uploads/2015/06/Monthly-Budget-Deficit-Surplus1.jpg

US Reports a Budget Deficit in May—Not a Cause for Concern

By

Updated

Deficit reported

The US budget deficit totaled $82.4 billion in May 2015. In April 2015, there was a budget surplus of $156.7 billion. A year ago, the budget deficit was $130 billion.

Surplus and deficit figures are released by the US Department of the Treasury in its MTS (“Monthly Treasury Statement”), which gives you an overview of the financial activities of the federal government and off-budget federal entities.

The MTS provides information on the government’s receipts and outlays, surplus or deficit, and the means of financing. A deficit occurs when the government’s receipts are less than its outlays.

Article continues below advertisement

Why is it important?

Knowing the budget balance is important because a large budget deficit increases the national debt. In these cases, a higher percentage of the country’s income is used for interest payments on the debt.

The budget deficit for the fiscal year ended September 2014 was $483.3 billion, or 2.8% of the GDP (gross domestic product). A fiscal year for the US Treasury begins in October and runs until September of the following year. In 2009, the budget deficit had run up to nearly 10% of the GDP.

In fiscal year 2015, the Congressional Budget Office expects the deficit to fall to 2.7% of the GDP, or $486 billion, according to a release in March 2015. This projection is higher than the $468 billion estimated in January 2015. So far this fiscal year, the budget deficit is ~$365.1 billion, 16.3% less than it was in the same period a year ago.

Details

The US budget balance has improved in 2015, as tax receipts have surged due to strength in the overall economy.

In May, most receipts—$85 billion—came from individual income taxes. That made up a significant portion of the government’s total $212.4 billion in receipts. The highest budget outlays were $83.9 billion spent on the Department of Health and Human Services, followed by $79.4 billion spent on the Social Security Administration.

Unlike some economic releases, a budget deficit has no direct impact on companies or ETFs. However, an increase in the budget deficit over a period of time signals worsening government finances, which isn’t good for the economy.

Though the US reported a budget deficit in May, its financial position was better than it had been in the previous year. A continued rise in tax receipts could help to reduce the deficit in the financial year ending September 2015.

Over the long run, government finances impact the equity markets, which affects broad-based equity ETFs including the SPDR S&P 500 ETF Trust (SPY), the SPDR Dow Jones Industrial Average ETF (DIA), and the iShares Core S&P 500 (IVV).

Goldman Sachs (GS), IBM (IBM), and 3M (MMM) make up ~20% of DIA and are the ETF’s top three holdings.

Fixed income ETFs including the iShares Barclays 20+ Year Treasury Bond Fund (TLT) and the iShares Barclays 7-10 Year Treasury Bond Fund (IEF) also track this report.

From the next article onward, let’s look at primary market activity related to Treasury bills.

Advertisement

More From Market Realist