US budget deficit doesn't look so bad if you use the right data

Most investors know that government budgets are a function of revenue (mostly taxes) and outlays (spending).

But those inside the beltway know that there is more to the U.S. federal budget. In addition to the Congressional Budget Office (CBO) and executive Branch Office of Management and Budget (OMB) tabulations and projections, there are what lobbyists call the "soft" tabulations -- the budget, plus or minus what might be.

Is this some kind of budget hocus-pocus? Hardly. Washington is always evaluating new, potential areas of revenue, and new areas to cut expenses. Just as Wall Street continually prices stocks and other financial instruments, Washington is continually taking the pulse of potential revenue sources and budget cuts. And after considering this, the critical and discerning investor will realize the federal budget deficit is not as daunting as some would have you believe. Here's why:

The U.S. budget deficit totaled $459 billion in fiscal 2008, and will balloon to $1.845 trillion according to CBO (pdf), and $1.668 trillion according to OMB (pdf), this year, fiscal 2009. Further, assuming the U.S. economic recovery starts this year, the budget deficit dips to $1.379 trillion and $1.138 trillion, respectively, in fiscal 2010 -- still a gargantuan total. These aforementioned are the "hard" tabulations.

Now let's add a few soft tabulations to the equation.

IRS: Ah yes, the diligent civil servants over at the Internal Revenue Service. Did you and/or your accountant review that 2008 tax report carefully before filing it? That's good. A colleague and friend at the IRS says the service is doing a very good job reviewing returns, too, but it could be doing a better job. Yup, the IRS is underfunded, and with increased staff -- more IRS agents and related personnel -- it could close the tax gap: that's the difference between federal taxes owed and taxes actually paid. This amount is estimated to be $150-200 billion annually. My IRS friend, a 20-year IRS pro, believes it could be as high as $250 billion. Net federal revenue gain: $250 billion.

Off-shore tax havens: If Congress passed laws eliminating several, currently legal, off-shore tax havens -- or at least made it more palatable for corporations and very, very wealthy Americans to bring that money home -- the federal budget would benefit to the tune of $100-200 billion per year. But let's conservatively estimate it at a net gain of $100 billion.

Cut the fat: Anyone who has worked in Congress or the White House, or lobbied for appropriations on Capitol Hill, knows that the federal government could cut at least $100 billion today -- including $50 billion from the U.S. Department of Defense -- and you wouldn't know the difference. The nation's ability to defend itself or undertake military operations would not be hurt, nor would citizens see a disruption in essential civil services and related programs. Federal budget savings: $100 billion.

Add the soft tabulations up and we have $450 billion in savings, which decreases the fiscal 2010 federal budget deficit to $688 billion.

Further, assume a slightly rosier GDP growth scenario and the federal budget deficit drops to about $550 billion in fiscal 2010.

Now, a $550 billion deficit in fiscal 2010 would not be a small amount, but investors need to know that the level is well within what's serviceable by the U.S. government.

And no one has even talked about raising income taxes or eliminating federal agricultural subsidies yet.

Financial Editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.

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