Recent news from the Iraq front can only mean that the deficit will be on the up and up. This war-related increase is already being noticed, but as Morgan Stanley's Ted Wiseman reminds us, so to is the demographic push in mandatory spending programs (like Medicare). Meanwhile as the 'soft patch' continues, tax returns go down.
As we head into the key April tax season and the budget conference committee to reconcile the different House and Senate tax and spending plans, the budget gap continues to sharply widen. Even before considering any additional fiscal stimulus, the current fiscal year budget gap already appears to be running well above our $275 billion estimate. As seen in the summary table below, in the trailing twelve months through February, the budget deficit has widened to $284 billion from the FY2002 (ending in September) deficit of $158. Tax receipts continue to fall sharply and spending to grow at a robust pace, led not only by defense but also by hefty growth in mandatory spending programs (in particular Medicare)...........
In the near term, three issues will be important in determining the ultimate FY2003 budget gap and corresponding additional Treasury supply needs -- tax refunds, nonwithheld tax receipts, and debate over additional fiscal stimulus. Of course, the pace of economic recovery will also play a key role, as will developments in Iraq. While the war has caused no clear signs of a significant immediate financing need in the Treasury's daily cash flow statements, President Bush's request for $75 billion in supplemental spending (most of which is earmarked for the current fiscal year) clearly indicates that growth of defense and security spending is likely to remain significantly elevated for some time, so there is little prospect of any relief from the spending side of the ledger.
Source: Morgan Stanley Global Economic Forum
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