Conclusion: The U.S. Federal budget deficit sees little improvement with the December numbers reported today. The Congressional Budget Office’s estimates for the deficit will likely be going much higher when its new projections come out in the coming weeks.
Positions: Long the U.S. Dollar via UUP; Short 1-3YR Treasuries via SHY
While the U.S. budget deficit for December came in line with consensus at a deficit of -$80BN, the question is really whether consensus matters. As it relates to the budget deficits, we would argue that where the number comes in versus consensus is really irrelevant as compared to the degree of change sequentially and on a year-over-year basis. The key takeaway for the first three months of the federal budget year is that deficit issue is not getting better.
As it relates to the key line items for the first quarter of the fiscal year, this is what was reported:
- Expenditures continue to grow and for the first quarter are up 3% on a y-o-y basis;
- Net interest expense on debt is up 9.5% y-o-y and is now almost 7% of total government expenditures (we are seeing the negative impact of more debt and higher interest rates); and
- Finally, if we normalize for TARP, the overall deficit for the first quarter is -$372BN, which is an increase over -$369BN in the same period last year.
To be fair to the federal government, they offered that a number of timing issues that may be distorting this year’s numbers versus last year (calendar issues and the timing of insurance payments). From our perspective, we would expect these timing issues to normalize over the course of the year and have no real way of backing them out. Therefore, when we look at the numbers we normalize for 1-time payments or expenditures only, which in the case of our analysis are TARP and payments to GSEs.
A key take away from this report is that the Congressional Budget Office is going to have to take up its budget deficit projections for fiscal 2011. The last update on annual budget projections came in August of 2010 and fiscal 2011 was projected to have a budget deficit of -$1,066BN, which would have been more than ~ -$230BN less than the actual budget deficit in fiscal 2010, or a 17% improvement. Given that we are seeing minimal improvement in the deficit the CBO will likely have to dramatically take up its estimates for this year and perhaps the next couple years. The new estimates are expected to be released later this month and will be a catalyst to be focused on.
Just as a refresher, the current budget deficit projections for the next three years are:
- 2011 - $1,066BN;
- 2012 - $665BN; and
- 2013 - $525BN
These projections will be going higher, and likely dramatically so in the coming weeks.
This report and its implications that future estimates need to go higher will be coming at a very opportune time for Republicans in Congress who have made deficit reduction one of their hallmark issues heading into the 112th Congress. This report only adds more credibility to the case of deficit hawks like Ron Paul who will have the conch in coming weeks.
Daryl G. Jones