By Tom Bradley
While the Republicans and Democrats are duking it out in Washington over the debt ceiling, it’s ironic that the Congressional Budget Office is unable to report the fiscal year-end budget numbers (it’s not deemed an essential service and is shut down). If it could, it would show that the U.S. government has made great progress on bringing down the deficit. It will likely come down this year by 40% to $600-700 billion.
Whenever I go through a government budget document (not too often, thank goodness), I’m always struck by how similar governments are to low (profit) margin, debt burdened companies. Small changes to the inputs into the budget calculations can have a huge impact on the surplus/deficit number. Like a highly geared, marginally profitable company, the swings can be dramatic - explosive on the upside when things work out, but serious trouble when a few factors go against them.
At our annual client presentations the last two years, I’ve suggested that we’ll be pleasantly surprised by how quickly the U.S. government deficit improves. Government turnarounds usually do surprise people because of the high operating and financial leverage.
Think about Canada’s situation in the mid-1990’s. In just a couple of years, we went from being on the IMF’s watch list because of government debts and deficits, to being the star of the show at the G8 meetings. For sure Paul Martin did a good job and the economic landscape turned favourable, but ... Wow!
Today, we’ve watched the U.S. deficit drop from 8% (as a percentage of GDP, or the overall economy) to 4% and there are forecasts pointing towards 2-3% in the not-too-distant future. A slightly better economy and some cost control (if you can call sequestering cost control) have caused the numbers to improve significantly ... and rapidly.
Certainly, the inputs into the budget calculation have to get better, but when they do, look out. Going forward, we shouldn’t be surprised if Europe’s turnaround is quicker than we ever thought possible.