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fiscal 2013

US Deficit Narrowed From Last Year On Record Revenue For October

According to the Monthly Treasury Statement, the US government reported a deficit of $91.6 billion in October. These figures were lower than the $102 billion deficit expected by economists surveyed by Bloomberg.

 

Revenues climbed 8.0% YoY to $198.9B (strongest October revenues to date), while outlays fell 4.5% YoY to $290.52.4B. As a consequence, the deficit decreased by 23.6% compared to last year at the same period.

 

 

Rising employment, house prices and a payroll tax increase supported receipts while budget cuts combined with lower unemployment-benefit payments restrained outlays. Last month, the Treasury said the shortfall in fiscal 2013 was 4.1 percent of GDP. In the meantime the Congressional Budget Office projected it will decline to 3.3% this fiscal year and 2.1% in 2015.

 

Note that October figures also improved due to a partial government shutdown during the first half of the month which was suspended Oct. 17. The agreement to reopen operations created a House-Senate conference committee with a Dec. 13 deadline to offer ways to resolve the fiscal disputes between the parties.

 

The October figures offer a 29-member congressional panel a little room to maneuver during talks on government spending for the rest of the fiscal year. House and Senate negotiators met yesterday as part of an effort to write a budget in the coming weeks and were somehow optimistic concerning a potential compromise.

CBO: US Deficit Could Only Reach 4% in Fiscal 2013

Yesterday, the CBO (Congressional Budget Office) published its Monthly Budget Review for August 2013. It shows that revenues have risen significantly in 2013 and deficit will be less than half as large as the shortfall in 2009, which was 10.1 percent of GDP.

 

More from CBO:

 

The federal government ran a budget deficit of roughly $750 billion for the first 11 months of fiscal year 2013, CBO estimates—a reduction of more than $400 billion from the shortfall recorded for the same period last year. Revenues have risen significantly, accounting for more than two-thirds of the decline in the deficit. The deficit for all of fiscal year 2013 is expected to be smaller than the 11-month figure, as revenues are likely to outpace outlays in September.

 

In this context, if September surplus is above last year at the same period ($75 billion), the annual deficit for fiscal 2013 could be close to the most recent CBO estimate which is $642 billion. Therefore, relative to the size of the economy, the deficit this year will reach almost 4% percent of GDP.

White House Trims Deficit Estimates

On Monday, The White House revised downward its forecast for budget deficit for the fiscal year that ends in September. The White House slashed its estimate to $759 billion, or 4.7% of GDP, from its April forecast of $973 billion or 5.3% of GDP. The 2013 fiscal year will be the first of President Barack Obama’s presidency without a deficit in excess of $1 trillion.

 

The new figures reflect additional revenues generated by the improving economy and take into account automatic, across-the-board spending cuts that the White House had hoped to avert. Nevertheless, the new estimate is still not as small as Congressional Budget Office (CBO) is predicting.

 

More from MarketWatch:

 

New White House estimates are showing a smaller budget deficit for the fiscal year that ends in September — but still not as small as congressional number-crunchers are predicting.
 
In its mid-session review, the White House’s Office of Management and Budget said the budget deficit for the 2013 fiscal year will shrink to $759 billion, about $200 billion less than predicted three months ago, as the economic recovery continues. That’s 4.7% of GDP.
 
Deficits are dropping thanks to both the improving economy, which brings in more revenues, and a tax increase on the wealthy that went into effect this year.
 
Obama and congressional Republicans have argued over how best to replace the sequester, but remain at loggerheads. Many in the White House reportedly see the end of this fiscal year as probably the last chance for Obama to scale back the sequester before the 2014 midterm elections.

State and Local Government Spending Should No Longer be a Drag from H2 2013

 1/ State and Local Government Spending have been a drag since Q4 2009

 

After the 2007-09 recession and a wave of federal stimulus funding, governors and mayors were forced to slash spending which had a negative impact on growth. According to the Bureau of Economic Analysis (BEA), since Q4 2009, their spending cuts have subtracted from national output in every quarter with only one exception (Q3 2012).

 

 

2/ Fortunately, a growing economy has led to higher tax revenues and surpluses for most states in fiscal 2013

 

An improving economy has led to more job creation and a rebound in housing prices and transactions which has supported tax revenues. Indeed, according to data compiled by the Rockefeller Institute of Government in Albany, New York, tax revenues for U.S. states grew about 9 percent in the first three month of this year compared to the same period in 2012, the biggest gain in nearly two years.

 

Moreover, a twice-yearly survey of state budgets conducted by the National Governors Association and the National Association of State Budget Officers notes that revenues have come in stronger than expected this fiscal year so that most states will be able to end fiscal 2013 with surpluses. The fiscal years of all states but four end on June 30.

 

The table below shows that in total, states will likely end this fiscal year with balances of $23.7 billion. Florida and Indiana will likely have ending balances of more than $2 billion. Massachusetts, Minnesota, New York, Ohio and Texas are expected to have surpluses greater than $1 billion. Finally, California, which faced strong difficulties during the crisis, should have a surplus of $785 million.

 

 

The survey also underlines that budget gaps should decrease significantly in fiscal 2013 and 2014:

 

“State revenue improvement and spending controls have helped to significantly reduce budget gaps in fiscal 2013. Eighteen states reported closing $33.3 billion in budget gaps in fiscal 2013. This compares with 27 states reporting $68.1 billion in budget gaps in fiscal 2012, and 31 states with $78.2 billion in budget gaps in fiscal 2011. Because of rising revenue collections and decreased spending demands compared to the pre-recession period, budget gaps are expected to decline further in fiscal 2014 with 13 states projecting $6.8 billion in budget gaps.”

 

Finally, the net mid-year budget cuts which is one of the most effective signs of fiscal stress is also expected to fall in fiscal 2013:

 

“One of the clearest signs of fiscal stress is net mid-year budget cuts, as these actions are evidence that states will not be able to meet previously set revenue collection forecasts. Eleven states enacted mid-year budget cuts in fiscal 2013 totaling $1.3 trillion, slightly less than the $1.7 trillion in mid-year budget cuts made in fiscal 2012.”

 

 

3/ It gives more room for officials to increase spending from H2 2013 (beginning of fiscal 2014)

 

As a consequence, the survey shows that officials are more confident to increase spending on infrastructure and education. Total expenditures are expected to increase by 4.1% in fiscal 2014.

 

“Modest state fiscal advancements are widespread with 42 governors recommending higher spending levels in fiscal 2014 compared to fiscal 2013.”

 

“Revised revenues estimates for fiscal 2013 indicate that states are in better fiscal position to increase spending for some program areas in fiscal 2014, particularly K-12 education which experienced significant reduction during the recession.”

 

“In fiscal 2014, general fund expenditures are projected to increase by 4.1%. Governors’ recommended budgets show general fund spending increasing to $728.0 billion in fiscal 2014, compared to $699.2 billion in fiscal 2013.”

 

4/ My view

 

Even if the survey also suggests that some risks remain as the federal government budget cuts or Medicare, the base case scenario is that state and local government spending should not be a drag in fiscal 2014 (starting in Q3 2013) which should support GDP.

 

Yet, I believe that states should be cautious at the beginning of the fiscal 2014 because the debate on debt ceiling should not be addressed by government before the end of Q3 2013. A real boost could take place in Q4 2013.