into one massive 2,200+ page bill, that was passed within 24 hours of being written. 

Following the process doesn’t guarantee a balanced budget or reduced spending. However, Congress’ failure  to follow its budget process is helping to drive increased federal spending.

Do you agree the broken process is leading to bad fiscal results?

Fiscal 2018 Deficit through December

Below is a graph comparing the monthly deficit for Fiscal 2018 with Fiscal 2017.

The preliminary December deficit was $26 billion, which is $1 billion less than December 2017. The cumulative deficit for the first three months is $20 billion more than the prior year. Revenues for the first quarter have risen by 4%, but expenditures have risen by 5%. 

Since Congress has yet to finalize the spending for Fiscal 2018. The final appropriations bills could reduce spending and shrink the projected deficit, or they could increase spending and enlarge the deficit.

Do you expect the current year deficit will be larger or smaller than last year?

A New Year - A New Budget

If you're like a lot of people, you create a budget at the beginning of the new year. Budgets are a great way to manage your finances. Putting your income and expenses down on paper can help you better understand how much margin you have in your spending, or if it looks like you're going to come up short. Budgets may not account for every expense or event that may happen, but they are effective financial tools to help you understand your financial obligations, establish priorities and manage your cash flow.

The U.S. government also has an annual budget. However, its fiscal year starts on October 1 rather than January 1. The budget resolution is passed by Congress but doesn't require the signature of the President. The federal budget establishes the guidelines, and the specific spending is determined by separate appropriations bills. 

Although Congress has a budget and spending process, it rarely follows it anymore. Congress didn't pass the Fiscal 2018 budget until November, and none of the appropriations bill have been passed, even though we're more than three months into the current fiscal year. Congress has passed short-term continuing resolutions to keep the U.S. government from shutting down. 

Budgets can be useful financial tools, if used effectively. Individually, budgets should be more than an exercise you conduct at the beginning of the year. You should periodically review and update your budget to check your progress. For the federal government, it should pass a budget and the related appropriations bills before the start of the fiscal year, rather than after several months have passed.

How effective would you rate the federal government's budget process?

U.S. Budget Deficit through November

Below is a graph tracking the monthly federal deficit for Fiscal 2018, which runs from October 2017 through September 2018.

The federal government overspent by $198 billion in October and November. This compares to the $181 billion deficit through November 2017. Revenues and expenditures both grew at 6% over last year. Since annual expenditures exceed revenues by $600 billion, the cumulative deficit is greater than last year.

Congress has yet to pass the required appropriations for Fiscal 2018, and current spending is determined by temporary funding measures. The current shot-term Continuing Resolution ends January 19, 2018.

Do you think the spending measures approved by Congress will increase or decrease the budget deficit for this year?

The Fiscal 2017 Deficit

The U.S. government's fiscal year ended on September 30, and a new year began on October 1. The Congressional Budget Office (CBO) estimates the Fiscal 2017 deficit was $668 billion, which is $81 billion more than Fiscal 2016. A year ago, the CBO was projecting the Fiscal 2017 deficit would be less than Fiscal 2016, not $81 billion more. The chart below compares the monthly deficit or surplus to the prior year.

Total government revenues increased by 1%, but expenditures increased by nearly 3%. As a percentage of Gross Domestic Product (GDP), the Fiscal 2017 deficit was approximately 3.5% of GDP, up from 3.2% in Fiscal 2016. It's also the second consecutive year the deficit rose as a percentage of GDP, which indicates government spending is growing faster than the U.S. economy.

We're already two weeks into the new fiscal year, and Congress is still a long ways from deciding on government spending for the coming year. To prevent a government shutdown, Congress approved a Continuing Resolution, that effectively continues all Fiscal 2017 spending until mid-December. Since it's unlikely Congress will enact the necessary monetary legislation until close to the deadline, spending for nearly one-fourth of the year will be equal to or greater than last year. Unless Congress enacts spending cuts (which it has been unable to do so far), they have created a situation where the Fiscal 2018 deficit will likely be higher than the most recent $668 billion deficit.

Are you concerned the federal government spent $668 billion more than it received during the last year?

Mandatory Spending - Not Necessarily

Congress essentially classifies federal spending as either discretionary or mandatory.

Discretionary spending is not fixed or guaranteed and is subject to annual appropriations. Since it's discretionary, in theory anything can be added or eliminated. In practicality, only a small percentage of discretionary spending is actually subject to change. Consider regulatory agencies like the Food and Drug Administration (FDA) or Securities and Exchange Commission (SEC). These agencies might make some changes by adding staff, eliminating programs or shifting resources, but they can't dramatically alter operations every year. Therefore, most discretionary expenditures are somewhat fixed.

Mandatory spending doesn't require annual appropriations and is essentially on auto-pilot. The spending is typically based on some eligibility criteria and it expenditure is made as long as the criteria is met. Social Security, Medicare and Medicaid are the three largest types of mandatory spending. Although Congress treats mandatory expenditures as beyond of their control, all mandatory spending can be changed or eliminated by passing new legislation. For example, Congress can raise the age of eligibility for Social Security retirement benefits from 67 to 70 by passing a new law, which would cause Social Security spending to decrease for the year. Politically it may be difficult, but it can be done.

Although nearly two-thirds of all current federal spending is classified as mandatory and on auto-pilot. Congress has the Constitutional power to change any and all federal spending, if they choose; both discretionary and mandatory. In short... Congress controls all spending and balancing the budget may not be easy, but it can be done.

Status of the Fiscal 2017 Budget Legislation

As described in the prior post, Congress is supposed to pass a Budget Resolution followed by 12 separate Appropriations Bills. With one week left before Fiscal 2017 starts, the status of the 13 different pieces of legislation is outlined below.

• The Budget Resolution - Passed out of the House Budget Committee on March 16, 2016. It has not been voted upon by the entire House of Representatives or the Senate.
• Agriculture - Passed by the House and Senate Committees by May 19th but not voted on by either Chamber.
• Commerce/Justice/Science - Passed by the House and Senate Committees by April 21 but not voted on by either Chamber.
• Defense - Passed by the House on June 16 but Senate twice rejected a cloture motion required to vote on the House bill.
• Energy and Water - Passed by the House and Senate but waiting on a Conference Committee to reconcile the differences.
• Financial Services - Passed by the House on July 7 but no vote by the Senate.
• Homeland Security - Passed by the House and Senate Committees by May 26 but not voted on by either Chamber.
• Interior and Environment - Passed by the House on July 14 but no vote by the Senate.
• Labor/HHS/Education - Passed by the House and Senate Committees by July 14 but not voted on by either Chamber.
• Legislative Branch - Passed by the House on June 10 but no vote by the Senate
• Military/Veterans - Passed by the House and Senate, but three times Senate rejected a cloture motion required to vote on the conference report reconciling the differences between the House and Senate versions.
• State/Foreign Affairs - Passed by the House and Senate Committees by July 12 but not voted on by either Chamber.
• Transportation/HUD - Passed by the House and Senate Committees by May 24 but not voted on by either Chamber.

Although the required legislation is in different stages of the process, Congress is 0-13 with one week before the start of a new fiscal year. The Senate is already making preparations for a Continuing Resolution to keep the government from shutting down on October 1.

We'll provide more updates next week.

The Budget Process-As It's Supposed to Work

Congress has established a process for how the budget process is supposed to work. However, this process has not been followed for years.

Below is a quick synopsis of the process.

• The President delivers his proposed budget between the last Monday in January and the first Monday in February.
• The Congressional Budget Office (CBO) scores the President's proposed, which estimates the projected revenues and expenditures and the CBO results are compared to the estimates prepared by the Office of Management and Budget (OMB)
• The House and Senate pass a Budget Resolution outlining the revenue and spending priorities of Congress. As a Congressional Resolution,  the President does not sign the Budget Resolution.
• Congress passes 12 separate Appropriations Bills authorizing the specific spending by the various Departments and Agencies of the U.S. government.

The last time Congress passed all 12 appropriations bills on time was in 1994. For the last 20+ years, they have consistently used omnibus spending bills and continuing resolutions, where they combine more than one appropriations bills (or all of them), into one piece of must-pass legislation, to fund the government. 

Is it possible there is a correlation between the departure from the established budget process and the increase in annual budget deficits?

The next post will provide a status overview of the Fiscal 2017 budget and appropriations bills.