Is The Treasury’s Surplus In April A Good Sign For The Economy?

There was a report yesterday (May 10) that the US Treasury had recorded a surplus in April. This simply means the US government collected more taxes (receipts) than it spent (outlays). The total surplus amounted to $59 Billion, which was the first surplus recorded since September 2008 (over 42 months ago).

Now, as I talked in my last post about accounting identities, this means that if the Treasury (public sector) had surplus, someone had to have run a deficit. Presuming that the trade deficit (Foreign account) did not decrease significantly in April (We just got the data for March today and the trade deficit actually increased which likely means no jump in April), this must mean that the Private Sector as a whole, ran a net deficit. All that means is that the amount of Net Private Savings (Savings-Investment) went down.

Now usually, a Treasury Surplus would be a bad thing during weak economic times (especially now during a balance sheet recession), but given that this is only 1 month, I am not worried because the annual Treasury budget is going to still be a deficit. In fact, the treasury surplus can be a GOOD sign for the economy.

Why do I think a decrease in Net Private Savings (a public sector surplus) is a good thing? Is it because the US Government is finally “tightening its belt” and paying down its debt? No. That would be a drag on the economy and would weaken any mediocre growth we see.

Well, the reason why I see this as a good thing is because there was a MAJOR jump in receipts (taxes) collected. Now was this because taxes were raised? No. The “Fiscal Cliff” (The expiration of the Bush & payroll tax cuts) is next year and no tax rates were raised in April. Since no rates were raised and tax reciepts increased, this means that there was significant economic growth.

What actually caused the increase in receipts?

Below is a chart of the total Reciepts and Outlays, and on the side is the total Deficit/Surplus (click to enlarge).

 

There was a major  jump in receipts, an ~86% increase Month-over-Month (MoM). Now, the outlays saw a drop MoM (~30%), but there was no significant deviation from the trend like there was in outlays. The drop is probably just cyclical.

Now, to dig deeper. What was the specific reason for the increase? To find out I compared the March and April Treasury Statements, but specifically, I looked at classification breakdown of the Receipts.

  1. Individual Income Receipts  increased from 59K (in Millions) to 179K.
  2. Corporate Income Receipts  Increased from 24K to 28K.
  3. Social Insurance & Retirement Receipts (All sub-categories) Increased from70K  to 94K.
  4. Excise Taxes increased from 6.3K to 7.4K
  5. Estate & Gift Taxes increased from0.9K to 2.6K
  6. Customs Duties & Miscellaneous Receipts stayed stable at around 11K.

Below is a chart of the breakdown (Note: I’m pretty sure ‘Income Taxes’ means both Individual and Corporate).

 

 

 

 

 

 

 

 

 

 

Final Thoughts

Both Income and Social Security & Retirement receipts saw big increases in April, which contributed to the biggest one month collection since April 2008. Individual income can be defined as  Employment Income (Wages, Salaries, Other Earnings), Tips, Interest, Dividends & other distributions (like capital gains), Rent, Retirement Plans/Pensions & Annunities, Social Security (excludes SSI), and other income. Social Security & Retirement receipts are funded by FICA, SECA, and the Medicare HI tax. Since both of these type of taxes are linked pretty heavily to jobs, this means that there was more income paid (higher and/or just more) which is a good sign for the economy (because that signals idle capital is being transferred to labor via hiring and/or higher wages/salaries).

Now a couple of caveats. One month “does not a trend make”, so this could just be a hiccup. Also, April seems to be the strongest month of the year for receipts collected. In fact, April has been THE strongest month dating back to 1981 (except for in 1983, where it narrowly missed), so there definitely is some type of cyclical trend there.

Presuming that we see a continued strong trend in receipts collected this year, this will certainly be a positive sign for the economy going forward, even if that means smaller government deficits (which have been covering for the weak aggregate demand from the private sector as they deleverage).

Addendum
I forgot to state that the reason why the April receipts are so high is because of the tax deadline in mid-April. This is why April is the highest month usually. However, my point was that the jump this April was so significant/big, that there must have been some type of economic growth, since it was SO much higher than the previous months.

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