Budget deficit decrease -- Why it is a one-time thing

July 12, 2006

On July 11, President Bush announced that the FY2006 budget deficit will fall to $296 billion, which is 7% lower than the FY2005 deficit of $318 billion.

The forecast also shows that the President’s goal to halve the budget deficit is a year ahead of schedule. The new projected FY2008 budget deficit is $188 billion, which is half of its FY2004 peak of $521 billion.

What It Means:
The first quarter of 2006 showed a higher-than-expected increase in GDP of 5.6% growth. The decrease in the budget deficit was because corporate tax receipts in Q1 2006 were therefore higher than expected. Corporate earnings were driven partially by a snapback in the economy after the negative impact of Hurricane Katrina in Q4 2005.

However, GDP growth for the remainder of 2006 and 2007 is forecast at a fairly flat 3.4%. This does not support the projected 11% higher tax receipts for FY2007, nor the 36% decrease in the deficit forecast for FY2008.

Action Steps:
A significant reduction in the budget deficit would, in fact, support the strength of the dollar, and keep interest rates low. Instead, expect continued decline of the dollar and increased inflation.

Check your retirement portfolio to be sure you are 30% allocated in overseas funds, especially Europe and Japan. These areas are not as dependent on the U.S. market, and will not be as adversely affected by a declining dollar. Also, make sure you have a fixed-interest rate mortgage to hedge against the increased rates that are likely for the next several years.

Source: Bureau of Economic Analysis, Office of Management and the Budget,