Tax Receipts Exceed Treasury Predictions
Early Surge Lowers Deficit Projections
Washington Post | May 5, 2005
By Jonathan Weisman
After three years of rising federal budget deficits, a surge of April tax receipts brought unexpected good news to fiscal policymakers -- the tide of government red ink appears to be receding.
The Treasury Department this week reported there would be a $54 billion swing from projected deficit to surplus in the April-to-June quarter, after an unanticipated gush of tax payments poured into the Treasury before the April 15 deadline. That prompted private forecasters to lower their deficit projections for the fiscal year that ends in September.
Budget analysts inside and outside the government said the positive turn is likely to be short-lived. Indeed, after a four-year absence, the Treasury Department announced yesterday it is considering reissuing its 30-year Treasury bond to help finance long-term government debt, jolting the bond markets and pushing down the price of existing 30-year securities.
But in the short term, many forecasters said the budget deficit appears to have crested.
"I think it has turned the corner," said David Wyss, chief economist at Standard & Poor's, the credit rating agency. "My guess is 2004 will have been the worst year."
For that fiscal year, the government recorded a $412 billion deficit, the largest ever in nominal dollar terms, although not as large as some of the deficits of the 1980s when measured against the size of the economy. The 2004 mark was up from 2003's $378 billion deficit, which topped 2002's $158 billion deficit.
In January, Bush administration officials projected that the streak would continue, with a deficit of $427 billion for the fiscal year that ends Sept. 30. But that estimate was widely regarded as inflated and many forecasters believed the total would be more like $400 billion.
April, however, turned out to be a far better month than anticipated. Taxpayers were confronted with unexpected tax bills, many from capital gains and the alternative minimum tax, a parallel income tax system designed to hit the rich but that is increasingly pinching the middle class. The Treasury announced this week that it will repay $42 billion in federal debt in the third April-to-June quarter, instead of borrowing $12 billion.
Wall Street analysts reduced their deficit forecasts this week, from around $400 billion to around $370 billion. In nominal dollar terms, that would still be the third-highest deficit on record. Even measured against the size of the economy, "it's still a high number," said Brian Bethune, director of financial economics at Global Insight Inc., a Massachusetts forecasting firm. "It needs to come down."
One factor should help in the short term: Seven months into the fiscal year, Congress is only now passing the $82 billion emergency war spending bill for fiscal 2005, which means that much of the money will be spent in 2006. That should reduce the 2005 deficit while bringing down war costs next year. Wyss said the deficit should continue to fall in 2006 and 2007.
"A month ago, I would have told you the budget numbers were on track for $400 billion. To get an adjustment this quickly would suggest a huge surprise," said Edward F. McKelvey, an economist and federal budget analyst at Goldman Sachs & Co.
Few economists say the U.S. government is out of the woods. One of the reasons for the turnaround, the alternative minimum tax, should be reduced or eliminated before it starts impinging on economic growth, Bethune said.
Also, by next year, costs from the new prescription drug benefit should start rolling in. By the end of the decade, pressure from the retiring baby boom generation will start pushing Medicare, Medicaid and Social Security costs up significantly.
Treasury officials have long resisted reissuing 30-year bonds, in part, because "nobody wanted to admit the deficits were permanent," said Wyss, the Standard & Poor's economist.
Treasury officials disputed that notion during a meeting with reporters yesterday.
"The deficit has nothing to do with it," said Timothy S. Bitsberger, assistant Treasury secretary for financial markets. "In fact, we think the deficits are coming down."
Wall Street wasn't buying it. "If you weren't borrowing this much, you wouldn't be doing it," Wyss said. "No question."
After four years of rising budget surpluses, the Treasury announced in October 2001 that it would no longer issue the 30-year bond. The decision was intended to lower the cost of government borrowing, since bonds that mature in more than 10 years, known as long bonds, typically offer higher interest rates to attract buyers willing to accept the added risk of such long maturation periods.
With a 2001 forecast of surpluses totaling $5.6 trillion over 10 years, Treasury officials figured they could focus on reducing debt, not adding to it. And eliminating the 30-year bond would push buyers to the 10-year Treasury bond. Since 30-year mortgages are closely tied to the 10-year bond, the added demand for that bond would drive down mortgage rates and help the economy.
But forecasted surpluses turned into huge, forecasted deficits. Since President Bush entered office, the total federal debt -- including debt to the public and debt owed the Social Security system -- has risen from $5.7 trillion to $7.8 trillion. Long-term interest rates should begin rising in the near term, so the government should lock in interest rates on 30-year bonds soon, Wyss said, before the cost of federal borrowing begins to rise.
Moreover, aging populations around the world have forced governments -- especially in Europe -- to shore up pension funds by requiring that they invest in long bonds. Washington is considering similar changes for its private pension systems. That has sent demand for long bonds skyrocketing, said Neal M. Soss, chief economist at Credit Suisse First Boston LLC.
Bush's proposal to convert part of Social Security to individual investment accounts would also add considerable demand for 30-year bonds if it were to pass, Soss said. A decision on whether to issue 30-year bonds will be announced Aug. 3, Bitsberger said.