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US: A Budget Gap or a Great Divide? - Wells Fargo

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 16, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Research Team at Wells Fargo, notes that in the US Congressional Budget Office’s (CBO) Budget and Economic Outlook, the agency paints a dire picture of the growing gap between revenues and outlays over the next decade.

    Key Quotes

    “While the budget gap existed in last year’s projections, it is clear that the fiscal outlook, as a result of changes to the economic outlook and legislation passed last year, is far worse in the CBO’s updated analysis. Under current law, the budget gap runs a high risk of becoming a great divide between revenues and outlays.

    We find that revenues as a share of GDP are expected to decline slightly through 2019 and then remain stable as a share of GDP through 2026. The largest source of revenue growth over the next 10 years comes from individual tax collections, primarily as real bracket creep subjects a larger share of the population to higher tax rates.

    Outlays, on the other hand, are expected to rise from 20.7 percent of GDP in fiscal year 2015 to 23.1 percent by 2026. This rapid growth can be attributed to higher outlays for Social Security and health care programs related to the aging of the population along with large and growing net interest expenses. The result of these imbalances is a continued widening of the federal budget deficit over the next 10 years.

    A widening fiscal imbalance in the coming years is not a new story for the federal budget. Yet this year’s Budget and Economic Outlook, as a result of downward economic revisions and legislative changes, offers an especially challenging path for the budget. Although federal revenues as a share of GDP are expected to be moderately above their historical average, outlays are projected to grow at a more rapid pace over the next decade.

    Mandatory spending, particularly health care, Social Security and interest costs, are expected to generate the most significant budgetary strains. This in turn threatens to subdue spending on both defense and nondefense discretionary programs. If the CBO’s baseline scenario comes to fruition, the gap between revenues and outlays over the next decade risks becoming a great divide.”
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