Six months ago, global finance officials meeting in Washington berated the U.S. for failing to put its fiscal house in order. This time, the critics were silent.
The Congressional Budget Office projected today that the 2014 deficit
will be the lowest in six years and down more than 60 percent from the
record $1.4 trillion in 2009. With the annual April 15 tax filing
deadline looming, the U.S. has received about $80 billion more in income
taxes this fiscal year than it had 12 months earlier.
The
Treasury’s coffers are swelling as the almost five-year economic
expansion gains momentum, generating more corporate and personal
income-tax revenue and reducing spending on social services. Stronger
growth, in turn, will depend less on government spending to fuel growth
than it has in the past.
“Without fiscal stimulus, we’ll see
over the next year or two if the economy is really standing on its own
two feet,” said Ira Jersey, a fixed-income and interest-rate strategist
at Credit Suisse Group AG in New York. “We suspect it is. This means
further improvement of the deficit over the next few years.”
More
evidence of fiscal health came last week, when the Treasury Department
reported a deficit of $36.9 billion, the smallest for that month in 14
years. Revenue increased 16 percent to $215.8 billion from $186 billion
in March 2013. Spending totaled $252.7 billion, down 13.6 percent.
Photographer: Joshua Roberts/Bloomberg
The Congressional Budget Office is projecting the 2014 deficit will be the lowest in... Read More
Corporate tax revenue may climb further as accelerating growth and declining unemployment
boost sales and earnings. The International Monetary Fund, in a report
last week, forecast a U.S. expansion of 2.8 percent this year and 3
percent in 2015, compared with 1.9 percent last year.
Japan, Europe
The
U.S. is strengthening as other developed economies struggle to grow.
The 18-country euro area will expand 1.2 percent this year and 1.5
percent in 2015, according to IMF projections. Japan, the world’s third-largest economy, will gain 1.4 percent in 2014 followed by 1 percent the year after.
“The
United States recovery continues to gain strength, while other
countries continue to adjust and reform,” Treasury Secretary Jacob J.
Lew said in an April 11 statement during meetings in Washington held by
the IMF and World Bank.
Things were different when central
bankers and finance ministers of the world’s 20 biggest industrial and
developing countries met in Washington in October. Then, the U.S. was in
the midst of a partial government shutdown with politicians locked in a
stalemate over raising the federal debt ceiling.
Debt Limit
IMF
Managing Director Christine Lagarde urged the U.S. at the time to show
leadership and warned that failure to lift the debt limit risked
triggering a global recession. The administration of Barack Obama and Republicans in Congress eventually agreed to end the 16-day shutdown and suspended the $16.7 trillion limit.
Now, Michael Darda, chief economist at MKM Partners LLC in Stamford, Connecticut,
estimates the U.S. deficit fell to 2.9 percent of gross domestic
product in the first quarter from a peak of more than 10 percent in
2009.
Among the reasons, he said in an April 11 note: “a
sustained, albeit moderate, economic recovery” and the 2013 automatic
spending cuts and tax increases known as sequestration.
The
deficit will shrink to $492 billion this year from $680 billion in 2013,
according to the CBO, which today projected a gap of $469 billion in
2015. After that, the deficit will start rising every year, reaching $1
trillion by 2023.
The increase will be driven by “dramatically”
rising Medicare and Social Security payments needed to care for an aging
society, said Jersey of Credit Suisse.
Fiscal Drag
For
now, a slower pace of decline in the budget deficit will provide a
tonic for the economy because fiscal “drag” -- the contractionary effect
of reduced fiscal stimulus -- is abating, says Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.
“If
the projected declines over the next couple of years were larger as a
percentage of GDP, they would be giving rise to more fears about fiscal
drag,” he said.
The lessening fiscal headwinds and an improving
labor market are among the reasons the Federal Reserve is pulling back
on the monthly bond purchases intended to spur growth and employment.
The
near-term outlook isn’t without concerns. Last week was the worst for
the Standard & Poor’s 500 Index since 2012. Investor worries
included disappointing results at JPMorgan Chase & Co. and signs
that hedge funds were dumping the bull market’s top performers.
Consumer Confidence
Still, Americans are growing more upbeat as job prospects improve. Consumer confidence rose in April to the highest level since July (CONSSENT), according to the Thomson Reuters/University of Michigan preliminary index of sentiment released last week.
Payrolls
excluding government agencies rose by 192,000 workers in March after a
188,000 gain in February that was larger than first estimated, according
to Labor Department figures released April 4. That brought the job
count to 116.1 million, exceeding the pre-recession peak for the first
time.
Lew, in his April 11 statement, said the U.S. expansion
“is expected to strengthen further this year as private-sector demand
increases, the fiscal drag lessens, and household balance sheets and the
housing market continue to improve.”
To contact the reporter on this story: Ian Katz in Washington at ikatz2@bloomberg.net
To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net Mark Rohner
