Surprise — The Federal Budget Deficit Turns Sharply Lower

by Greg Valliere, AGF Management Ltd.

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Insights and Market Perspectives

WE ALL KNOW that monetary policy will be restrictive until further notice, but there’s been little focus on fiscal policy — which also is becoming less accommodative as tax receipts surge and deficits plunge.

A SLOWDOWN IN SPENDING comes as Democrats are trying to persuade maverick Sen. Joe Manchin to support a scaled-back Build Back Better bill that would raise revenues. That could appeal to a deficit hawk like Manchin. Democrats think they can sell this to him (whether Democrat Kyrsten Sinema would go along is unclear).

AT THE LEAST, THIS TRIAL BALLOON seems to confirm that deficit reduction is back on the bargaining table. If Republicans capture the House this fall, which seems likely, huge new spending bills would be off the table and deficit reduction would be a major GOP goal.

IRONICALLY, OPPOSITION to more spending comes just as deficits are falling — from $3.1 trillion in fiscal 2000, to $2.8 trillion in fiscal 2021, to possibly something close to “only” $1 trillion in this fiscal year. Surging corporate and individual tax receipts have had a major impact.

BUT THIS SHARP DEFICIT REDUCTION has not satisfied deficit hawks like Manchin, who claim that the spending binge has exacerbated inflation. That’s far from certain; there are many reasons why inflation has surged. There was a $119 billion federal surplus in January, as inflation fears spooked the markets.

WITH MANCHIN CALLING FOR DEFICIT REDUCTION, could there be a scaled-back BBB bill, spending about $500 billion on climate provisions and $400 in new health care programs — while reducing the budget deficit? That would require a significant tax hike.

MANCHIN SUPPORTS RAISING the corporate tax rate to 25% from 21%, hiking the top capital-gains rate to 28% from 23.8% and increasing taxes on private-equity managers’ carried-interest income. He also could accept some increase in corporate foreign income. “Sounds like something we should be talking about,” Manchin says.

BOTTOM LINE: There’s probably enough monetary and fiscal stimulus in the pipeline to keep the economy in good shape this year. But with federal spending cooling and the Fed hiking interest rates, a GDP slowdown may be looming in 2023.
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UKRAINE UPDATE: It’s way too early to declare victory, but signs of a possible Russian pull-back this morning are encouraging. Vladimir Putin may have concluded that the costs — Russian casualties, economic sanctions, etc. — would be too great. We think his fall-back might be cyberwarfare and an uneasy stalemate at the border that could persist for months.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

For further information, please visit AGF.com.

©2022 AGF Management Limited. All rights reserved.

This post was first published at the AGF Perspectives Blog.

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