The Bush administration is expected to slash its 2007 budget deficit estimate when it updates its forecast on Wednesday, but uncertainty over slowing corporate receipts may lead the White House to express a more cautious view than some in the financial markets.
With individual tax receipts gathering momentum, some private-sector analysts think the U.S. budget gap will shrink to between $145 billion and $150 billion in fiscal 2007 from last year's $248 billion.
The White House Office of Management and Budget, which forecast a $244 billion deficit in February, looks set to trim its projection when it releases its mid-year budget update at 1 p.m. (1700 GMT) on Wednesday.
But some doubt its view will be as optimistic.
OMB will almost certainly come out with a high-ball estimate in the mid-session review, said Lou Crandall, chief economist at Wrightson-ICAP LLC in Jersey City, New Jersey.
He said he expects the White House figure to be at the high end of a deficit range of $150 billion to $200 billion estimated by the nonpartisan Congressional Budget Office in early June. His own forecast is at the low end.
A strong tax collection season this spring, bolstered by bigger paychecks for individuals and capital gains from a strong stock market, has brought down deficits faster than anticipated, despite spending that remains near record levels.
We've got a $145 billion (deficit) estimate for fiscal 2007. We had good receipt flow with the April tax date and have a pretty good expectation for the rest of the fiscal year, said Kim Rupert, director of fixed income research at Action Economics in Hillsborough, California.
The CBO last week estimated that the government brought in a $25 billion surplus during June, another big month for tax collections, compared with a $21 billion surplus a year earlier. Receipts for the month rose $12 billion from a year earlier, with almost all of the increase accounted for by individual income and payroll tax collections.
Through the first three quarters of fiscal 2007, the government's deficit totaled $123 billion, compared with $206 billion recorded for the same period last year, the CBO estimated. The U.S. Treasury is due to release its June budget statement on Thursday.
CORPORATE TAX GAINS SLOW
But the CBO noted that increases in corporate tax revenues, a big driver in the deficit reduction last year, have slowed substantially throughout this year -- from 22 percent in the first quarter of the fiscal year to 11 percent in the second and just 4 percent over the most recent quarter, compared to corresponding year-ago periods.
They grew about 3 percent in June, the CBO said.
During the 2004-2006 period, corporate tax receipts increased at an average annual rate of nearly 40 percent as profits grew rapidly.
Crandall said the slower growth rate reflects smaller increases in profits and estimated tax payments, particularly among financial services firms and other companies directly affected by the downturn in the housing market.
Going into June 15th, one of the big question marks was whether problems in the subprime mortgage market would pull the growth rate of corporate tax payments down further. So far that appears to be the case, he said.
Analysts said the slowdown in corporate tax revenues was still being offset by gains in individual receipts, so the outlook for further deficit reductions in fiscal 2008 remains positive. A much-heralded stabilization in the housing sector and predictions of stronger economic growth later this year would bolster those prospects.
With the White House likely to stay conservative in its deficit estimates, the Treasury also is expected to take a wait-and-see approach to its borrowing plans.
It retired the 3-year Treasury note in May in response to reduced borrowing needs, but is not likely to eliminate any other maturities anytime soon.
Action Economics' Rupert said the current Treasury debt auction schedule could still accommodate a $140 billion deficit with some tweaking of bill auction sizes.
Some groups were anticipating the White House would use the release of the estimates as an opportunity to trumpet the success of President George W. Bush's 2003 tax cuts, which are scheduled to expire at the end of 2010.
Jim Horney, director of federal fiscal policy at the liberal Center for Budget and Policy Priorities in Washington, said the lower deficit was simply a result of a normal economic expansion, adding that without the tax cuts, the federal government would be enjoying a budget surplus.
This is what happens in an expansion. The deficit goes down some, he said.