WASHINGTON (MNI) – The White House’s Office of Management and
Budget Friday released the Mid-Session Review, which updates the
Administration’s estimates for outlays, receipts, and the deficit in
light of economic, legislative, and other developments since the
President’s 2013 Budget was released in February. The following are
excerpts from the report:

Revised Deficit and Debt Outlook

The deficit for 2012 is now expected to be $1,211 billion, down
$116 billion from the deficit of $1,327 billion deficit estimated in
February. As a percentage of GDP, the 2012 deficit is projected to be
7.8 percent of GDP, down from 8.5 percent of GDP in February. This
latest projection also represents a decline in the deficit from 2011,
both in dollar terms and as a percentage of GDP. The reduction in the
estimated 2012 deficit from February is more than accounted for by lower
projections of spending for this year, which are partly offset by lower
projected receipts.

A portion of the lower deficit is due to revised estimates of the
impact of the Administrations proposals for temporary tax relief and
investments to create jobs and jumpstart growth. In the February Budget,
much of the cost of these proposals was estimated to occur in 2012.
However, because most of these proposals have not yet been enacted, the
MSR estimates that these costs will largely shift to 2013 and later
years, which reduces the 2012 deficit.

Relative to the February estimate, the deficit is now projected to
be higher in 2013, estimated at $991 billion as compared to $901 billion
in February. This increase is driven by lower receipt projections and
the shift in costs of the temporary jobs proposals.

Over the 10-year budget window, 2013 through 2021, deficits are now
projected to be $240 billion lower than in February, due almost entirely
to economic and technical revisions that reduce outlays while reducing
receipts by lower amounts. As a percent of GDP, deficits are reduced in
each year of the MSR forecast after 2014. The deficit is projected to
stabilize at 2.6 percent of GDP after 2017, down from an ultimate level
of 2.8 percent of GDP in the February projections.

The lower deficit outlook in the MSR produces correspondingly lower
projections for Federal Government debt held by the public. Debt held by
the public, which is an important indicator of the extent to which
Government activity affects the financial markets, is projected to be
$11,414 billion at the end of 2012, or 73.5 percent of GDP, down from
the estimate of $11,578 billion, or 74.2 percent of GDP, in February.

Debt at the end of 2013 is projected to be $12,572 billion, down
from $12,637 billion in February, but as a percent of GDP is projected
to be slightly higher than in February (77.5 percent versus 77.4
percent) because of downward revisions in the GDP forecast.

Over the longer term, the lower deficits in the MSR result in a
declining path for debt held by the public as a share of GDP. In the
February Budget, deficits stabilized in the second half of the 10-year
budget window at around 2.8 percent of GDP, a level which was sufficient
to hold debt stable at around 76.5 percent of GDP.

The reduction of outyear deficits in the MSR to 2.6 percent of GDP
is sufficient to bring the debt share of GDP down slightly each year,
with debt falling from 77.1 percent in 2017 to 75.1 percent in 2022.
Debt net of financial assets, a measure which nets out financial assets
such as direct loan holdings from the debt level, shows a similar
declining path, falling from 68.4 percent of GDP in 2017 to 66.2 percent
of GDP in 2022.

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Economic and financial fragility in the Euro area remains a
significant risk to the U.S. recovery and to the global economy. Europe
is the largest export market for the U.S., so weaker demand in Europe
means weaker job growth at home. European banks are interconnected with
financial markets around the world, so volatility in Europe undermines
sentiment in the United States. Because of these concerns, the
Administration has consulted closely with its European counterparts
throughout the crisis and has urged European officials to take steps to
reduce immediate financial market stresses, even as they undertake
longer-term reform and integration plans to promote growth, adjustment,
and stability. Despite these headwinds, the Administration expects
economic growth to continue at a moderate pace in 2012 and 2013 and to
pick up in 2014.

The U.S. economy is operating well below its capacity, with higher
levels of unused resources than at any time in over a quarter century.
The potential for a more rapid recovery is present in this low level of
resource utilization. At some point over the next few years, such an
acceleration in the recovery is likely to occur, and the Administration
forecast reflects that expectation. The Administration does not believe
that the U.S. economy has permanently foregone all of the output lost
during the recession.

—

Real Gross Domestic Product (GDP) and the Unemployment Rate:

Real GDP is expected to rise by 2.6 percent during the four
quarters of 2012 and to increase 2.6 percent in the four quarters of
2013. The growth rate is projected to rise to 4.0 percent in 2014 and
4.2 percent in 2015. Beyond 2015, real GDP growth is projected to
moderate as the level of real GDP approaches its potential. The growth
rate is steady at 2.5 percent per year in 2020-2022. The unemployment
rate is projected to reach 7.9 percent by the fourth quarter of 2012,
below its level in June. Unemployment is projected to decline slowly
this year and next, because of the moderate pace of expected real GDP
growth and because, as labor market conditions improve, workers rejoin
the labor force, adding upward pressure on unemployment. With
accelerated growth, the unemployment rate is projected to fall more
rapidly, eventually stabilizing at 5.4 percent.

Inflation:

Overall inflation rose in early 2012 mainly because of a sharp rise
in world oil prices, and it has moderated since then as oil prices have
declined. Core inflation, which excludes food and energy prices, also
rose, but much less dramatically than the topline measure. Although core
inflation does not include direct energy costs, it does reflect indirect
costs, as energy is used to produce a wide range of goods and services
throughout the economy. For example, airplane fares and trucking costs
bear a close relationship to energy prices. Core inflation was 2.2
percent between June 2011 and June 2012; it had been only 1.6 percent
over the preceding 12 months.

Looking ahead, inflation is expected to edge down somewhat in the
short term. As the economy recovers and unemployment declines in the
medium term, inflation is expected to rise somewhat. In the long run,
the CPI inflation rate is projected to be 2.2 percent per year. The
other main measure of inflation in the projection is the chained price
index for Gross Domestic Product. Year-over-year inflation by this
measure is projected to be 1.7 percent in 2012, and 1.9 percent in
2017-2022.

Interest Rates:

The projections for interest rates are based on financial market
data and market expectations at the time the forecast was developed. The
three-month Treasury bill rate is expected to average only 0.1 percent
in 2012 and 0.2 percent in 2013. It is expected to begin to rise in 2014
and to reach 3.8 percent by 2018.

The yield on the 10-year Treasury note is projected to average just
2.0 percent in 2012, the lowest rate ever recorded for the 10-year note,
which has been issued since 1953. As the economy continues to recover,
the 10-year rate is expected to rise and to reach 5.1 percent by 2019.
In the later years of the forecast, interest rates are close to their
historical averages in real terms, given the projected rate of
inflation.

** MNI Washington Bureau: 202-371-2121 **

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