–Projects -$1.1 Trln Deficit In 2012 Vs. -$1.066 Trln Previous Estimate

WASHINGTON (MNI) – The following is the first part of the summary
provide by the U.S. Congressional Budget Office Wednesday of its Budget
and Economic Outlook:

The United States faces daunting economic and budgetary challenges.
The economy has struggled to recover from the recent recession, which
was triggered by a large decline in house prices and a financial crisis
— events unlike anything this country has seen since the Great
Depression. During the recovery, the pace of growth in the nation’s
output has been anemic compared with that during most other recoveries
since World War II, and the unemployment rate has remained quite high.

For the federal government, the sharply lower revenues and elevated
spending deriving from the financial turmoil and severe drop in economic
activity — combined with the costs of various policies implemented in
response to those conditions and an imbalance between revenues and
spending that predated the recession — have caused budget deficits to
surge in the past two years. The deficits of $1.4 trillion in 2009 and
$1.3 trillion in 2010 are, when measured as a share of gross domestic
product (GDP), the largest since 1945 — representing 10.0 percent and
8.9 percent of the nation’s output, respectively.

For 2011, the Congressional Budget Office (CBO) projects that if
current laws remain unchanged, the federal budget will show a deficit of
close to $1.5 trillion, or 9.8 percent of GDP. The deficits in CBO’s
baseline projections drop markedly over the next few years as a share of
output and average 3.1 percent of GDP from 2014 to 2021. Those
projections, however, are based on the assumption that tax and spending
policies unfold as specified in current law. Consequently, they
understate the budget deficits that would occur if many policies
currently in place were continued, rather than allowed to expire as
scheduled under current law.

The Economic Outlook

Although recent actions by U.S. policymakers should help support
further gains in real (inflation-adjusted) GDP in 2011, production and
employment are likely to stay well below the economy’s potential for a
number of years. CBO expects that economic growth will remain moderate
this year and next. As measured by the change from the fourth quarter of
the previous year, real GDP is projected to increase by 3.1 percent this
year and by 2.8 percent next year. That forecast reflects CBO’s
expectation of continued strong growth in business investment,
improvements in both residential investment and net exports, and modest
increases in consumer spending. It also includes the impact of the Tax
Relief, Unemployment Insurance Reauthorization, and Job Creation Act of
2010 (referred to in this report as the 2010 tax act), enacted in
December, which provides a short-term boost to the economy by reducing
some taxes, extending unemployment benefits, and delaying an increase in
taxes that would otherwise have occurred in 2011. CBO projects that
inflation will remain very low in 2011 and 2012, reflecting the large
amount of unused resources in the economy, and will average no more than
2.0 percent a year between 2013 and 2016.

The recovery in employment has been slowed not only by the moderate
growth in output in the past year and a half but also by structural
changes in the labor market, such as a mismatch between the requirements
of available jobs and the skills of job seekers, that have hindered the
reemployment of workers who have lost their job. Payroll employment,
which declined by 7.3 million during the recent recession, gained a mere
70,000 jobs (or 0.06 percent), on net, between June 2009 and December
2010. (By contrast, in the first 18 months of past recoveries,
employment rose by an average of 4.4 percent.) Consequently, the rate of
unemployment has fallen by only a small amount: After climbing to 10.1
percent of the labor force during 2009, the unemployment rate declined
only to 9.4 percent by December 2010. Other measures of labor market
conditions suggest even more slack than does the unemployment rate. For
example, almost 9 million workers who have wanted full-time work in the
past two years have been employed only part time.

As the recovery continues, the economy will add roughly 2.5 million
jobs per year over the 2011-2016 period, CBO estimates. However, even
with significant increases in the number of jobs, a substantial
reduction in the unemployment rate will take some time. CBO projects
that the unemployment rate will gradually fall in the near term, to 9.2
percent in the fourth quarter of 2011, 8.2 percent in the fourth quarter
of 2012, and 7.4 percent at the end of 2013. Only by 2016, in CBO’s
forecast, does it reach 5.3 percent, close to the agency’s estimate of
the natural rate of unemployment (the rate of unemployment arising from
all sources except fluctuations in aggregate demand, which CBO now
estimates to be 5.2 percent).

For the period beyond 2016, CBO’s economic projections are based on
trends in the factors that underlie potential output, including the
labor force, capital accumulation, and productivity. The projections
therefore do not explicitly incorporate fluctuations resulting from the
business cycle. In CBO’s projections, growth of real GDP averages 2.4
percent annually from 2017 to 2021, a pace that matches the growth of
potential GDP over those years. The unemployment rate averages 5.2
percent in that same period.

The Budget Outlook

The recovery now under way might be expected to lessen the budget
imbalance in 2011 by increasing tax revenues and decreasing spending for
certain income-support programs, such as unemployment compensation.
However, revenue growth will be restrained by the slow and tentative
pace of the recovery and by the 2010 tax act.

Moreover, outlays for many programs are projected to continue to
grow and more than offset the decreases in spending (for unemployment
compensation, for example) yielded by improving economic conditions.

The resulting federal budget deficit of nearly $1.5 trillion
projected for this year will equal 9.8 percent of GDP, a share that is
nearly 1 percentage point higher than the shortfall recorded last year
and almost equal to the deficit posted in 2009, which at 10.0 percent of
GDP was the highest in nearly 65 years.

By CBO’s estimates, federal revenues in 2011 will be $123 billion
(or 6 percent) more than the total revenues recorded two years ago, in
2009. The continued slow improvement in economic conditions is
anticipated to boost revenues from individual income taxes, corporate
taxes, and other sources by nearly $200 billion between those two years;
however, revenues from social insurance taxes are projected to decline
by more than $70 billion relative to their level two years ago, mostly
as a result of a one-year reduction in payroll taxes included in the
2010 tax act.

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

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