Budget Deficit Likely Lower Than Forecast

As I’ve noted in a series of posts, the budget deficit this year will be gigantic. Indeed, it’s already reached almost $1.3 trillion. That’s big money, even in Washington.

As Stan Collender points out over at Capital Gains and Games, however, the absolute amount of the deficit is not the only thing that matters politically. Also important is how the deficit stacks up relative to expectations. And, as Stan says, there’s good reason to believe that the deficit will come in less than original forecasts.

Back in May, the Obama administration projected that this year’s deficit would come in at $1.84 trillion, assuming enactment of the President’s policies. In June, the Congressional Budget Office came up with a very similar estimate.

Now it’s looking as though the deficit could come in several hundred billion dollars lower than that.

The evidence for this is two-fold:

• Primary dealers — the folks who purchase bonds from the Treasury — estimate that the deficit will come in around $1.64 trillion, about $200 billion less than the earlier OMB and CBO estimates. (This estimate is reported in the charts that Treasury released in conjunction with its recent quarterly refunding analysis.)

• As I discussed the other day, Treasury estimates that borrowing will be about $1.8 trillion during the current fiscal year. But that doesn’t mean that Treasury believes the deficit will be $1.8 trillion. Most of the borrowing is indeed used to finance the deficit, but not all of it. The TARP program, for example, requires more financing than shows up in the budget. That’s not, I should hasten to add, because of any budget funny business. It’s just that the TARP is accounted for on a net present value basis, not a cash basis.  I haven’t had time to check the numbers, but it’s easy to imagine that the borrowing to finance the TARP is several hundred billion dollars more than the estimated net present value cost of the program. Barring other financing issues that lean the other way, that would imply that Treasury believes the deficit will be several hundred billion lower than the $1.8 trillion in total borrowing (i.e., perhaps in line with the private sector estimates).

Reading between the lines of his post, I think that Stan is predicting that the Administration will let this good news dribble out in two pieces. Some will show up in the release of OMB’s Midsession Review (expected sometime this month), and the rest will show up when the final budget figures are released.

That will presumably set off some debate about why the deficit is lower than originally projected. We will have to see the final numbers to be sure, but I suspect that the largest single reason will be the absence of a TARP II. The President’s budget included funding for an additional financial stabilization fund, which CBO scored as costing $125 billion this year. Happily, we haven’t had to do a TARP II, and that $125 billion hasn’t been added to the deficit.