Steven Engelhardt

I read a number of stories about the decrease in the U.S. Deficit today, such as this and this ($), and I decided to bypass the imperfect filter of the news media and go directly to the source: the U.S. Treasury Preliminary Statement of Budget Results for Fiscal Year 2006. I decided to ignore any budgetary estimates and deal only with the final numbers. Here’s what I found:

In short, since total receipts went up by $253.4 billion while total outlays went up by $182.3 billion (all figures in nominal dollars), the total federal budget deficit shrank by about $71 billion. Therefore, an impressive surge in total revenues significantly outpaced the growth of total spending, which was still up a fair amount.

While the total federal budget deficit is an important figure, as it tells us how much money the Federal Government must borrow through the sale of Treasury bonds to the public, it is only part of the larger picture. A number of programs (currently, the Social Security Trust Fund and the U.S. Post Office) are separated into their own entity which isn’t considered part of the official federal budget. These programs are called “off-budget”, and the remaining programs are called “on-budget”. There are legitimate reasons for these entities to be put off-budget, and both the on-budget and off-budget budgets (heh) should independently be in balance over the long term. Let’s see what the numbers look like now:

Therefore, $60 billion out of the $71 billion (or approximately 85%) of the improvement in the federal deficit is attributable to an improvement in the state of the on-budget budget. However, the off-budget programs are still subsidizing the on-budget ones to a remarkably large degree. The off-budget surplus is, of course, by design — most of the surplus is from Social Security tax overpayment in an effort to prefund the retirement benefits of Baby Boomers, with the expectation that the on-budget budget will “pay the money back”. To do this, the on-budget budget must transition from the current, $434 billion deficit to a significant (probably around $200 billion) surplus.

In short, the FY 2006 budget news is a welcome improvement largely due to an unexpected increase in on-budget receipts, but there is a very long way to go.

More analysis of the FY 2006 budget to come.

Bill Miller, manager of the $19 billion Legg Mason Value Trust fund, has posted returns better than the Standard & Poor’s 500-stock index 15 years in a row — a legendary run known in the industry simply at “The Streak.” No one else in the $8 trillion mutual-fund business is even close. Manu Daftary, manager of the Quaker Strategic Growth Fund, is second, with eight years of outperformance. But this year, Mr. Miller’s fund is down 3.6%, putting it 12% behind the S&P on a total-return basis, according to Morningstar (Mr. Daftary’s run is also in jeopardy; his fund is 6.4% behind the S&P). While Mr. Miller has made strong end-year runs in the past (last year’s big Google holding helped the fund edge past the benchmark at the last minute), it’s looking increasingly unlikely that he’ll do so this year.

MarketBeat: Where’s the Soda Pop? The Wall Street Journal 12 Oct 2006.

While I may have concerns about index investing, it remains extremely hard to consistently outperform an index.