The monthly government budget release is typically a pretty sleepy one. I know, because I'm sitting there at 2 p.m. Eastern most of the time, watching markets shrug it off--even as the numbers have climbed higher and higher over the years.
Yesterday was different. Not because there was a huge immediate reaction, although we did see the 10-year rise a few basis points when the report crossed. It's because the numbers are just getting so big, and this worrisome news came right after the equally worrisome CPI report that had already sent yields higher.
So what did we learn? That the January U.S. budget deficit came in much higher than expected, at $128 billion, driven by a nearly 30% increase in spending year-on-year, and only a modest increase in receipts. For this fiscal year, which began in October, the deficit has already hit $840 billion--versus $530 billion a year ago, which was already a dire outcome.
We ended last year with a $1.8 trillion deficit. We are now at $2.1 trillion on a rolling 12-month basis. So yes, there were some one-off reasons for the extra-large January deficit this year--specifically, February payments were logged in January because Feb. 1 fell on a weekend, as the Committee for a Responsible Federal Budget explains. But even if February "normalizes," the underlying trend shows the new administration clearly has its work cut out.
Treasury Secretary Bessent has a stated goal of reducing the deficit to just 3% of GDP. Right now, the rolling 12-month deficit is at more like 7.3% of GDP, as CRFB estimates--which would be the largest non-emergency deficit we've ever had.
As if on cue, House Republicans released their draft budget yesterday morning, following their colleagues in the Senate. This "fiscal blueprint" aims for $4.5 trillion of tax cuts over the next decade (or technically, eight-and-a-half years)--offset by between $1.5 to $2 trillion of spending cuts. If they can't hit the $2 trillion figure, the plan notes, then their tax cuts should be "reduced by a commensurate amount."
The budget hawks are not thrilled. CRFB believes the plan would result in nearly $4 trillion of additional debt by 2034, on top of the $36 trillion we already have. And they project the deficit in 2034 would still be running at 6.5% of GDP, more than double Bessent's stated intent (although the primary deficit, stripping out the cost of paying interest on the debt, is about half that).
Money Report
Republicans themselves think the picture would be brighter, thanks to stronger economic growth projections. But even hitting 2.8% annual GDP growth, as their plan assumes, would result in a 5.6% deficit a decade from now, CRFB notes--still a big number.
Remember--each year we run deficits, that has to be financed by issuing more debt. Each new dollar of debt has to have interest paid on it. And because rates are high, those interest payments are now one of the biggest sources of annual government spending, which makes it harder to close the deficit. You can see the "doom loop" people worry about.
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So what do we do? I'd keep an eye on some of the other chess pieces, like Federal Reserve Chair Powell mentioning on Capitol Hill yesterday that the Fed could loosen its supplemental leverage rule, which would free up bank balance sheets to hold more Treasuries, as BMO's Ian Lyngen notes. That could help bring more buyers into the Treasury market.
Also--watch gold. Its price keeps hitting fresh record highs as investors speculate that global central banks are turning to a de facto "gold standard" in lieu of the Treasury standard that has prevailed in recent decades.
All of which is to say, while "DOGE" is creating plenty of concern about unfettered cuts to government programs, the market's real concern is that the U.S. needs to do far more to rectify its debt and deficits. This is Republicans' chance to see how far spending cuts can really go. Otherwise, as my colleague Brian Sullivan wrote this morning, "it's going to be very, very difficult to afford this without huge tax increases on the middle class."
See you at 1 p.m...
Kelly
