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09/12/2014

Budget Deficit Update

The other day the Congressional Budget Office updated its projections for the federal budget deficit. To wit:

“The federal budget deficit for fiscal year 2014 will amount to $506 billion, CBO estimates, roughly $170 billion lower than the shortfall recorded in 2013. At 2.9 percent of gross domestic product (GDP), this year’s deficit will be much smaller than those of recent years (which reached almost 10 percent of GDP in 2009) and slightly below the average of federal deficits over the past 40 years. However, by CBO’s estimates, federal debt held by the public will reach 74 percent of GDP at the end of this fiscal year – more than twice what it was at the end of 2007 and higher than in any year since 1950.

“Spending is expected to rise by about 2 percent this year, to $3.5 trillion. Outlays for mandatory programs, which are governed by statutory criteria and not normally controlled by the annual appropriation process, are projected to rise by about 4 percent. That increase reflects growth in some of the largest programs – including a 15 percent increase in spending for Medicaid and a roughly 5 percent increase in spending for Social Security. In contrast, CBO estimates, net spending for Medicare will increase by only 2 percent in 2014, and spending for some mandatory programs will fall; in particular, outlays for unemployment compensation are expected to drop by nearly 40 percent, primarily because the authority to pay emergency benefits expired at the end of December 2013.

“Discretionary spending, which is controlled by annual appropriation acts, is anticipated to be 3 percent less in 2014 than it was in 2013. Nondefense discretionary spending is expected to be about the same this year as it was last year, but defense spending is likely to drop by about 5 percent.” [Emphasis mine.]

Regarding this last bit, turmoil in the Middle East, for one, will preclude future cuts in defense spending (or cuts in the rate of growth), while sluggish economic growth would impact revenues. 

And these are but projections. For example, while the CBO says it has a handle on ObamaCare and its future costs, this really can’t be known with any certainty as yet. It could be better...or it could be worse. Interest rates are another critical item. Will they normalize, or, as PIMCO projects, will a “new neutral” mean rates well below the historic norm for years to come, which would be a positive in terms of lower interest expense on the federal debt?

U.S. Budget Deficit (billions; fiscal year ends 9/30) / Revenues-Outlays

F 2007... $160...$2568 / $2728
F 2008... $458...$2524 / $2982
F 2009...$1412...$2105 / $3517
F 2010...$1294...$2162 / $3456
F 2011...$1296...$2302 / $3598
F 2012...$1087...$2450 / $3537
F 2013... $680...$2775 / $3455

Updated Projections (Congressional Budget Office, August 2014)

F 2014... $506...$3006 / $3512
F 2015... $469...$3281 / $3750
F 2016... $556...$3423 / $3979
F 2017... $530...$3605 / $4135
F 2018... $560...$3748 / $4308
F 2019... $661...$3908 / $4569
F 2020... $737...$4083 / $4820
F 2021... $819...$4257 / $5076
F 2022... $945...$4446 / $5391

*The CBO is forecasting GDP growth of 3.4% for both 2015 and 2016. It also projects 3-month Treasury bills to rise from zero to an average of 2.1% in 2017, while the rate on 10-year Treasury notes is projected to rise from a recent average of 2.4% to 4.2% in 2017.

GDP is forecast to grow, on average, 2.2% between 2018 and 2024. The 10-year Treasury note will average 4.7% from 2018-2024.

Sources: Congressional Budget Office / Treasury Department

Wall Street History will return in two weeks.

Brian Trumbore

 



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Wall Street History

09/12/2014

Budget Deficit Update

The other day the Congressional Budget Office updated its projections for the federal budget deficit. To wit:

“The federal budget deficit for fiscal year 2014 will amount to $506 billion, CBO estimates, roughly $170 billion lower than the shortfall recorded in 2013. At 2.9 percent of gross domestic product (GDP), this year’s deficit will be much smaller than those of recent years (which reached almost 10 percent of GDP in 2009) and slightly below the average of federal deficits over the past 40 years. However, by CBO’s estimates, federal debt held by the public will reach 74 percent of GDP at the end of this fiscal year – more than twice what it was at the end of 2007 and higher than in any year since 1950.

“Spending is expected to rise by about 2 percent this year, to $3.5 trillion. Outlays for mandatory programs, which are governed by statutory criteria and not normally controlled by the annual appropriation process, are projected to rise by about 4 percent. That increase reflects growth in some of the largest programs – including a 15 percent increase in spending for Medicaid and a roughly 5 percent increase in spending for Social Security. In contrast, CBO estimates, net spending for Medicare will increase by only 2 percent in 2014, and spending for some mandatory programs will fall; in particular, outlays for unemployment compensation are expected to drop by nearly 40 percent, primarily because the authority to pay emergency benefits expired at the end of December 2013.

“Discretionary spending, which is controlled by annual appropriation acts, is anticipated to be 3 percent less in 2014 than it was in 2013. Nondefense discretionary spending is expected to be about the same this year as it was last year, but defense spending is likely to drop by about 5 percent.” [Emphasis mine.]

Regarding this last bit, turmoil in the Middle East, for one, will preclude future cuts in defense spending (or cuts in the rate of growth), while sluggish economic growth would impact revenues. 

And these are but projections. For example, while the CBO says it has a handle on ObamaCare and its future costs, this really can’t be known with any certainty as yet. It could be better...or it could be worse. Interest rates are another critical item. Will they normalize, or, as PIMCO projects, will a “new neutral” mean rates well below the historic norm for years to come, which would be a positive in terms of lower interest expense on the federal debt?

U.S. Budget Deficit (billions; fiscal year ends 9/30) / Revenues-Outlays

F 2007... $160...$2568 / $2728
F 2008... $458...$2524 / $2982
F 2009...$1412...$2105 / $3517
F 2010...$1294...$2162 / $3456
F 2011...$1296...$2302 / $3598
F 2012...$1087...$2450 / $3537
F 2013... $680...$2775 / $3455

Updated Projections (Congressional Budget Office, August 2014)

F 2014... $506...$3006 / $3512
F 2015... $469...$3281 / $3750
F 2016... $556...$3423 / $3979
F 2017... $530...$3605 / $4135
F 2018... $560...$3748 / $4308
F 2019... $661...$3908 / $4569
F 2020... $737...$4083 / $4820
F 2021... $819...$4257 / $5076
F 2022... $945...$4446 / $5391

*The CBO is forecasting GDP growth of 3.4% for both 2015 and 2016. It also projects 3-month Treasury bills to rise from zero to an average of 2.1% in 2017, while the rate on 10-year Treasury notes is projected to rise from a recent average of 2.4% to 4.2% in 2017.

GDP is forecast to grow, on average, 2.2% between 2018 and 2024. The 10-year Treasury note will average 4.7% from 2018-2024.

Sources: Congressional Budget Office / Treasury Department

Wall Street History will return in two weeks.

Brian Trumbore