The Budget Deficit Is Stabilizing

Despite the biggest monthly budget deficit on record reported for April ($82.7 billion), the fiscal situation appears to be slowly stabilizing; in fact, an argument can be made confidently that it is already turning the corner.

A direct comparison of last month's deficit with April 2009 is somewhat disheartening, as it represents a nearly $62 billion deterioration- the combined result of a 8% decline in revenue and a 14% increase in spending. On the revenue side, the weakness in individual tax receipts (-$30billion) far exceeded a $9 billion gain in corporate receipts. On the spending side, the increase in April was, to a large extent, artificial due to the acceleration of payments certain payments to April 30th from May 1st, due to the involvement of a weekend.

In the first seven months of the current fiscal year, the deficit has totaled $799.7 billion, essentially identical to the cumulative $802 billion deficit in the first seven months of fiscal 2009. But the steadily improving pace of economic activity and the quick rebound of the corporate sector underway are all setting the stage for relatively robust June and September tax payments, which should help solidify the picture of the overall deficit having turned the corner. Adding to the broader improving fiscal dynamic is the dwindling pieces of last year's fiscal stimulus spending program.

Although it does not sound like a development worth celebrating, the budget deficit is at this point on track to total $1.3 trillion this year, versus $1.42 trillion last year. The risk, if anything is that it may turn out to be slightly below the $1.3 trillion mark. In fact, such an outcome would be fully in line with the Congressional Budget Office's most recent forecast issued in January.

As a direct result of that improvement, the recently announced reductions in the size of the Treasury's 3- and 10-year note auctions are likely to be expanded to cover other coupon maturities by the end of the third quarter. However, given the Treasury's underlying bias to increase its reliance on longer-maturity debt, its slowly declining borrowing needs in the coming months are likely to be manifested primarily in the short end of the yield curve. By the end of the calendar year, the cuts in the size of all auctions will have become more aggressive, given a deficit that is currently projected to be smaller by as much as 1/3 in 2011 compared to the current fiscal year.

Anthony Karydakis