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fiscal 2014

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.

Fiscal Uncertainties Are Weighing on Companies’ Expectations

Last Friday, the House of Representatives voted (203-189) to approve a stopgap spending bill to fund the government through mid-December. Indeed, in order to extend the current government spending at the current rate and to avoid a “government shutdown” after September 30, Republicans-controlled House chose to attach a provision to dismantle President Obama’s health care law “Obamacare”.


However, the provision has no chance of approval as it will face a veto from President Obama in the Democrats-controlled Senate. Today, the Senate should begin to debate on the spending bill where Senate Majority leader Reid (D-NV) will reject the provision and will send the bill back to the House.


Nevertheless, even if Democrats and Republicans find a compromise on a temporary bill until mid-December, they will need to specify the 2014 budget. The fact is Democrats want to spend $1,058 billion for fiscal 2014 while the budget control acts sets spending caps at $967 billion ($109 billion of sequestration). Some want to meet the spending caps by allocating more on defense and less to civilian programs. Finally, some Republicans are asking for larger cuts to entitlement programs, to which Obama is unlikely to agree. The only good news is that, in the worse case, sequestration will not happen until January (after Congress holidays).


Moreover, concerning fiscal issues, some press reports suggest that House of Representatives will also try to vote on debt limit this week as the Treasury Department predicts the debt ceiling will be reached by mid-October. The legislation would seek to increase the debt ceiling until Dec-2014 and likely include approving the Keystone XL pipeline, reforming the corporate and households’ tax code, delaying “Obamacare” and eliminating the Consumer Financial Protection Board (CFPB). Remind that if Congress does not reach a deal to raise the debt limit, a default and/or debt downgrade could ensue.


Debates are already weighting on companies’ expectations. The BRT’s (Business RoundTable) third quarter CEO Economic Outlook Survey, released on September 18, show slightly more optimism about the economy with lower expectations for sales and capital investment. Note that the composite index fell to its lowest level since 4Q 2012.


 Source: Business RoundTable


 Source: Business RoundTable


The survey which included an additional question concerning the effects of political stelmate show that 50% of respondents indicated that the ongoing disagreement in Washington is having a negative impact on their plans for hiring additional employees over the next 6 months.


In this context, my view remains that growth could be sluggish at least until Congress validates the stopgap bill and raises the debt ceiling (mid-October/beginning of November). As a consequence, Fed policy will remain accommodative so that “tapering” will not start before December.

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.