Goldman Sachs is convinced the long-term US budget outlook is far worse than official projecti...
Goldman Sachs is convinced the long-term US budget outlook is far worse than official projections suggest.
The Congressional Budget Office (CBO) currently projects that the 10-year budget balance for fiscal 2004-2013 will be a surplus of $0.9 trillion. However Goldman Sachs' estimate is for a deficit of £4.2 trillion.
Analysts Bill Dudley and Ed McKelvey say this reflects both a worse starting point than the official projections and future changes in tax and spending policy not captured in the CBO estimates.
Not only is the long-term outlook bleak, Dudley and McKelvey say the near-term budget outlook has also deteriorated sharply. They estimate that the deficit is likely to climb to at least $375bn in fiscal 2003 and $425bn in fiscal 2004, above the CBO forecasts of $246bn and $200bn respectively.
They say their projections are higher because they anticipate the US economy will recover more slowly than the CBO estimates. The office's estimate is for real GDP to rise by 2.5% and 3.6% in 2003 and 2004 respectively. Goldman Sachs is predicting rises of just 2.1% and 3%.
Secondly, while the CBO is assuming no changes in tax or spending policies, Dudley and McKelvey believe there will be an enactment of a package of tax cuts and aid to state and local governments costing $40bn in 2003 and $120bn in 2004.
They also assume additional defence spending of $50bn and $30bn over the two respective years for costs associated with the war in Iraq and the subsequent occupation of the region.
Finally, while the CBO assumes that much of last year's large shortfall was temporary, they assume that the persistent deterioration in the equity market will result in another shortfall in tax revenues in the spring.
Gil Knight, manager of the Govett US Opportunities fund, has also lowered his US GDP estimate for 2003, from 3.3% to 2.7%. He says the economy was slowing in the first quarter of the year and the war with Iraq will affect the second quarter. However, he is looking for the second half of 2003 to prove more robust.
He adds the near-term estimates for the budget are currently high because Bush is setting $100bn-$125bn aside for the war with Iraq. He adds that if the war goes on longer than expected this will rise further and, assuming a US-coalition victory, money will also have to be spent rebuilding Iraq, pushing the budget up further.
Knight says: 'Looking further ahead, the fact that Congress was able to curtail Bush's tax cuts programme is a good thing for the budget deficit. They were able to halve what he originally wanted.'
Dudley and McKelvey say that much of the deterioration in the long-term budget outlook can be avoided through careful tax and spending decisions.
Unchecked, they argue this deterioration will lead to higher interest rates and lower capital formation, harming the US economy's long-term performance.
They say: 'The key issue is not whether the public balance will worsen, but how it does. Our choice would be to forego further fiscal stimulus. In that case, the economy would be weaker, which would push up the federal budget deficit.'
Congress curtailed Bush's tax cuts.
Second half of 2003 may prove more robust.
Fiscal loosening will provide stimulus.
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