–White House’s Mid-Session Review Projects Large Deficits For Decade
–OMB’s Orszag: Must Cut Deficit, But ‘Foolish’ To Make Big Cuts Now
–CBO Report: U.S. Debt Could Grow To ‘Unsupportable Levels’
–CBO: Large Debt Would ‘Restrict’ Range of Policy Options For Economy

By John Shaw

WASHINGTON (MNI) – As lawmakers wind down their summer legislative
session, two recent fiscal reports show a dark fiscal landscape that
will require policymakers to respond.

The reports do not make for soothing beach reading.

Last Friday, White House budget director Peter Orszag released the
administration’s mid-session review. The report showed budget deficits
of $1.471 trillion in fiscal year 2010, $1.416 trillion in FY’11 and
$911 billion in FY’12.

The administration now projects deficits of $736 billion in FY’13,
$698 billion in FY’14, $762 billion in FY’15, $758 billion in FY’16,
$721 billion in FY’17, $749 billion in FY’18, $822 billion in FY’19 and
$900 trillion in FY’20.

Speaking this week at the Brookings Institution, Orszag said
serious deficit reduction steps are needed in the U.S., but added that
it would be “foolish to dramatically reduce the deficit immediately.”

Orszag urged policymakers to avoid the “false debate between jobs
and the deficit.” He said that sound economic policies require
short-term stimulus and longer-term deficit reduction.

“We need both and it’s all a question of timing,” Orszag said.

“Over the medium and long term, we’re on an unsustainable fiscal
path,” Orszag said.

The departing White House budget chief said that passage of
comprehensive health care reform this year has done a great deal to
tackle long-term deficits, but added “more needs to be done.”

Orszag said the work of the deficit reduction commission chaired by
former White House chief of staff Erskine Bowles and former senator Alan
Simpson will be a “critical kick start” to the fiscal debate next year.

The panel’s finding should help policymakers “get ahead of the
problem,” he said.

Orszag said that the U.S. is in “no immediate danger” of a loss of
global confidence in its ability to manage its fiscal affairs.

Orszag is stepping down Friday as White House budget director.

The day before Orszag’s remarks, the Congressional Budget Office
issued a paper, “The Federal Debt and Risk of a Fiscal Crisis,” that
focused on the gravity of the nation’s fiscal predicament.

The CBO paper said the recent surge in the federal debt is due to
the convergence of three factors: an imbalance in spending and revenues
that predates the recent recession and financial crisis; the sharp
reduction in revenues and surge in spending that “derive directly” from
the recession; and the cost of policy responses that were designed to
get the nation out of the recession.

The CBO said that the aging of the population and the rising costs
of health care will keep upward pressure on deficits unless policy
changes are made.

“Unless policymakers restrain the growth in spending, increase
revenues significantly as a share of GDP, or adopt some combination of
those two approaches, growing budget deficits will cause debt to rise to
unsupportable levels,” the report said.

The CBO report said rising debt levels would “increasingly restrict
the ability of policymakers to respond to unexpected challenges, such as
economic downturns or international crises.”

The CBO study warned that a rising level of public debt “would also
increase the probability of a sudden fiscal crisis” in which investors
could lose confidence in the government’s ability to manage its budget
and the government would thus lose its ability to borrow at affordable
interest rates.

The CBO report noted that any loss of investor confidence could
come gradually, but it could also occur, as recent international
examples show, “abruptly and interest rates on government debt would
rise sharply.”

If a fiscal crisis occurs in the U.S., “policy options for
responding to it would be limited and unattractive,” the CBO concludes.
The government would need to undertake some combination of restructuring
its debt, pursuing inflationary monetary policy, and implementing an
austerity program with spending cuts and tax increases.

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

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