My call for 2011 is that the US deficit will come in significantly below projections of roughly $1.3 trln and it will improve even further in 2012.
There are two reasons why I expect improvement. First, the 112th Congress will be radically different than the profligate 111th Congress it replaces (Cash for Clunkers anyone? Home buyers tax credit? Bye-bye!). Many of the incoming House freshmen are tea-party adherents who will focus far more on the size and role of government than on “solving” every conceivable problem with 2,000 impenetrable 2,000 page pieces of legislation.
The second, and most important factor, is that I expect the US economy to grow more robustly in 2011 than in 2010, when growth sputtered at mid-year after a firm start.
A wild-card that could radically alter the deficit picture is the potential, small though it is, that Congress and the President could come together to forge a comprehensive budget overhaul along the lines of the Simpson-Boles commission recommendations from earlier this month.
Reforming entitlement spending before the economy is hit with the building budgetary/demographic tsunami scheduled to hit later this decade is the the most important task the government needs to undertake. It will be politically unpopular, but it cannot wait.
If tangible progress can be made in reining in future government outlays, markets will become much more forgiving of cyclical deficits prompted by the global financial crisis of the last several year. That would go a long way toward returning the dollar to the unchallenged global reserve currency, in my view.
Does the market expect that to happen this year? Not by a long shot, but the potential is there, in my view. Obama will be focused on his reelection and will take a page from Bill Clinton in working with Congressional Republicans to get things done in the second half of his first term after spending the first half of his term working with his political base to pass their political wish-list, now largely accomplished…
We live in hope.
