from Follow the Money

40% y/y growth is hard to sustain

August 5, 2005

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Budget, Debt, and Deficits

Regular readers know that I am convinced that the pace of Chinese export growth will slow.   That is a bit at odds with parts of the conventional wisdom.  There is a widespread sense that China is the future of (almost all) manufacturing.

However, I just don't see how Chinese exports can keep growing at 30% y/y (or more

At the end of 2004, China exported about $590 billion of goods.  If this year's 30% plus growth is sustained, that total rises to $770 b.  If that growth continues, China's 2006 goods exports will top $1 trillion.  And if 30% growth continues in 2007, China's exports rise to almost $1.3 trillion.  

To keep its trade surplus from ballooning beyond reason, China's imports would have to rise as well - something that is a bit at odds with this year's trend, along with the trend inside China to replace imported components with Chinese made components.

Something will give.   It is hard to know precisely what, but it is safe to assume something will. 

US corporate tax revenues are growing even faster than Chinese exports.  According to the CBO, they are up over 40% y/y in 2005.  That is one big reason why the US fiscal deficit is falling; higher than expected revenues from individual income and capital gains taxes are the other.

There are several reasons why this happened:

  • Corporate profits are rising as a share of US GDP.  See DeLong's great post on oil profits, and corporate profits more generally.  
  • A tax break that helped keep corporate taxes low in 2003 and 2004 expired.  Yep, the deficit is falling in part because the Bush Administration raised corporate taxes.
  • And the low tax rate this year on repatriated profits no doubt is generating a one off boost to US tax revenues.  Previously untaxed profits of US firms held overseas came home to take advantage of the US government's special offer.

It is safe to assume that the special circumstances that generated 40% y/y growth in tax revenues won't last.

The increase in "withheld" income and payroll taxes in 2005 has not been nearly as impressive.   Year to date revenues (05 v 04) are up only 6%, and they were up only 4% if you compare July 05 with July 04.   That is not enough to keep up with ongoing spending increases.

However, overall income tax revenue is up by 14.5% or so.  Lots of people had to make big payments in April.   More bonus income?  More people getting caught up in the AMT, which is gradually undoing some of the Bush tax cuts?  Or a one off surge linked to capital gains from the stock market rally and the surge in housing prices?

It will be interesting to see the CBO's updated 2006 revenue forecast, due in a few weeks.

One other nugget.  The fastest growing component of spending?   Interest on the US debt.  Up 13% y/y.  A still growing stock, and higher short-term rates.

With about 1/2 of all Treasuries held abroad, that will spillover into the US balance of payments.  Japan is gonna earn more interest on its Treasury holdings this year than last.  The average rate the US pays on its external debt also will start trending up, after several years of trending down.    Over the past few years, falling rates have helped to mask the impact of a rising stock.  No more.

More on:

Budget, Debt, and Deficits