10/28/2024

U.S. Deficit Peaked in February 2024; Set To Decrease In 2025

Although concerns related to the long-term sustainability of the US budget deficit remain, the deficit is actually set to improve in the short term. The deficit has been declining for most of this year and is set to decrease further in 2025. In addition, both political parties will be constrained to increase discretionary spending moving forward given rising net interest costs.

Bond yields are rising and investor concerns over the US fiscal situation are hitting a fever pitch. Yet few investors seem to be aware that the US budget deficit actually peaked in February 2024 at $2.1 trillion and fell to $1.8 trillion at the end of fiscal year 2024 (in September). Additionally, regardless of which party wins the election and despite all of the policy proposals both sides have promised, we expect the US deficit to decrease by between $300 billion and $400 billion in 2025.

One key reason we expect a lower deficit is that the 20% increase in the stock market this year would equate to a $200 billion gain in April tax revenues next year (if stocks remain at their current levels through the end of 2024). In addition, federal entitlement spending is set to slow with inflation moderating and federal discretionary spending is decelerating as pandemic-related stimulus rolls off. A lower deficit requires less Treasury issuance and, with the Federal Reserve cutting rates, Treasury will be able to finance the deficit at lower rates. The Congressional Budget Office (CBO), which provides budget and economic data to Congress, currently forecasts that the US deficit will be $1.94 trillion in fiscal year 2025, but will have to revise down that forecast in January as tax revenue will likely come in above the agency’s current estimates.

Next year, Congress will enact a tax bill to extend at least some of the individual income tax cuts included in the Tax Cuts and Jobs Act. Both presidential candidates are discussing the need to raise revenue in order to pay for any tax cut extensions. Former President Trump wants to do so with revenue from tariffs on imported goods, lower spending, and reduced tax subsidies for electric vehicles and green energy. Vice President Harris wants to increase taxes on high-income individuals and corporations to pay for tax cuts. The important takeaway from this is that, given higher interest costs to service the US deficit (due to higher interest rates), both parties are realizing the constraints on the federal budget as those interest costs crowd out other federal spending priorities. As a result, we are moving into a period in which Congress cannot cut taxes and increase federal discretionary spending at will. Instead, they will need to provide revenue offsets to limit the deficit impact.

Also of note, the US will hit its debt ceiling on January 1, 2025. That will put the issue of the US deficit and debt on the minds of policymakers as they consider the tax bill and any other policy priorities they would like to enact. While interest costs remain a problem and will continue to weigh on the US budget, their impact will be more than offset in the near term.

APPENDIX – IMPORTANT DISCLOSURES

Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index. Market and economic statistics, unless otherwise cited, are from data providers FactSet and Bloomberg.

This communication was prepared by Strategas Securities, LLC (“we” or “us”).  Recipients of this communication may not distribute it to others without our express prior consent. This communication is provided for informational purposes only and is not an offer, recommendation or solicitation to buy or sell any security. This communication does not constitute, nor should it be regarded as, investment research or a research report or securities recommendation and it does not provide information reasonably sufficient upon which to base an investment decision. This is not a complete analysis of every material fact regarding any company, industry or security. Additional analysis would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any particular client and is not presented as suitable to any other particular client.  Investment involves risk. You should review the prospectus or other offering materials for an investment before you invest. You should also consult with your financial advisor to assist you with your analysis, risk evaluation, and decision-making regarding any investment.

The performance and other information presented in this communication is not indicative of future results. The information in this communication has been obtained from sources we consider to be reliable, but we cannot guarantee its accuracy. The information is current only as of the date of this communication and we do not undertake to update or revise such information following such date. To the extent that any securities or their issuers are included in this communication, we do not undertake to provide any information about such securities or their issuers in the future. We do not follow, cover or provide any fundamental or technical analyses, investment ratings, price targets, financial models or other guidance on any particular securities or companies. Further, to the extent that any securities or their issuers are included in this communication, each person responsible for the content included in this communication certifies that any views expressed with respect to such securities or their issuers accurately reflect his or her personal views about the same and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this communication. This communication is provided on a “where is, as is” basis, and we expressly disclaim any liability for any losses or other consequences of any person’s use of or reliance on the information contained in this communication.

The information offered is provided to you for informational purposes only. Robert W. Baird & Co. Incorporated is not a legal or tax services provider and you are strongly encouraged to seek the advice of the appropriate professional advisors before taking any action. Strategas Securities, LLC is affiliated with Robert W. Baird & Co. Incorporated (“Baird”), a broker-dealer and FINRA member firm, although the two firms conduct separate and distinct businesses. A complete listing of all applicable disclosures pertaining to Baird with respect to any individual companies mentioned in this communication can be accessed at http://www.rwbaird.com/research-insights/research/coverage/third-party-research-disclosures.aspx. You can also call 1-800-792-2473 or write: Baird PWM Research & Analytics, 777 East Wisconsin Avenue, Milwaukee, WI 53202.