Saturday, February 13, 2010

US Budget Deficits: Slightly Larger, Still Unsustainable [Goldman Sachs Research]

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We now expect the US budget deficit to rise to $1.64 trillion (11.2% of GDP) in fiscal year (FY) 2010 and to total $10.8 trillion (trn) over the next ten years. This profile is modestly above our early October forecast and well above the administration’s figures.

Even so, near-term risks lie to the side of a bigger deficit. Tax receipts have started the year in a deep hole and could continue to fall short. And if the economy struggles as the current dose of fiscal stimulus wears off, as we expect, then policymakers are apt to adopt more stimulus than we have assumed.

While such a response would be quite sensible at this point in the cycle, restraint must be the order of the day as soon as the private sector is strong enough to drive growth on its own, as the long-term federal fiscal trend is unsustainable. By FY 2020, we expect the debt/GDP ratio to approach 90%, from 53% last September.

The magnitude of this imbalance is indicated by our profile for the primary budget deficit, which excludes net interest and never falls below 2% of GDP. Achieving a primary balance, which in most circumstances would lead to stability in the debt-to-GDP ratio, would require budget cuts of nearly $300bn per year in current dollars. Fortunately, the Treasury’s current program of debt issuance is more than sufficient to finance the deficits we envision over the next five years.

In a week of mostly stronger-than-expected data, the standout was the 0.3-point drop in the unemployment rate in January, to 9.7%. Although this came in the face of yet another drop in nonfarm payrolls and still-sticky jobless claims, we have adjusted our path for the unemployment down and now see a peak of 10½% in early 2011, against 10¾% previously. However, we continue to expect no interest-rate hikes from the Fed in 2010 and, more likely than not, in 2011 as well.


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