–Estimates Significantly Underestimate Deficits
–10-Year Deficits Could Reach $12T–Not $6 Trillion
–10-Year Debt Interest Costs Could Hit $5 Trillion
–Current Recovery ‘Anemic’ Compared To Others in US
–State Governments Face ‘Tremendous Finacial Squeeze’
–‘Gradual Implementation’ of Deficit Cuts Needed

By John Shaw

WASHINGTON (MNI) – Congressional Budget Office director Doug
Elmendorf said Wednesday that his agency’s new fiscal report almost
certainly understates the severity of the nation’s deficit outlook
because of the requirements of budget estimating.

At a briefing following the release of the CBO’s ten-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.

Under this assumption, most of the Bush era tax cuts would be
extended for only two more years. However, President Obama supports
extending many of the middle class tax cuts while congressional
Republicans want all of the Bush era tax cuts to be extended.

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 FY12 through FY16 period, the CBO sees cumulative deficits
of $3.547 trillion and for the FY12 through FY21 period it sees
cumulative deficits of $6.971 trillion.

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

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

He added the U.S.’s long-term fiscal outlook is “daunting,” and
that “significant changes in tax and spending policy” are needed.

It would be preferable to implement deficit reduction gradually,
Elmendorf said. If this does not occur, “drastic” changes in fiscal
policy may be required and these would almost certainly be “disruptive”
to the economy.

He said there is no way to know “analytically” when American fiscal
policy reaches a “tipping point” in which a major crisis would ensue.

But he said “the risk does rise as the debt rises,” adding that
high debt levels hamper the flexibility of government policy.

Elmendorf said the call by both President Obama and congressional
Republicans to impose a freeze or even cuts in discretionary spending
would be consequential, but are not of sufficient size to get control of
the deficits that are approaching.

“I don’t think there is a single policy change that would eliminate
the fiscal imbalance,” he said, adding that policymakers should develop
a “number of different pieces of policy working together.”

Elmendorf said the tax cut extension and spending deal reached by
Obama and Congress will increase the budget deficit by $390 billion in
FY11, $407 billion in FY12, and $120 billion in FY13.

The CBO chief said the nation’s state governments are facing a
“tremendous financial squeeze,” adding that spending cuts by state
governments are “undoing” some of the positive work of federal
stabilizers.

Elmendorf said that local governments are also facing “large and
very serious problems” in financing.

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

Elmendorf said the U.S. is 10 million jobs short of full
employment, adding that the economy is now creating about 2.5 million
jobs a year.

The U.S. unemployment rate will fall to 8.2% in the fourth quarter
of 2012 and then decline to 5.3% in the fourth quarter of 2016, the CBO
chief said.

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

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