Don’t Look Now, But Wall Street Is Betting on Bigger Deficits

By Jonathan Nicholson

Wall Street is looking past concerns that a politically wounded White House will be unable to move its agenda — and promises of a revenue-neutral tax overhaul —and is instead putting its chips on an outcome deficit hawks hate: a bigger budget deficit sooner.

The latest evidence came from materials the Treasury Department released Aug. 2 as part of its quarterly statement of debt management policy. Treasury security primary dealers — firms that pledge to regularly participate in the department’s debt auctions and sell the securities in the secondary market afterward — expect larger budget deficits in 2018 and 2019 than either the nonpartisan Congressional Budget Office or the White House’s Office of Management and Budget, a survey showed.

The likelihood of higher deficits in coming years was also a topic of conversation between a smaller group of private-sector Treasury debt management advisers and departmental debt managers. Most of the back-and-forth Aug. 1 between the Treasury Borrowing Advisory Committee (TBAC) and Treasury was over how to deal with a rush of new debt supply stemming from Federal Reserve, paring back its Great Recession-induced bond purchases. Also discussed was an increase in debt from other actions taken in Washington.

Differing Deficit Projections

“Another important variable for judging Treasury’s funding needs is the path of future budget deficits, a topic about which there’s considerable uncertainty,” said the report of the meeting the TBAC submitted to Treasury. “If the median deficit forecast by the primary dealers is a good guide, Treasury’s borrowing needs are likely to be substantially higher over the coming years. In the baseline estimates, borrowing needs will increase from $525 billion in calendar year 2017 to $1,010 billion in calendar year 2020, effectively a doubling.

“The higher borrowing needs are primarily driven by the federal deficit, so Treasury should carefully consider fiscal policies as it makes decisions about various debt management scenarios,” the report said.

The quarterly survey of primary dealers, completed a few days before the dramatic Senate vote that stalled Republican attempts to repeal the Affordable Care Act, showed debt dealers slightly more optimistic than the CBO and OMB on the current fiscal year’s deficit but more pessimistic about the 2018 and 2019 shortfalls.

The average 2017 forecast in the primary dealer survey called for $664 billion deficit for 2017, below the CBO’s $693 billion projection and the OMB’s $702 billion estimate. For 2018, though, the dealers see the deficit increasing, while the CBO and OMB see a drop. The dealer survey called for a $690 billion deficit in 2018, with the range of forecasts between $550 billion and $875 billion. In contrast, the CBO and OMB projected $563 billion and $589 billion, respectively.

The average dealer forecast for 2019 was for a $789 billion deficit, with a range between $650 billion and $980 billion. The CBO’s projection is $689 billion — $100 billion lower. The OMB did not update its 2019 forecast when it issued the mid-session review in mid-July, leaving it unclear what it expects for the year. It projected a $526 billion 2019 deficit in May, when it issued 10-year estimates.

‘Not Given Up Hope’

The CBO’s baseline estimates are based on current law, while the OMB’s assume the White House’s proposed policies are put in place, which accounts for some of the difference.

The continued ebullience of the stock market shows some investors expect a boost to the economy from the White House, Mike Moran, chief U.S. economist with Daiwa Capital Markets America, told Bloomberg BNA.

“You see some building in of fiscal stimulus from the administration,” he said. “It seems that equity investors have not given up hope of tax reform.”

Moran also said there was skepticism lawmakers would produce a truly revenue-neutral tax overhaul and instead could simply cut taxes.

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