Greg Valliere, Chief Political Strategist
May 8, 2015
A DRAMATIC SURGE IN RECEIPTS: Everyone focuses on spending, but we’ve argued for years that the key factor in analyzing the budget is receipt growth. That certainly looks true this year, following the release of post-April estimates from the Congressional Budget Office that showed receipts through the first seven months of this fiscal year are up by an astonishing 9%, thanks to surging tax payments — which CBO maddeningly ALWAYS underestimates. Revenues rose by $48 billion more this April than in 2014.
THIS DEMOLISHES CBO’S GLOOMY FORECAST OF MARCH 9 – so in less than two months, the agency’s official forecast is already obsolete. It’s virtually certain that more progress in lowering the deficit is likely this year, despite a surprisingly strong rise in outlays (much of it from entitlements) and a drop in payments to Treasury from Fannie Mae and Freddie Mac. It’s all about receipts, so we think red ink this year will fall significantly below CBO’s deficit forecast of $486 billion.
HOW LOW CAN IT GO? The deficit this year, as a percentage of GDP, surely will fall below CBO’s estimate of 2.7% — perhaps to 2.5% or a little less, with a further drop in fiscal 2016-17, perhaps getting close to 2% of GDP. Yes, there will be some new spending, but this is a very positive story for the bond market — the deficit will not be a major concern until much later in the decade, when demographic changes could drive red ink higher. Can we grow our way out of deficits? That’s a wildly optimistic scenario — but we can grow our way to a low deficit environment that the markets can easily live with.
CONGRESS EYES CURBS ON FED: No good deed goes unpunished — the Federal Reserve almost single-handedly saved us from another Great Depression, but Congress wants to meddle. The bill to watch is from Richard Shelby, Chairman of the Senate Banking Committee. Not only would he seek to curb the influence of the NYC Fed, but his proposal would impose a “mechanical” rule — modeled after proposals from Stanford Prof. John Taylor — that would stipulate conditions under which the Fed could raise or lower rates.
THERE’S SURPRISING ANTIPATHY TOWARD THE FED IN CONGRESS — which could intensify if critics on the left begin to stir once the central bankers raise rates later this year. For now, we think any legislation — including a measure to audit the Fed’s decision making — would get vetoed if it got to the White House, so the Fed is off the hook at least until 2017. Beyond that, if Republicans control the White House and Congress in two years, all bets are off.
CONGRESS CONTINUES TO SURPRISE: It’s not exactly a well-oiled machine, but Congress continues to exceed low expectations, defying predictions of gridlock and dysfunction. After Senate passage, by 99-1, of a bill to review an Iranian nuclear deal, the stage is set early next week for a key procedural vote on “fast track” trade legislation. We think the Senate will pass the trade bill, setting up a close (but winnable) fight in the House later this spring.
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