Mixed Signals on the Bugdet

The White House's FY2010 budget is now online. the new proposal sends a couple of mixed signals. As Obama promised, the budget seeks to reduce the deficit. Under this plan the deficit would go from 12.3 percent of GDP today to 3.5 percent in 2012 at the end of Obama's first term. That's a big decline in deficits does not surely mean any reduction in the debt.

Financial Stabilization Reserves

The budget could be altered significantly by the existence of one line item: additional financial stabilization efforts. The current budget places $250 billion in for 2009 and provides no estimates for following years. According to the proposal, "Additional action is likely to be necessary to stabilize the financial system and thereby facilitate economic growth."

The $250 billion is meant to facilitate $750 billion in additional asset buys (assuming that the government is able to recover 66 percent of any purchase price--the average recovery rate for purchases so far). In a previous post, I noted that recovery rates vary considerably by asset type, with the auto loans resulting in little expected return. If the government goes after the most toxic assets recovery rates are likely to decline.

Upbeat Unemployment projections

The budget's projections for unemployment signal faster recovery than either the CBO or market participants project. Below are the projections for unemployment along with those from the CBO and according to the blue chip stocks. We can see that the budge unemployment projections peaks at least .5 percent lower than the other two measures and begins to decline in 2010 rather than 2011. These near term differences could impact how much money needs to go toward further stabilization, and the budget uses the projection lest likely to call for more spending.

Source: An Era of New Responsibility, Office of Management and Budget, 2-26-09