Watch for Budget Battles to Resume

Watch for Budget Battles to Resume

Remember the great kerfuffle over the “fiscal cliff” a few years back?  It’s been pretty quiet on the federal budget front since then, partly due to generally favorable trends. From 2011 to 2014 federal red ink shrank from $1.37 trillion to $513 billion. That still may sound like a big gap, but it’s just 3% of U.S. gross domestic product, near the average deficit of the past 45 years. 

The pace of improvement is slowing. In the first seven months of fiscal 2015 the deficit was $22 billion less than the year-earlier period. Revenues were up 9%, but outlays rose 6.5%, wholly attributable to Social Security and Medicare, which may be entering a multi-year surge.

Defense spending has been flat to down, but geopolitical challenges are adding pressures on that front. Interest on the federal debt also has been flat, but the debt outstanding now tops $12 trillion. Interest expense could be a bigger factor if rates really do rise sustainably.

High-profile budget skirmishes are looming, as four major forcing events converge around September 30th. The debt ceiling will need to be raised this fall, and spending authority must be established for fiscal 2016, which starts October 1st.  Also percolating are partisan differences over an array of tax extenders and a big highway funding bill.

Hardly anybody is talking about this right now, but markets probably won’t like it when budget brinksmanship is again hogging the headlines. Last time around it created a little buying opportunity.

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