From International Business Times:
This morning the CBO (Congressional Budget Office) reported that the "compromise" that the Dems and Reps passed in the closing moments of 2010 (remember compromise in our government means when both sides get what they want), pushed the CBO's estimate of the 2011 deficit from just over $1T to $1.48T. To put this in perspective, when the economy was in near total freefall in fiscal 2009 (i.e. revenues were damaged as economic output was awful), the budget deficit was $1.42T. That INCLUDED $142B for TARP... so essentially with 6% more revenue than we had in fiscal 2009 AND without the cost of TARP, we will a significantly higher deficit. Pretty impressive work by Washington D.C.
I am chuckling as the financial infotainment TeeVee crew is clucking that this massive deficit will have the market worried. Are you kidding? As I've written countless times, the equity market loves bigger and bigger deficits because it takes from the future to give to today. The market does not worry about implications years (or even quarters) in the future. Long term is next week. Do you think the market was 'worried' when every worker was given a 2% pay raise Jan 1, 2011 via the payroll tax deduction? No, that will only spur consumption over and above what it would be. More iPads to be sold! If payroll taxes were cut to 0%, it would have celebrated even more. Who cares if the empty Social Security lockbox (already empty) became even more empty - that's a problem for another quarter, year, or decade. Same goes for any spending program - I am just using the social security payroll tax as an example. Any program (tax cut or spending increase) that draws money into the today from the tomorrow, is a reason for celebration on 'the Street'. Indeed I think the market would celebrate annual $4T deficits - can you imagine how high GDP would be? Perhaps 6%! So once more we are looking at an annual deficit of 10%ish of GDP. Even as the "recovery" rolls on.
The 2011 figure reflects 3.1% GDP for the year, which is in line with the 3-3.5% a lot of economists' project. Then in 2012 they see the deficit dropping to "only" $1.1 Trillion (again, half a decade ago $400B was a record), and then the figures drop dramatically because the CBO has to assume all the supports in the economy go away - i.e. the entire Bush tax package goes away. Fat chance. :) Hence, every projection post 2012 is useless and indeed I would not be surprised to see a package of aid to the states at some point in the next 18 months which will push up the '12 deficit as well.
