Remember those optimistic deficit estimates from the White House, and the slightly less rosy projections from the Congressional Budget Office? Get ready for a major recalculation. Tax revenues fell drastically in April, the AEIR reports, a month which usually brings the most money into government coffers:
Federal tax revenue plunged $138 billion, or 34%, in April vs. a year ago — the biggest April drop since 1981, a study released Tuesday by the American Institute for Economic Research says.
When the economy slumps, so does tax revenue, and this recession has been no different, says Kerry Lynch, senior fellow at the AIER and author of the study. “It illustrates how severe the recession has been.”
For example, 6 million people lost jobs in the 12 months ended in April — and that means far fewer dollars from income taxes. Income tax revenue dropped 44% from a year ago. …
Big revenue losses mean that the U.S. budget deficit may be larger than predicted this year and in future years.
Time to break out the budget deficit projection chart again:
These projections were based on some very questionable assumptions, primarily that growth in 2009 would come it no lower than -1.2% of GDP. There isn’t a direct correlation between percentage of tax receipts and GDP growth, but a 34% drop indicates that the first part of the year has shown a lot of loss. The first quarter came in at an annualized GDP loss of -6%, which means that the next three quarters would have to show enough growth to get to that -1.2% GDP. Theoretically, it could happen, but the enormous loss of revenue demonstrates its remote possibility.
More directly, that $138 billion goes directly to the bottom line of the 2009 deficit number. Some loss had already been expected, but this is far worse than anyone imagined. Unless we get that sharp reversal, the gray bars on this graph will extend far below either CBO or White House projections, and that will further damage the credit of the US in bond markets. The debt Obama is incurring for his grand reorganization of American government will get more expensive, leading to higher debt-service payments in coming years, which will deepen these deficits even further. It’s a vicious cycle, one which has only one eventual outcome: default.