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

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

Spending, for the most part, has been growing faster than revenues.
Programs related to the federal government’s response to the problems in
the housing and financial markets are an exception; outlays recorded for
the Troubled Asset Relief Program (TARP), for example, will decrease by
$176 billion from 2009 to 2011, CBO projects. But if current laws remain
unchanged, federal outlays other than those for the TARP are projected
to be $366 billion (or 11 percent) higher in 2011 than they were in
2009.

According to CBO’s projections, mandatory spending excluding
outlays for the TARP will increase by $191 billion (or 10 percent)
between 2009 and 2011. Significant growth in many areas — in
particular, for Social Security, Medicare, and Medicaid — is expected
to be offset only partially by reductions in outlays for other programs,
primarily for Fannie Mae, Freddie Mac, and deposit insurance.
Discretionary spending will increase by an estimated $137 billion over
the two-year period; about one-third of that increase stems from funding
provided by the American Recovery and Reinvestment Act of 2009 (ARRA).
In addition, outlays for net interest will rise by an estimated $38
billion from 2009 to 2011, mostly because of substantial increases in
borrowing.

Under current law, CBO projects, budget deficits will drop markedly
over the next few years — to $1.1 trillion in 2012, $704 billion in
2013, and $533 billion in 2014. Relative to the size of the economy,
those deficits represent 7.0 percent of GDP in 2012, 4.3 percent in
2013, and 3.1 percent in 2014. From 2015 through 2021, the deficits in
the baseline projections range from 2.9 percent to 3.4 percent of GDP.

The deficits that will accumulate under current law will push
federal debt held by the public to significantly higher levels. Just two
years ago, debt held by the public was less than $6 trillion, or about
40 percent of GDP; at the end of fiscal year 2010, such debt was roughly
$9 trillion, or 62 percent of GDP, and by the end of 2021, it is
projected to climb to $18 trillion, or 77 percent of GDP. With such a
large increase in debt, plus an expected increase in interest rates as
the economic recovery strengthens, interest payments on the debt are
poised to skyrocket over the next decade. CBO projects that the
government’s annual spending on net interest will more than double
between 2011 and 2021 as a share of GDP, increasing from 1.5 percent to
3.3 percent.

CBO’s baseline projections are not intended to be a forecast of
future budgetary outcomes; rather, they serve as a neutral benchmark
that legislators and others can use to assess the potential effects of
policy decisions. Consequently, they incorporate the assumption that
current laws governing taxes and spending will remain unchanged. In
particular, the baseline projections in this report are based on the
following assumptions:

* Sharp reductions in Medicare’s payment rates for physicians’
services take effect as scheduled at the end of 2011;

* Extensions of unemployment compensation, the one-year reduction
in the payroll tax, and the two-year extension of provisions designed to
limit the reach of the alternative minimum tax all expire as scheduled
at the end of 2011;

* Other provisions of the 2010 tax act, including extensions of
lower tax rates and expanded credits and deductions originally enacted
in the Economic Growth and Tax Relief Reconciliation Act of 2001, the
Jobs and Growth Tax Relief Reconciliation Act of 2003, and ARRA, expire
as scheduled at the end of 2012; and

* Funding for discretionary spending increases with inflation
rather than at the considerably faster pace seen over the dozen years
leading up to the recent recession.

The projected deficits over the latter part of the coming decade
are much smaller relative to GDP than is the current deficit, mostly
because, under those assumptions and with a continuing economic
expansion, revenues as a share of GDP are projected to rise steadily —
from about 15 percent of GDP in 2011 to 21 percent by 2021.

As a result, the baseline projections understate the budget
deficits that would arise if many policies currently in place were
extended, rather than allowed to expire as scheduled under current law.
For example, if most of the provisions in the 2010 tax act that were
originally enacted in 2001, 2003, and 2009 or that modified estate and
gift taxation were extended (rather than allowed to expire on December
31, 2012), and the alternative minimum tax was indexed for inflation,
annual revenues would average about 18 percent of GDP through 2021
(which is equal to their 40-year average), rather than the 19.9 percent
shown in CBO’s baseline projections. If Medicare’s payment rates for
physicians’ services were held constant as well, then deficits from 2012
through 2021 would average about 6 percent of GDP, compared with 3.6
percent in the baseline. By 2021, the budget deficit would be about
double the baseline projection, and with cumulative deficits totaling
nearly $12 trillion over the 2012-2021 period, debt held by the public
would reach 97 percent of GDP, the highest level since 1946.

Beyond the 10-year projection period, further increases in federal
debt relative to the nation’s output almost certainly lie ahead if
current policies remain in place. The aging of the population and rising
costs for health care will push federal spending as a percentage of GDP
well above that in recent decades. Specifically, spending on the
government’s major mandatory health care programs — Medicare, Medicaid,
the Children’s Health Insurance Program, and health insurance subsidies
to be provided through insurance exchanges — along with Social Security
will increase from roughly 10 percent of GDP in 2011 to about 16 percent
over the next 25 years. If revenues stay close to their average share of
GDP for the past 40 years, that rise in spending will lead to rapidly
growing budget deficits and surging federal debt. To prevent debt from
becoming unsupportable, policymakers will have to substantially restrain
the growth of spending, raise revenues significantly above their
historical share of GDP, or pursue some combination of those two
approaches.

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

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