Download Economic Insights Isn`t it ironic? US public finances and the debt

Economic Insights
Isn’t it ironic? US public finances and the debt ceiling
February 2014
Earlier in February the Congressional Budget Office (CBO) announced that the federal budget
outlook would continue to improve in 2014, with the federal deficit projected to fall from
US$680 billion in the fiscal year 2013, to US$514 billion in fiscal year 2014 — its lowest level
since President Obama took office in 2009. To give a sense of context, the deficit that year
totaled a record US$1.4 trillion.
Michelle Shwarzman
Senior Economic Analyst
This positive news should bode well for the upcoming debt ceiling debate. The US officially
reached the debt ceiling on 7 February 2014, and the Treasury Department is currently
implementing “extraordinary measures” to allow the federal government to keep meeting its
obligations. However, given the backlash from the way the previous efforts to raise the debt
ceiling were handled, combined with the positive CBO outlook, the perceived political benefit to
waging the type of debt standoff that we’ve seen in the past is small. It’s more likely that we’ll see
a quieter resolution to the issue.
There’s some irony to this. When the economy is doing poorly, the deficit generally grows,
attracting the type of public and political attention that encourages the political brinksmanship
we’ve witnessed surrounding the debt ceiling since 2011. But it is also the time during which it
is most difficult to make headway on fiscal issues. When economic growth rebounds, while the
opportunity to make comprehensive reforms may exist, the public becomes more sanguine and
politicians less motivated to act. To be clear: That action should not take the form of a standoff,
but rather comprehensive dialogue and long-term thinking.
The good news
In its February report, the CBO credited higher tax revenues and slower spending growth for the
narrowing deficit in 2014. Specifically:
• Revenues are expected to increase 9% in 2014 to US$3 trillion (17.5% of GDP) as a result
of changes in tax provisions that were adopted last year, including expiring tax provisions
that reduced corporate taxes and the two-year reduction in social security payroll tax rates,
as well as increases in income tax rates. More broadly, revenues are expected to grow as a
more rapidly expanding economy is expected to lift corporate and personal disposal income,
resulting in higher revenues.
• Spending is expected to increase at a slower rate of 2.6% to US$3.5 trillion (20.5% of
GDP). Of that, mandatory spending (e.g., social security, Medicare) accounts for most of
the increase (US$85 billion), while the slower rate of spending growth can be attributed to
discretionary spending which constitutes around one-third of the budget is expected to edge
down.
The ‘not so good’ news
The CBO report goes on to detail that after 2015, deficits are projected to start rising again,
equaling about 4% of GDP between 2022 and 2024, mainly due to increase in the mandatory
spending mentioned above as well as higher net interest payments on US debt. That debt, the
CBO reiterates, remains very high by historical standards, as it is expected to total 74% of GDP
at the end of 2014, increasing to 79% in 2014.
Bottom line
While the need for comprehensive fiscal action — along the lines provided by the Simpson-Bowles
commission1 — remains, it’s unlikely that it will be taken given the positive short-term outlook
for US public finances. The public support just isn’t there. It is also likely that for this reason, we
are likely to see a less rancorous resolution of the upcoming debt ceiling deadline, which is good
news for investors still dealing with uncertain markets.
1
Formally known as the National Commission on Fiscal Responsibility and Reform, a bipartisan Presidential commission created in 2010 to
identify “… policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run.”
Note: The source for all the numbers in the piece (e.g., the deficit, revenues numbers, etc.) is “The Budget and Economic Outlook: 2012 to
2014”, which was produced by the Congressional Budget Office and released on 4 February 2014.
All data is sourced from Invesco dated 11 February 2014 unless otherwise stated. This document contains general information only. It is
not an invitation to subscribe for shares in a fund nor is it to be construed as an offer to buy or sell any financial instruments. Nor does this
constitute a recommendation of the suitability of any investment strategy for a particular investor. While great care has been taken to ensure
that the information contained herein is accurate, no responsibility can be accepted for any errors, mistakes or omissions or for any action
taken in reliance thereon. Opinions and forecasts are subject to change without notice. Investment involves risks. This material is issued by
Invesco Asset Management Asia Limited in Hong Kong and Invesco Asset Management Singapore Limited in Singapore.