zondag 10 november 2013

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.

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