Wall Street's Best Minds
The Next President Will Face Growing Budget Deficit
Strategas writes that increasing deficit could limit a possible U.S. fiscal stimulus package.
By Strategas Research Partners
The Obama Administration has increased its estimate for the current fiscal year budget deficit to $600 billion. This revised deficit forecast was up from a previous estimate of $530 billion and the prior estimate suggested that the deficit would decline this year.
Thus, we are seeing a rapid change in the expectations for the federal budget deficit. Even if the deficit comes in a little below $600 billion, the year over year increase for this year will be about 25%.
Strategas anticipated this change as Congress passed significant fiscal policy at the end of 2015 in order to boost GDP ahead of the 2016 election. But there is complacency from both policymakers in Washington and investors over the deficit.
The belief is that the deficit is under 3% of GDP and therefore manageable. But the current trends suggest the deficit will continue to widen as tax collections have all slowed considerably.
And demand for spending continues to grow. The importance of this is whether it will impact the size of the fiscal stimulus package in 2017. Investors across the globe are anticipating the US will act on stimulus next year as every new president gets flexibility to move on fiscal policy. But a growing deficit may restrict the size of the package and is worth keeping an eye on.
Corporate tax collections have been the weakest part of the budget with tax revenues declining year over year. This is a function of declining corporate profits and new tax incentives enacted as part of the 2015 budget deal. The budget agreement allowed companies to write off 50% of their capital equipment purchases as a way to spur capital expenditures in the non-energy sector. Since the provision went into effect, manufacturing orders rebounded and the stocks most levered to this provision are outperforming the S&P 500.
Defense spending was hit with three different types of cuts over the past six years including the drawdown of war spending, a freeze on the base Defense budget in 2011, and sequestration which came into effect in 2013. The 2015 budget deal relaxed those sequestration caps which will allow for Defense spending to increase for the first time on a year-over-year basis since 2011. It seems likely we are at the end of the six-year declining budget cycle given the geopolitical challenges facing the US.
The increase in government spending will likely benefit the companies that depend on government spending for their revenue growth.
Daniel Clifton, Jeannette Lowe, and Courtney Rosenberger contributed to this article.