Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
While there is a lot of hot air coming out of D.C. about deficit reduction there is almost zero action. Even as the Democrat’s massive 2009 multi year stimulus falls off the books, other programs have come in to supplant it, and spending is almost identical to where it was during the height of the crisis. Half way through the fiscal year the deficit is down 6% but almost all of that is due to higher revenue. Wherever you stand on this issue politically, or whatever the effects long term, there is no arguing that the massive federal deficit spending has sent a huge influx of money into the economy and supports GDP. The house ATM mid decade has been replaced by the government ATM.
One thing you will begin hearing a lot about in the coming months is the ‘fiscal cliff’ facing the economy in 2013. The Bush tax cuts were punted out 2 years at end of year 2011, and the spending cuts – in theory mostly to the Defense department – are supposed to kick in after the turn of the year. Not to mention the 2% “temporary” payroll tax cut that is now in its second year. With a lame duck Congress returning post November elections, I expect a lot of fanfare but little change – a lot more kicking down the road and extending and accounting tricks. But a year from now I expect a very similar deficit. But I do expect it to bring angst to the market at some point in the second half of the year, similar to the debt ceiling. As always, “when” it matters will be the question.
Let’s see what March brought:
- The U.S. budget deficit is running slightly lower than last year’s through the first six months of the budget year but is still on track to top $1 trillion for a fourth straight year. The Treasury Department said Wednesday that the deficit in March totaled $198.2 billion, a record for that month.
- That left the gap through the first half of 2012 at $779 billion, down 6.1 percent from a year ago.
- The Congressional Budget Office forecasts a deficit of $1.17 trillion for the entire 2012 budget year, which began Oct. 1. This would be a small improvement from last year’s $1.3 trillion deficit.
- Through the first six months of this budget year, government revenue has totaled $1.06 trillion, up 4.4 percent from the same period a year ago. Individual and corporate tax receipts are both up, reflecting the improving economy. Government spending through the first half of the budget year totals $1.84 trillion, slightly less than in the same period a year ago.
“Fiscal Cliff”:
- Congress and the White House have struggled to agree on changes to tax levels or spending programs that would reduce the deficit. They will face another big challenge at the end of this year. That’s when tax cuts enacted by the Bush administration in 2001 and 2003 are set to expire.
- A set of automatic spending cuts totaling about $1.2 trillion over 10 years are also scheduled to kick in. Both parties oppose the automatic spending reductions, in part because they include deep cuts in defense.
- The CBO has estimated that if Congress extends the Bush tax cuts, as it has in the past, and blocks the spending cuts, the deficit will remain near $900 billion or more for the next decade.
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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
