Not surprisingly, I have recently fielded a fair number of questions about the President’s so-called “One Big Beautiful Bill” (OBBB). In full disclosure, I have not read the entire bill nor do I intend to do so. From what I understand, the proposed legislation is something like 1,038 pages long.
As such, I doubt very many people, if any, have actually gone to the trouble of reading every single word on every single page. However, that hasn’t stopped a lot of folks from having sophisticated opinions about the proposed legislation. Actually, histrionic is a better choice of adjective.
One of the loudest complaints I have heard is that the OBBB is going to make a bad situation even worse when it comes to the Treasury’s annual budget deficits. My goodness. We are already running close to $2 trillion in shortfalls! We simply can’t afford to extend the current marginal income tax rates, increase the standard deduction and State and Local Tax (SALT) deduction cap, enhance the child tax credit and raise the estate tax exclusion to $15 million!
Can we?
I have only scratched the surface of what is included in those 1,000+ pages, but, no, we can’t afford to do such things. Come on. That is foolish talk. Washington has to start balancing the budget and paying down the massive pile of debt it has accumulated. As such, the government should actually be jacking up tax rates and squeezing as much blood out of the proverbial turnip as is possible.
Is my sarcasm coming across loud enough?
You see, Washington doesn’t really have a revenue problem. It rakes in a lot of money. Currently, it is on pace to collect $5.342 trillion this fiscal year. To put that number into perspective, that amount would make the Federal government the 4th largest economy in the entire world. Bigger than any of the other countries in the G-7: Germany, Japan, the UK, France, Italy and Canada.
That is a lot of money. Unfortunately, Washington spends even more, as in a ridiculous amount more.
- The Bureau of Economic Analysis predicts the Treasury will spend roughly $7.168 trillion this fiscal year. The first link in the above paragraph will take you to the table. That is a, get this, 47.4% nominal increase from Q1 2020’s seasonally adjusted annual rate. You read that correctly, a 47.4% increase. That is 8.07% when you annualize it, which would be a pretty smart return for most balanced investment portfolios.
- By comparison, the median 5-year growth rate in Federal expenditures going back to the Q1 2000 observation, was 31.8% through 1Q 2025. Had Washington maintained this level of spending over the past five years, the Treasury would be borrowing approximately $760 billion less this year
Of course, that assumes the current $5.342 trillion level of receipts.
Would you like some more math? Okay.
- IF Federal expenditures had only grown 2% more than the annualized CPI of 2.32% since Q1 2000, or 4.32% per year, this year’s annual budget deficit would be only $26.2 billion. You read that correctly, and I redid my math 2 times because I had difficulty believing it.
Put another way, IF the Treasury had only grown expenditures at a 2% real growth rate from Q1 2000 through Q1 2025, we probably wouldn’t even be discussing the budget deficit. It just wouldn’t be a major concern, or even a minor one for that matter.
Of course, we can argue as to why the government has grown so exponentially in recent years, but it wouldn’t change one basic fact: We have to grow the economy much more rapidly than we have been. Anything less than 3% simply isn’t good enough. Regardless of the marginal tax rate scheme, the math will never work at those levels.
No? Well, consider the following. Over the last 50-years, “U.S. Treasury Federal Budget Yearly Total Receipts as a Percent of GDP” has averaged 17.05%. The annual observation is pretty consistent with a standard deviation of only 1.15%. Now, how many changes to the tax code have we had since 1974? Various marginal income tax rate schemes? Credits for this and/or that?
Plenty.
So, here is the drill. IF the Treasury plans to spend $7.168 trillion, the only surefire way of balancing the budget is to grow the economy from $29.977 trillion (Q1) to $42.043 trillion. This assumes Federal tax receipts equal the 50-year average of 17.05%. At one standard deviation to the right, 18.2%, we would have to grow Gross Domestic Product to $39.387 trillion.
Sure, we would have our work cut out for us, but it wouldn’t be impossible:
- We would just need a 5.6% annualized nominal growth rate over the next 5-years.
- If inflation averages, say, 2.5%, we would have to grow the economy 3.1% in real terms
- AND hold expenditures constant at the current eye-watering levels.
To be sure, there would be some economic discomfort for a lot of folks. A real loss of purchasing power for many. Stasis in the defense budget at the exact wrong time. All of it. Unless, of course, Washington decided find some ‘savings’ elsewhere in order to not have to make the more painful cuts.
Could it come up with roughly $200 billion per year for five years in savings to offset the impact of inflation? This while getting out of the way of the private sector so it can grow at a 3.1% real rate over that time frame?
You see, when you chop away at it, it isn’t impossible. We simply have to want to do it. However, continuing to grow the Federal government budget 8.1% per year simply isn’t an option. I don’t care about the excuses, reasons or what have you. Bad things will eventually happen IF we don’t get spending under control.
To that end, do you want your pain served up to you in smaller doses over the next half-decade? Or would you like it dumped on you all at once at some undetermined point in the future? Intuitively, the latter will hurt a lot more.
In conclusion, for all the talk of the OBBB, we need to focus primarily on what will grow the economy AND keep spending somewhat under control. That is all that matters when it comes to growing the economy and balancing the budget.
So, don’t pay any attention to the histrionics. We’ve got this under control IF we want it.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.