Washington Makes Wall Street Gloomy

It sees higher taxes and higher deficits.

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Uncle Sam is making it tough for investors to be upbeat. Take a peek at this analysis from Morgan Stanley (bold is mine):

The bottom line is that we look for the F2009 budget deficit to rise to US$540 billion (3.7 percent of GDP), and in 2010 our estimate is US$450 billion (2.9 percent of GDP). . . . The outlook is gloomy— but hardly unprecedented. Note that our budget deficit estimates for 2009-10 are somewhat larger than those just published by the CBO. This is due to a number of factors. First, our near-term outlook for the US economy is weaker than that of the CBO. Second, the CBO's estimates do not include an extension of the AMT fix. Third, the CBO assumed only US$20 billion of outlays for the GSEs. Fourth, the CBO's estimate for FDIC outlays is lower than our own.

In the longer run, we expect tax rates for individuals to go up after 2010 regardless of who wins the election. This, together with a recovering economy and a likely flattening out of defense spending, should help to bring the budget deficit back down to US$300 billion or so by 2012. Obviously, the US still faces severe budget pressures beyond that point due to sharply escalating outlays for Medicare and Social Security, but these forces don't become too drastic until later in the decade.