A Look At The Ministry of Finance Japan Draft 2016 Budget

One year has passed and Japan has not deteriorated as many analysts predicted. The Japanese stock market has gone up 10% since last year, the yen has been flat against the U.S. dollar, the Japanese housing market is rebounding, real GDP is at 1% and people who invested in the Japanese bond market didn’t lose any of their money.

I mentioned in a previous post last year that Japan’s situation wasn’t that bad at all. The current account was improving, the budget deficit was contained, bond yields were falling and I said that the benefits of the restart of the nuclear reactors was going to boost the economy of Japan. Well, two of the 48 nuclear reactors have been restarted and many more are going to be restarted as approvals are underway. With this in mind, let’s see how the fiscal situation will look like in 2016.

Go here for the analysis.

Interest payments as a percentage of tax revenue: Fiscal Year 2013

As fiscal year 2013 passes by we note that the interest payments as a percentage of tax revenue has declined over the past year (Chart 1: red line). The number came in at 13% and wasn’t due to a decrease in interest payments.

Chart 1: Interest Payments

 As a matter of fact, the interest payments went up this year due to higher debt and higher interest rates (Charts 2 and 3).

Chart 2: U.S. Debt Vs. Interest Payments

Chart 3: 10 Year U.S. Bond Yield Vs. Interest Payments

The reason why we see a decline in the interest payment to tax revenue ratio is because of the huge increase in tax revenues the government received this year (Chart 4).

Chart 4: U.S. Government Tax Revenue

This was all due to a tax increase at the start of 2013 (Chart 5: blue line), which plunged the savings rate (Chart 5: red line) of households.

Chart 5: Tax Revenue Vs. Savings Rate

All in all a pretty positive year for the U.S. budget.

The question is, what can we expect from the coming year? The projected tax revenue is going to follow this trajectory according to the Federal Budget. This is more than enough to pay for the increase in interest payments due to higher public debt and higher interest rates. It will all depend on what Janet Yellen will do. If she decides to increase QE, we might see even lower interest payments due to lower interest rates.

Chart 6: Projected Revenue

Budget – Trade – Current Account Deficit

It can be interesting to watch how the budget deficit, the trade deficit and the current account deficit evolves over time. As I said before, deficits are inversely correlated with the currency value. Ever since 1970, the U.S. dollar decreased in value as deficits went up. The following chart gives the annual budget – trade – current account deficit.

The budget deficit (yellow chart) is a measure of how much the federal government is spending more than it receives. The budget deficit = Federal government spending minus Federal government receipts. We currently have an annualized $1 trillion budget deficit.

The current account (BOPBCA) (green chart) is simply a measure of how much money is flowing out of the country compared with how much is flowing in from foreign sources.

The balance of trade (BOPGSTB) (red chart) is the biggest part of the current account. It measures the value of what we sell overseas minus what we buy from overseas. The U.S. trade deficits started since 1970, when the U.S. started to import a lot of oil and consumer goods.

Pentagon Slashes 6% of Workforce

As a follow-up on this post, where I pointed out that the debt ceiling is taking its toll on the workers at the Pentagon, today we were notified that of the 800000 employees at the Pentagon, 46000 will be terminated as of today. Although this is but a small percentage (6%), it still points out that the budget of the U.S. is in trouble.

If the March deadline on $50 billion budget cut isn’t resolved, Pentagon employees will have to work 1 day less each week from that day onwards.

The moral of the story is that money is critical for the defense sector of a country. No money means no security.

Analysis of Deficits to Outlay Spending Ratio

I already talked about how the U.S. budget deficit is skyrocketing in this article. Reason was that outlay spending has outpaced government tax revenues since 2008.

I decided to make another chart of this going to the early 1980’s. As James Turk stated, when governments start to borrow more than 40% to fund their outlay spending, then we have come to a hyperinflationary scenario.

To see what this chart means, go to: the full version of this article.

Chart 1: Deficits (+)/Surplus (-) versus Outlay Spending Ratio