Wednesday, January 26, 2011

CBO: Tax Cut Deal to Push 2011 Federal Deficit to $1.5T

After never exceeding ~ $400 Billion, the federal budget deficit surged well in excess of $1 Trillion during the financial crisis that hit the United States, and now we seem on a permanent path of this level as the economy requires easy money in the form of ultra low interest rates, lower and lower taxes, and higher and higher spending / stimuli, simply to keep going sideways.  [Nov 18, 2009: Minyanville - Our Economy is on Steroids]  It is impossible to tell how our underlying (organic) economy is doing without all these layers of supports....however considering record breaking assistance is only generating 3%ish type of growth, I don't think we want to know the answer.

This morning the CBO (Congressional Budget Office) reported that the "compromise" that the Dems and Reps passed in the closing moments of 2010 (remember compromise in our government means when both sides get what they want), pushed the CBO's estimate of the 2011 deficit from just over $1T to $1.48T.  To put this in perspective, when the economy was in near total freefall in fiscal 2009 (i.e. revenues were damaged as economic output was awful), the budget deficit was $1.42T.  That INCLUDED $142B for TARP... so essentially with 6% more revenue than we had in fiscal 2009 AND without the cost of TARP, we will a significantly higher deficit.  Pretty impressive work by Washington D.C.

I am chuckling as the financial infotainment TeeVee crew is clucking that this massive deficit will have the market worried.  Are you kidding?  As I've written countless times, the equity market loves bigger and bigger deficits because it takes from the future to give to today.  The market does not worry about implications years (or even quarters) in the future.  Long term is next week.    Do you think the market was 'worried' when every worker was given a 2% pay raise Jan 1, 2011 via the payroll tax deduction?  No, that will only spur consumption over and above what it would be.  More iPads to be sold! If payroll taxes were cut to 0%, it would have celebrated even more.  Who cares if the already empty Social Security lockbox became even more empty - that's a problem for another quarter, year, or decade.  Same goes for any spending program - I am just using the social security payroll tax as an example.  Any program (tax cut or spending increase) that draws money into the today from the tomorrow, is a reason for celebration on 'the Street'.  Indeed I think the market would celebrate annual $4T deficits - can you imagine how high GDP would be? Perhaps 6%!  So once more we are looking at an annual deficit of 10%ish of GDP.  Even as the "recovery" rolls on.

The 2011 figure reflects 3.1% GDP for the year, which is in line with the 3-3.5% a lot of economists' project.  Then in 2012 they see the deficit dropping to "only" $1.1 Trillion (again, half a decade ago $400B was a record), and then the figures drop dramatically because the CBO has to assume all the supports in the economy go away - i.e. the entire Bush tax package goes away.  Fat chance. :)  Hence, every projection post 2012 is useless and indeed I would not be surprised to see a package of aid to the states at some point in the next 18 months which will push up the '12 deficit as well.

Anyhow, nothing to worry about - I hear $400B will be cut from the deficit over the next 10 years aka $40B a year.  Woo hoo.

As amazing is despite all this whining about federal taxes by corporations and constituents, it's all dogma.  We want our cake and to be able to eat it too - tax revenue as % of GDP is at 60 year lows.
  • As a share of the economy, tax revenues in 2011 are projected to reach their lowest levels since 1950. The CBO projects that tax revenues will be 14.8 per cent of GDP in 2011, which would be 0.1 percentage point lower than in 2009.

Full report from the CBO here.

Highlights via Reuters:

  • The U.S. budget deficit this year will jump nearly 40 percent over prior forecasts, mostly due to the mammoth tax-cut package brokered by President Barack Obama and lawmakers last month, the Congressional Budget Office said on Wednesday.
  • The CBO said the fiscal 2011 deficit will hit $1.48 trillion, up from last August's $1.07 trillion estimate, which was crafted before Bush-era tax rates were extended at a cost of $858 billion.  "The United States faces daunting economic and budgetary challenges," the CBO said.
  • That tax-cut deal extended low tax rates for all Americans, renewed jobless benefits, gave workers a payroll tax break and let business more quickly write off investments, among other provisions.
  • In his State of the Union speech to Congress on Tuesday, Obama called for tackling the country's fiscal problems through tax reform and a five-year spending freeze for many domestic programs, which he said would save $400 billion over 10 years.
  • The CBO also said the U.S. economy will expand 3.1 percent this year and 2.8 percent in 2012, with real gross domestic product growing an average of 3.4 percent in 2013-2016.  (any projection past 18 months is a total guess)
  • CBO also said the $1.48 trillion deficit would be about 9.8 percent of GDP, up from 8.9 percent of GDP in 2010.
  • Greg Valliere, an analyst for investors at the Potomac Research Group, said of the significantly higher 2011 deficit estimate: "It's going to be difficult for the Republicans to complain about it because they were part of the deal in December" to extend tax breaks.  (don't worry - they will still complain...dogma is cool like that)
  • The jobless rate will gradually fall to 9.2 percent in the fourth quarter of 2011, 8.2 percent in the fourth quarter of 2012 and 7.4 percent at the end of 2013.  Only by 2016, in CBO's forecast, does it reach 5.3 percent, close to the agency's forecast of the what is considered a "natural" jobless rate.
  • Meanwhile, spending on expensive entitlement programs, including those that provide retirement benefits and healthcare for the poor and elderly will rise from about 10 percent of gross domestic product in 2011 to about 16 percent over the next 25 years, Elmendorf said.

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