–Estimates May ‘Significantly Underestimate’ Deficits
–Larger Deficits If Spending Rises, Tax Cuts Extended
–Current Recovery ‘Anemic’ Compared To Others in US
–Recent Indicators ‘More Negative’ Than CBO Expected
–‘Great Uncertainty’ About Long-Term Job Outlook

By John Shaw

WASHINGTON (MNI) – Congressional Budget Office director Doug
Elmendorf said Thursday that his agency’s new fiscal report may
“significantly underestimate” the nation’s short-term deficit outlook
because of the requirements of budget estimating.

At a briefing following the release of the CBO’s mid-year budget
and economic outlook, Elmendorf emphasized that under budget law the CBO
must make its baseline estimates by assuming that current tax and
spending laws are unchanged.

He added the U.S. fiscal outlook would be “quite different” if
other, arguably more plausible, assumptions were made.

Elmendorf said the U.S.’s long-term fiscal outlook is “daunting,”
adding that even using optimistic scenarios the U.S. level of public
debt will hit 70% of GDP by 2020.

“This is an extraordinarily high level of debt” when viewed in the
context of American history, he said.

He said that the debt level hit 114% of GDP after World War II, but
then declined steadily. In 2001, public debt was 33% of GDP.

Elmendorf said that an alternative scenario that CBO developed
includes extending the 2001 and 2003 tax cuts, making adjustments to the
alternative minimum tax, and projecting discretionary spending to rise
at its historic rate.

This scenario, he said, would lead to a budget deficit in 2020 that
represented 8% of GDP rather the 3% of GDP in the official estimates.

In CBO’s report, it sees the current 2010 fiscal year deficit at
$1.342 trillion, down slightly from the record deficits of FY’09.

But, assuming that current budget and tax policies continue, CBO
sees deficits falling to $1.066 trillion in FY’11, $665 billion in
FY’12, $525 billion in FY’13, $438 billion in FY’14 and $507 billion in
FY’15.

Looking further forward, the CBO sees deficits of $585 billion in
FY’16, $579 billion in FY’17, $562 billion in FY’18, $634 billion in
FY’19, and $685 billion in FY’20.

Elemendorf said the CBO sees growth in the U.S. economy as
“continuing at a modest pace.” The recovery so far has been “anemic,”
compared to other American recoveries after deep recessions, he said.

Elmendorf said recent economic indicators since CBO completed its
economic estimates have been “more negative” than it expected, but he
added that the new reports would not have changed CBO’s overall economic
estimates significantly.

The CBO chief said that he expects interest rates in the U.S. to
increase “as the recovery takes hold over time.” He also said that large
debt levels would put upward pressure on rates.

Elmendorf said the CBO envisions a “slow decline” in the
unemployment rate over the next several years, but added that there is
now “great uncertainty” about the precise relationship between economic
growth and specific employment levels.

** Market News International Washington Bureau: (202) 371-2121 **

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