Stan Collender is managing director of the Federal Budget Consulting Group at Fleishman-Hillard (And the author of The Guide to the Federal Budget) His weekly column at The National Journal is essential reading if you are at all interested understanding the how and why of the government’s budgeting and spending process.
It is especially crucial if you follow bond or equity markets, which is where the deficit has its most dramatic impact.
On CNBC this morning, Stan reiterated several assertions he’s made previously in his “Can you say $600 billion?” article published at govexec.com:
1) The FY 2003 budget deficit projections of $455B are actually high. There is an excess of $25B built into the estimates;
2) The budget deficit as a percentage of GDP is frequently quoted as ~4%; This number is misleading, as it includes the present Social Security surplus. Back that number out, and the deficit is closer to 6% off GDP.
3) FY 2004 deficit is likely to be at least $600 billion dollars.
4) Adminsitration assumptions about economic growth and spending restraint are unrealistic, and therefore under-estimate next FY deficit.
Collender notes how these very aggressive assumptions about economic growth and spending restraint nake the deficit numbers even more astounding:
-GDP is projected to increase by an average of 3.4 percent a year between 2004 and 2008.
-Discretionary spending—the part of the budget that is most controllable by the White House and Congress—is projected to grow by an average of only 2.1 percent.
-Total spending—including entitlements and the interest payments on the rapidly increasing public debt—is projected to grow by only 4.5 percent a year.
“This means that the White House’s new and dramatically higher deficit estimates likely understate what we’re going to see over the next five years, unless economic growth is far stronger and spending restraint is much greater than the administration’s very optimistic assumptions. It also means that, contrary to the official White House position, we will not be able to deal with the federal deficit through economic growth and spending restraint alone.”
-Stan Collender, July 23, 2003, Can you say $600 billion?
Incredibly, these projections do not include continued funding for either Iraq or Afghanistan.
Our pre-war thesis that Treasuries should be both sold and shorted continues in effect. The 30 year has a long term downtrend line at about a 6%; If that’s breached, I would expect the long bond to yield north of 7%+ by 2005 . . . unless we slip into into another recession.