US budget deficits returning

verfasst von Cosa, 25.05.2002, 17:28

Mal wieder der US-Staatshaushalt. Das Elend kurz zusammengefasst....

<font size="4">US budget deficits returning</font>

By Teis Knuthsen from SEB 05-24-2002

Summary.

Not only is the US budget returning to a deficit this year, we also believe that the budget will remain in the red in the years to come. This marks a return to normal practises, as budget surpluses have been the exception to the rule during the last 25 years. Combined with a return to potential growth and higher policy rates, the deteriorating fiscal position should push up bond yields from today's levels. We expect the debt ceiling issue to be solved before the US Treasury runs out of money in the second half of June.

Introduction.

Since the end of April the fiscal policy of the US has been an issue for financial markets, which have been reminded of the twin deficits (current account and budget balance) of the past. This note offers a review of recent events related to the fiscal situation and an outlook for the immediate future.

What do we know?

~ February 2002 - In the latest budget, the US government expects a deficit of $106bn in FY 2002 (1% of GDP), $80bn in FY 2003 (-0.7% of GDP), $14bn in FY 2004 (-0.1%) and a surplus of $61bn in FY 2005 (0.5%).
~ April 29, 2002 - The US Treasury says it expects to borrow $1bn Q2 2002, following lower than expected tax receipts and the stimulus package enacted in March. Earlier they expected a debt pay down of $89bn in Q2.
~ May 1, 2002 - Treasury announces that actual debt will be higher than the debt ceiling from mid-May. By the 2nd half of June additional borrowing capacity will be run down. The Treasury will work with Congress to permanently raise the debt ceiling by $750bn.
~ May 8, 2002 - White House budget director Daniels said in an interview that he doubt that the government will meet its original deficit-elimination target (in 2004).
~ May 13, 2002 - President Bush signs the Farm bill, with outlays amounting to $190bn.
~ May 14, 2002 - Treasury informs Congress that it will suspend or redeem investments in two trust funds, as the statutory debt ceiling will be exceeded from May 16. They repeated the message that congressional action is needed. Otherwise US risk default on their debt from the latter half of June.
~ May 15, 2002 - Treasury Secretary O'Neill before the Senate Finance Committee says that the budget imposes strict fiscal discipline, but that it will not guarantee fiscal surpluses."A strong economy is crucial to restoring surpluses."
~ May 20, 2002 - Monthly Budget Statement from the Treasury showing that the deficit in April 2002 was more than $120bn larger than a year earlier and that the annual budget balance show a deficit ($104bn) for the first time since December 1997.
~ May 21, 2002 - Moody's said that it is monitoring the US government's financial position for any indication that the failure to increase the Statutory Debt Limit would affect the government's ability to make timely payments on its debt obligations.

Dates to hold in mind.

On June 17 the Treasury will receive tax payments. The uncertainty regarding the amount to be received has increased the chances that additional measures than those announced on May 14, will be needed.

On June 28 the Treasury must credit interest payments to Social Security and other federal trust funds amounting to $67bn. This is not possible without an in crease in the statutory debt limit, according to the Treasury. Between July 1 and 3 the Treasury is scheduled to make other payments amounting to $54bn.

The Treasury says that lack of certainty by June 26 on how to fund these payments "challenge the Treasury's ability to ensure timely processing of payments".

The Treasury would normally announce on June 19 the size of the 2-year note auction scheduled for June 26. If the debt ceiling has not been raised prior to June 19 they need to delay the announcement or cancel the auction.

The debt ceiling issue will be solved.

The most likely scenario, according to the rating agency Moody's, is timely congressional action prior to there being any problems with payments, that is, before June 19. In addition the government has options on the expenditure side, such as closing the operations of certain agencies for a temporary period as occurred in 1996.

We agree with this scenario. The issue with the debt ceiling will be solved in one way or another, between political representatives from both legislative and executive powers. The play is with high stakes as mid-term elections to the Congress are up in November. In the end, no one will take the risk of being responsible for US defaulting on its debt and making payments impossible of benefits to Social Security recipients.

Future budget surpluses unlikely.

In the longer term the budget outlook is negative. In the last 25 years the US federal budget has shown a surplus only during the last 5-6 years, coinciding with a period of above-trend growth. The chart below shows a reasonable correlation between the"output gap" (calculated as a straight line fitted to the level of industrial production) and the annual Federal budget balance. The conclusion is that budget surpluses seem highly cyclical dependent.

An increase in industrial production by 10- 12% during the next 2-3 years is within reach. This is a rough estimate of what is required to balance the budget by 2004. However, without drastic measures on the income or spending side such an economic scenario will be met with a forceful response by the Federal Reserve.

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It is not easy to see how the budget situation may improve without the aid of a cyclical upswing. During the late 1990's the budget balance was better than could be expected from a growth perspective. This was to a large extent a result of a sharp increase in the income from personal taxes that again probably owes a great deal to excessive economic activity during that period.

The chance of tax hikes must be regarded as minimal and the pressure to increase spending and reduce taxes further is hard, both from the President and the Congress. For example, in June the House will vote on a Republican plan to spend $350bn over the next decade, nearly twice what the White House had sought. Democrats in the House and the Senate are considering a plan that could cost as much as $800bn. At the same time President Bush calls on Congress to make his tax relief plan permanent, which should provide a tax cut for all families who pay Federal income taxes. Our conclusion is that the budget is squeezed from all sides and is unlikely to show surpluses for years to come.

Conclusions:

~ The Federal budget will show a deficit in the years to come. This has been the norm during the last 25 years, except in times of extraordinary high growth. The general budget outlook in the US is now more alike the situation in UK, Germany and France.
~ The debt ceiling issue will be solved in one way or another before the US Treasury runs out of money in the second half of June.
~ The deteriorating fiscal position together with higher Fed fund rates should push up bond yields considerably from today's levels as growth returns to potential.
~ Market expectations of trend surpluses and a decline in bond issuance have been proven wrong. All other things being equal, the yield curve should steepen.
~ Currency markets are sensitive to the return of twin deficits on the government budget and the current account as such combination has proven to be bearish for the dollar.



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gesamter Thread:

• US budget deficits returning - Cosa, 25.05.2002, 17:28
  • Re: US budget deficits returning / Da muss ich Mal in die Wunde hauen..... - JÃœKÃœ, 25.05.2002, 17:34
    • Re: das wird noch spannend - Cosa, 25.05.2002, 18:11
      • Steht doch schon hier - Turon, 25.05.2002, 18:35
        • Re: Bush muss noch bluten - Cosa, 25.05.2002, 18:56
          • Ich denke - Turon, 25.05.2002, 19:23
    • Ab spätestens 28 Juni sind vermutlich shorts bei Gold und Silber angesagt - Turon, 25.05.2002, 18:33