Sunday, April 5, 2009

>US Economics Analysts (GOLDMAN SACHS)

The Budget Outlook—A Trillion Here, a Trillion There…

■ We now expect a US budget deficit of $1.86 trillion (13.2% of GDP) for fiscal year (FY) 2009, up from the $1.425 trillion (10%) we projected in late January. The main reasons for this change are greater weakness in the economy and a view that more funding will be needed for financial stabilization.

■ Over the next ten years, we expect the deficit to cumulate to $9.4 trillion, including a $1.5 trillion shortfall for FY 2010. Our ten-year figure is close to the CBO's estimate for President Obama's budget even though we don't include all his proposals. Our weaker economic outlook makes up the difference vis-à-vis CBO and puts our ten-year profile well above the administration's $7.0 trillion estimate for its own budget.

■ As a result, we now project that federal debt held by the public will double as a share of GDP over the next decade, to 83%. With a primary balance (excluding net interest) that remains in deficit throughout this period, policymakers have some wood to chop to keep the debt in check. While they work on that, market participants should take comfort in the fact that the Treasury will benefit from low borrowing costs as well as from yields on assets the government is acquiring in its efforts to stabilize the financial system, most of which will also be repaid.

■ To finance this surge, the US Treasury will need to ramp up its borrowing still further in coming months. We put the total borrowing need (gross coupon sales plus the net change in bills outstanding) at about $3¼ trillion and $2trn for FY 2009 and 2010, respectively. Current financing patterns can cover the FY 2010 need, but the Treasury will have to find another $800bn or so in the next few months if our FY 2009 numbers are right.

To see full report: US ECONOMICS ANALYSTS