By Yali N’Diaye

WASHINGTON (MNI) – Primary dealers on average expect the U.S.
federal budget deficit to be $1.351 trillion for FY’10, before declining
to $1.21 trillion in FY’11 and $997 billion in FY’12, the Treasury
Department reported Monday.

Interestingly, the primary dealers’ forecasts are more optimistic
than the Office of Management and Budget, which in its July mid-session
review said it expects the FY’10 deficit to be $1.47 trillion and the
FY’11 deficit to be $1.42 trillion.

For FY’12, however, primary dealers expect the deficit to be $86
billion larger than the OMB’s estimate of $911 billion.

The Congressional Budget Office is expected to release its Budget
and Economic Outlook on August 19.

Improving economic conditions should in fact help the federal
deficit decline over the coming years, U.S. Treasury’s chief economist
Alan Krueger said Monday.

“The outlook for the economy continues to be positive,” he said in
a statement following the release of borrowing estimates for the third
and fourth quarters.

“The improving economy is expected to help narrow the federal
budget deficit, which is projected to peak at $1.47 trillion (10 percent
of GDP) during the current fiscal year,” he added.

Yet fiscal sustainability won’t be achieved without challenges, he
said, even as the economy continues to recover.

This is especially true since the housing sector itself remains a
challenge for the recovery as high inventories of homes and foreclosures
continue to threaten home price recovery.

“Although the housing market is widely expected to continue the
recent underlying trend of modest improvement, significant near-term
volatility is likely in home sales and housing starts,” Krueger
emphasized.

And while home prices are showing some sign of stabilization, “The
large inventory of homes on the market relative to the sales pace, along
with a significant number of homes in foreclosure also poses a downside
risk to prices.”

Against this backdrop, and given the slack in the labor market and
the low level of capacity utilization, inflation is likely to remain “in
check.”

Earlier Monday, the U.S. Treasury estimated it will borrow $350
billion of net marketable debt for the third quarter of 2010, assuming a
$270 billion cash balance on September 30, the Treasury announced Monday
afternoon.

For the fourth quarter of 2010, Treasury estimated it would borrow
$380 billion, assuming a $270 billion cash balance on December 31.

Details of the quarterly refunding are scheduled to be released on
Wednesday, August 4 at 9:00 a.m. ET.

** Market News International Washington Bureau: 202-371-2121 **

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