Lower FY09 Deficit, But Higher Deficits FY10 and Beyond

Sometime soon, probably on August 18th, the President’s Office of Management and Budget will issue its Mid-Session Review of the Budget. No one has the numbers yet, but a consensus has emerged among Wall Street economists who follow the budget that the Fiscal 2009 deficit will come in about $200 billion lower than OMB’s $1.841 trillion estimate of last May and that the Fiscal 2010 may come in slightly worse than OMB’s $1.258 trillion. There are a lot of cross currents here. OMB’s estimates will reflect the economy as it looked through June, and that was considerably worse than they assumed last spring. Therefore, weaker revenues and rising outlays for unemployment insurance, Medicaid, and interest expense on the public debt will add to the deficit, but reduced spending on TARP than was previously assumed and $70 billion of TARP repayments have reduced the deficit by an even larger amount. The Fiscal 2010 estimate is likely to rise because of higher than forecast unemployment will produce weaker revenues and higher outlays.

The Congressional Budget Office will report its Summer Update on August 25th. Its economic assumptions are likely to remain somewhat weaker than OMB’s, and so it’s deficit estimates should continue to be slightly worse as a result.

Last Wednesday, Treasury said Congress would have to raise the $12.104 trillion debt limit in the fourth quarter.

Last Monday, Treasury announced it will borrow $406 billion of marketable debt during the third quarter, $109 b. less than it estimated in April, and that it expects to borrow $486 billion in the fourth quarter. Treasury also announced, partly at the behest of China, that it will expand its offerings of Treasury Inflation-Indexed Securities (TIPS) and will consider replacing the 20-year TIPS with 30-year TIPS. It will announce any changes on November 4th. Last weeks talks with China reportedly featured reassurances by President Obama and Treasury Secretary Geithner that we would address out worsening deficit outlook without resorting to inflating our way out of it. If, at any point in the future, China begins to purchase less U.S. debt, out interest rates would be forced up as a consequence, endangering our fragile recovery.

About Pete Davis 99 Articles

Affiliation: Davis Capital Investment Ideas

Pete Davis advises Wall Street money managers on Washington policy developments that affect the financial markets. President of his own consulting firm since 1992, Davis Capital Investment Ideas, he draws on 11 years of experience as a Capitol Hill economist with the Joint Committee on Taxation (1974-1981), the Senate Budget Committee (1981-1983), and Senator Robert C. Byrd (1992). He worked in the House and Senate, and for Republicans and Democrats.

Davis brought the first computer policy model, the Treasury Individual Income Tax Model, to Capitol Hill in early 1974, when he became a revenue estimator on the Joint Committee on Taxation. He formulated the 1975 rebate, the earned income tax credit, the 1976 estate tax rates, the 1978 marginal tax rates, and the Roth-Kemp tax cut. He left Capitol Hill in 1983 for the Washington Research Office of Prudential-Bache Securities, where he advised investors for seven years.

Davis has long written a newsletter on the Washington-Wall Street connection for his clients; Capital Gains and Games is his first foray into the blogosphere.

Visit: Capital Gains and Games

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