By Yali N’Diaye
WASHINGTON (MNI) – The Congressional Budget Office Wednesday
presented an update of its budget outlook and “discouraging” economic
projections that were based on data available through early July, hence
leaving out the recent market volatility and weak economic data.
Had the latter been factored into the economic projections, CBO
Director Douglas Elmendorf said it would have resulted in a lower growth
projection, although he did not say a recession.
“Incorporating the economic data of the past month and a half would
have led us to reduce expected growth in the near term,” he said during
a news conference.
He added the latest Federal Reserve policy decision had not been
taken into account either, partly explaining why current market interest
rates are lower than what the CBO is projecting. The CBO forecasts the
10-year treasury yield at 3.3% in 2011 and 3.2% in 2012.
Nor did the CBO try to estimate the effect of the downgrade by
Standard & Poor’s of the U.S. sovereign long term debt rating, Elmendorf
said.
Earlier Wednesday, the CBO said it projected a real GDP growth of
2.3% this year and 2.7% in 2012. It sees a federal budget deficit of
$1.284 trillion in 2011 and 973 billion in 2012, both revised down.
In the CBO’s baseline scenario, cumulative deficits are expected to
be $3.5 trillion between 2012 and 2021, with the debt held by the public
reaching 61% in 2021.
The cumulative deficits were revised down $6.7 trillion from March,
with the effects of the Budget Control Act accounting for two thirds of
the revision.
“Most of what’s left comes from a down revision to our projections
for interest rates,” both long term and short term, said Elmendorf.
While “The budget picture is bleak under current policies,” current
law would yield lower deficits, Elmendorf said.
The CBO sought the most neutral way to factor in the effects of the
Budget Control Act (BCA) that requires a $1.2 trillion deficit reduction
between 2012 and 2011.
As a result, the CBO spread equal amounts of deficit reduction for
each year during that period.
The BCA makes a “real difference in the budget outlook,” leading
the CBO to mark down the deficit projections over the next decade by
$2.1 trillion, Elmendorf said. “That is a very substantial amount of
money even by the standards of the current federal budget,” he added.
That said, the final outcome is not known, leaving the projection
subject to great uncertainty.
The “challenges that remain, though, are very large” since the
savings have not been worked out and a “tremendous” number of issues are
still unsettled, not to mention the high debt levels that jeopardize
economic growth, the CBO director cautioned.
So, “There is absolutely no doubt that there are profound budget
challenges,’ he concluded.
In fact, there is no doubt “profound economic” challenges also
remain, he said, adding, “a great deal of the pain of this economic
downturn still lies ahead of us.”
Earlier in its update, the CBO said “the economy remains in a
severe slump,” adding that “Recent turmoil in financial markets in the
United States and overseas threatens to prolong the slump.”
Yet when the CBO completed its economic forecast in early July and
later updated it to factor in the effects from policy measures included
in the BCA, it “did not have time to include other news, including the
recent swings in financial markets,” Elmendorf said.
“But otherwise we haven’t been able to take on board the news in
financial markets, the latest data on non financial economic activity.
Had the information about market volatility and weak data been
available at the time the forecast was made, “we would have ended up
with somewhat weaker economic growth in the second half of this year,”
he said. “And that would have meant somewhat larger deficits.”
But Elmendorf does not expect a recession.
“We still believe, taking on board all the information available
today, that the economy will continue to grow in the second half of this
year,” he said.
Based on data available through early July, real GDP will increase
by 2.3% this year and 2.7% in 2.7%.
Elmendorf stressed the uncertainties surrounding the current
forecast are “especially great” given the “unusual” nature of present
business cycle.
“Many developments could cause economic outcomes to differ
substantially from those CBO has projected,” he said.
Under the CBO baseline projections that assume current laws will
not change, deficits fall to 6.2% of GDP next year and 3.2% in 2013.
The CBO expects the tax and spending policies under current law to
restrain growth in 2013.
That said, Elmendorf said “There are a number of ways in which the
Congress could reduce taxes or raise spending” to improve employment
over the next few years.
“One can combine short-term stimulus and longer-term restraint in a
way that would boost the economy in the near term and not prove to be a
drag in the medium term and long term,” he said.
Short-term fiscal stimulus is in fact compatible with long-term
fiscal restrain. “That amounts principally to having the policy changes
take effect later.”
However, that would lead to greater debt accumulation over the
short term.
So depending on both economic developments and policies
implemented, “There are risks on both sides of our forecast” for the
economy and the budget, he said.
He said the CBO has no “preference” on how deficits should be
reduced.
That said, “Decisions about how to put the federal budget on a
sustainable path are best taken sooner rather than later,” Elmendorf
said.
“Uncertainty about government policy is not helpful for
encouraging” household or business spending or hiring decisions, for
instance.
“Earlier resolution of the uncertainty about how fiscal policy will
play out would be good for economic growth” in the near term and the
long run alike.
** Market News International Washington Bureau: 202-371-2121 **
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