/www.bloomberg.com/ By Carlos Torres and Mike McKee
Washington, Oct. 22 (Bloomberg) -- The U.S. government's budget deficit will deepen over the next 12 months as the economy struggles to regain its footing and as the prospect of war points to higher spending, economists said.
The deficit for the fiscal year that ended Sept. 30 was the first time in five years that expenditures exceeded revenue, the Treasury is likely to report in the next week. This year's stock market decline and a stagnant job market may push down tax receipts at the same time government payments rise for jobless benefits, food stamps and health care.
``The erosion of revenues this past year has been stunning,'' said Robert Hormats, vice chairman of Goldman Sachs International. ``We're building in big deficits for the rest of the decade.'' He expects the deficit to widen to as much as $220 billion this fiscal year from more than $150 billion last year.
The government has increased its borrowing to cover the shortfall. In August the Treasury sold a record amount of five- and 10-year notes, 21 percent more than in the previous quarterly sale in May. The Treasury has also increased the size of its auctions of two-year notes to a record $27 billion a month since May. That compares with a $10 billion two-year note auction in May 2001.
Many economists dismiss a threat that higher interest rates will result. ``There's not a lot of correlation'' between deficits and higher interest rates, said Steven Saslow, a partner at the Blackstone Group in New York. He was head of proprietary trading for HSBC Securities USA in the 1990s, when the budget deficit peaked at $290 billion, or 4.1 percent of gross domestic product. ``As the government was coming back into the market this year, interest rates continued to decline.''
Interest Rates
The yield on the 10-year Treasury note, to which many mortgages are tied, fell to 3.56 percent on Oct. 9, the lowest on notes with 10 years left until maturity since 1958. The 10-year yield averaged 6.2 percent in fiscal 2000, when the U.S. budget surplus peaked at $236.9 billion. Today the yield on the 4 3/8 percent Treasury note maturing in August 2012 rose one basis point to 4.26 percent. A basis point is 0.01 percentage point.
The deficit for the fiscal year ended Sept. 30 probably totaled $158.2 billion, economists expect the Treasury Department to report, based on the median of 33 forecasts in a Bloomberg News survey. The government hasn't given an exact date or time when they will announce the budget figures for September or the full fiscal year.
In August, the Congressional Budget Office projected the deficit would be $157 billion. For fiscal year 2001, the government recorded a surplus of $127 billion, the fourth in a row. That was the longest string of surpluses since 1927-30, just before the Great Depression.
``When the economy is down, running a government budget deficit is a good thing because it stimulates growth,'' said James Glassman, chief U.S. economist at J.P. Morgan Chase Securities in New York. ``It's hard to view this as a bad thing.''
Differing Forecasts
Government and private forecasters disagree on the federal budget trend. The Congressional Budget Office projected in August that an improving economy would lead to increased tax collections from individuals and corporations, narrowing the deficit to $145 billion in fiscal year 2003. The gap would contract in later years until a surplus is re-established in 2006, the agency said.
In July, the White House's Office of Management and Budget projected a deficit of $109 billion for this year with a return to surpluses in fiscal year 2005.
Wall Street analysts have said the current-year deficit is likely to widen to as much as $250 billion as Congress approves additional spending. One reason private economists are less sanguine than government forecasters is that recent economic data suggest the recovery is losing momentum.
Growth, Unemployment
The economy will probably expand at a 2.2 percent annual pace in the last three months of this year and by 3 percent in 2003, according to this month's consensus forecast of economists surveyed by Blue Chip Economic Indicators. That compares with an August forecast of 3 percent for the fourth quarter and 3.2 percent for all 2003.
The unemployment rate will probably average 6 percent over the next six months, up from 5.6 percent in September, according to the consensus Blue Chip forecast.
Tax collections may remain low this year. Economists expect a drop in individual capital gains taxes following the slide in stocks. The Standard & Poor's 500 index is down 23 percent so far this year. The weak job market may limit wage gains, which will curb taxes on ordinary income.
Spending Surge
Spending is expected to continue to surge as the government wages war against terrorism. Congress this month approved $355.1 billion for defense this fiscal year, an increase of $37.5 billion over 2002. That's the biggest one-year jump since the Reagan administration's first year.
Rules that required 60 of the Senate's 100 votes for any bill or amendment that cuts taxes or spends funds beyond budget limits were allowed to lapse Sept. 30. That may make it easier for other forms of spending to pass.
``Budget discipline has really disintegrated,'' said Rudy Penner, a senior fellow with the Urban Institute.
A possible war with Iraq would also swell the deficit this fiscal year. A war lasting up to two months would cost $25 billion to $40 billion, according to projections from the CBO last month. Other estimates have put the cost as high as $200 billion depending on the duration of the conflict.