–US Faces ‘Daunting Economic and Budgetary Challenges’
–Warns That ‘Rising Debt Can Snowball’ On
–Investors Could Become ‘Nervous’ Unless Budget Fixed

By John Shaw

WASHINGTON (MNI) – Congressional Budget Office Director Doug
Elmendorf repeated Thursday that the U.S faces “daunting economic and
budgetary challenges”.

He said the longer the nation waits to reduce budget deficits the
larger the changes will need to be — and the more “disruptive” these
changes will be for the economy.

In testimony before the Senate Budget Committee, Elmendorf repeated
that his agency’s new report, issued Wednesday, almost certainly
understates the severity of the nation’s deficit outlook because of the
requirements of budget estimating.

Elmendorf emphasized that under budget law the CBO must make its
baseline estimates by assuming that current tax and spending laws are
unchanged.

Using required rules, the CBO reported that the current 2011
fiscal year budget deficit will reach $1.48 trillion before beginning a
steady decline over the next several years.

For the FY’12 through FY’16 period, the CBO sees cumulative
deficits of $3.547 trillion and for the FY’12 through FY’21 period it
sees cumulative deficits of $6.971 trillion.

But Elmendorf has said that under a plausible scenario, the U.S.’s
cumulative deficits over the next decade could hit $12 trillion — not
$6 trillion.

In his testimony, Elmendorf said policymakers face a “difficult
tradeoff” between implementing deficit reduction during a time when the
economy is still struggling to gain strength versus delaying deficit
cuts until the future when more far more draconian changes are needed.

But Elmendorf made clear that American fiscal policy is on an
unsustainable path in which huge deficits are requiring increasingly
large debt service payments.

“Rising debt can snowball,” he said.

At his briefing Wednesday, Elmendorf said that if American fiscal
policy is unchanged, the U.S.’s net interest costs alone over the coming
decade could reach $5 trillion.

Elmendorf repeated there is no way to know for sure when American
fiscal policy reaches a “tipping point” in which a major crisis would
ensue.

But he said that investors could “become increasingly nervous” if
the U.S.’s fiscal trajectory doesn’t change.

Elmendorf said the tax-cut extension and spending deal reached by
Obama and Congress will increase the budget deficit by about $800
billion over the next several years.

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

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