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Obama's shrinking budget deficits silence foreign critics

Six months ago, global finance officials meeting in Washington berated the U.S. for failing to put its fiscal house in order. This time, the critics were silent.

The Congressional Budget Office projected today that the 2014 deficit will be the lowest in six years and down more than 60 percent from the record $1.4 trillion in 2009. With the annual April 15 tax filing deadline looming, the U.S. has received about $80 billion more in income taxes this fiscal year than it had 12 months earlier.

The Treasury's coffers are swelling as the almost five-year economic expansion gains momentum, generating more corporate and personal income-tax revenue and reducing spending on social services. Stronger growth, in turn, will depend less on government spending to fuel growth than it has in the past.

"Without fiscal stimulus, we'll see over the next year or two if the economy is really standing on its own two feet," said Ira Jersey, a fixed-income and interest-rate strategist at Credit Suisse Group AG in New York. "We suspect it is. This means further improvement of the deficit over the next few years."

More evidence of fiscal health came last week, when the Treasury Department reported a deficit of $36.9 billion, the smallest for that month in 14 years. Revenue increased 16 percent to $215.8 billion from $186 billion in March 2013. Spending totaled $252.7 billion, down 13.6 percent.

Corporate tax revenue may climb further as accelerating growth and declining unemployment boost sales and earnings. The International Monetary Fund, in a report last week, forecast a U.S. expansion of 2.8 percent this year and 3 percent in 2015, compared with 1.9 percent last year.

Japan, Europe

The U.S. is strengthening as other developed economies struggle to grow. The 18-country euro area will expand 1.2 percent this year and 1.5 percent in 2015, according to IMF projections. Japan, the world's third-largest economy, will gain 1.4 percent in 2014 followed by 1 percent the year after.

"The United States recovery continues to gain strength, while other countries continue to adjust and reform," Treasury Secretary Jacob J. Lew said in an April 11 statement during meetings in Washington held by the IMF and World Bank.

Things were different when central bankers and finance ministers of the world's 20 biggest industrial and developing countries met in Washington in October. Then, the U.S. was in the midst of a partial government shutdown with politicians locked in a stalemate over raising the federal debt ceiling.

Debt Limit

IMF Managing Director Christine Lagarde urged the U.S. at the time to show leadership and warned that failure to lift the debt limit risked triggering a global recession. The administration of Barack Obama and Republicans in Congress eventually agreed to end the 16-day shutdown and suspended the $16.7 trillion limit.

Now, Michael Darda, chief economist at MKM Partners LLC in Stamford, Connecticut, estimates the U.S. deficit fell to 2.9 percent of gross domestic product in the first quarter from a peak of more than 10 percent in 2009.

Among the reasons, he said in an April 11 note: "a sustained, albeit moderate, economic recovery" and the 2013 automatic spending cuts and tax increases known as sequestration.

The deficit will shrink to $492 billion this year from $680 billion in 2013, according to the CBO, which today projected a gap of $469 billion in 2015. After that, the deficit will start rising every year, reaching $1 trillion by 2023.

The increase will be driven by "dramatically" rising Medicare and Social Security payments needed to care for an aging society, said Jersey of Credit Suisse.

Fiscal Drag

For now, a slower pace of decline in the budget deficit will provide a tonic for the economy because fiscal "drag" -- the contractionary effect of reduced fiscal stimulus -- is abating, says Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

"If the projected declines over the next couple of years were larger as a percentage of GDP, they would be giving rise to more fears about fiscal drag," he said.

The lessening fiscal headwinds and an improving labor market are among the reasons the Federal Reserve is pulling back on the monthly bond purchases intended to spur growth and employment.

The near-term outlook isn't without concerns. Last week was the worst for the Standard & Poor's 500 Index since 2012. Investor worries included disappointing results at JPMorgan Chase & Co. and signs that hedge funds were dumping the bull market's top performers.

Consumer Confidence

Still, Americans are growing more upbeat as job prospects improve. Consumer confidence rose in April to the highest level since July (CONSSENT), according to the Thomson Reuters/University of Michigan preliminary index of sentiment released last week.

Payrolls excluding government agencies rose by 192,000 workers in March after a 188,000 gain in February that was larger than first estimated, according to Labor Department figures released April 4. That brought the job count to 116.1 million, exceeding the pre-recession peak for the first time.

Lew, in his April 11 statement, said the U.S. expansion "is expected to strengthen further this year as private-sector demand increases, the fiscal drag lessens, and household balance sheets and the housing market continue to improve."

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