This article analyses the Bush Administration's Mid-Session Review of the Budget, which paints a fairly optimistic picture of the budget situation in the next few years. There has been a surprising increase in revenues from both the household and corporate sector, while Congress has slowed the pace of discretionary spending. Entitlements have not been restrained, but the budget deficit should decline in the coming years and the debt/GDP ratio should stabilize by 2007.
Nonetheless, the longer-term budget backdrop for the bond market is bleak. There is little chance of any meaningful social security or medicare reform in the next few years. Financial markets may one day wake up to fiscal disaster in the next decade, brought on by the aging baby-boom generation.