US Government revenues are heading to a $1 trillion deficit

October 18, 2018

 Fiscal Year 2018 for the U.S. ended in September with a deficit of $779 billion in the federal budget.

 

The deficit grew approximately 17% in a year over year comparison. The deficit for fiscal year 2017 was $666 billion.

According to forecasts made by the Trump administration and other analyst, the deficit is now on a pace that could end in $1 trillion before the next presidential election.

 

The treasury department said on Monday that the deficit is due to a decline in corporate tax revenues caused by the Trump tax cuts while members of Trump’s administration attribute the deficit to more federal spending (like the military increased budget).  

 

 Ironically, while personal tax collections had a slight rise month to month, there was a significant reduction from the corporate tax revenues, Trump lowered the tax rate from 35% to 21%. 

 

 

 

The deficit for fiscal year 2018 is the largest since 2012 when the U.S. was recovering from recession. 

 

 Source: US Department of Treasury

 
What the numbers reflect is that contrary to what Trump said, the tax cuts his administration made are not raising revenues more that it’s loosing. Even though the unemployment rate is in a record low, government revenues are decreasing rather than increasing as Trump administration estimated.

 

They started by the premise that the rest of the economic activity would compensate the billionaire tax cuts. From another perspective, the issue is that even though if there were more flow of money entering, it’s less than what the government would have received if the tax cuts weren't implemented.  For instance, government revenues in 2015 grew 7.5% but in 2018 it only grew 0.4% in a “particularly bright moment”, as the fed said by rising interest rates, it is not solid enough to conclude that the tax cuts were effective, at least in the short term.

 

As for Puerto Rico, because of the political status and bond it has with the U.S., it exists a high correlation between the economies. Not only the political status and what that implies, the imports and exports are highly dependent on the U.S. and therefore, the trade war initiated by Trump will have an impact on Puerto Rico. Not only direct trade relations with the U.S. but with other countries like Mexico and Canada, Puerto Rico's top imports come from those countries involved in the trade war. This implies a raise in prices (inflation) and as consequence a direct impact in the natural way of being of an economy. Higher prices implies less consumption in a moment were the income is lowering in Puerto Rico. This makes it more difficult to recover from the delicate economic status the island was left after hurricane María.

 

For more analysis please contact us at info@economiapr.com!

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