US says debt outlook worsening
25 August 2009
, by Sarah O’Connor and Edward Luce in Washington (The Financial Times)http://www.ft.com/cms/s/0/68b8c09e-919f-11de-879d-00144feabdc0.html
The White House warned of a sharp deterioration in the fiscal outlook as President Barack Obama announced his intention to reappoint Ben Bernanke as Federal Reserve chairman.
Mr Obama said it was Mr Bernanke’s “bold action and out-of-the-box thinking that has helped put the brakes on our economic freefall”. The Fed chief pledged to do everything in his power to “restore a more stable economic and financial environment in which opportunity can again flourish”.
Tuesday’s announcement came as the White House pro jected the budget deficit would be $2,000bn higher over the next 10 years than it had forecast. Taken together with a separate forecast by the independent Congressional Budget Office, the news presented a bleak picture of America’s deteriorating debt position.
The CBO released sharply higher deficit projections predicting the 10-year deficit would reach $7,140bn, some $2,700bn more than it had thought in March. Unlike the White House’s calculations, the CBO estimate assumes all policies will stay exactly as they are.
“If you include the administration’s fiscal plans, this implies a deficit increase way in excess of $10 trillion over the next decade – the numbers are deeply alarming,” said Bill Gale, a senior economist at the Brookings Institution.
The deficit projections are a political millstone for the Obama administration as it seeks to promote health reform and other priorities. However, there is no sign of a rebellion in the bond market, where 10-year Treasuries were on Tuesday yielding 3.44 per cent. This suggests the market still sees a weak recovery ahead, even though data on house prices and consumer confidence suggested the recession was ending.
Karl Case, joint creator of the widely watched S&P Case-Shiller home price index, said its latest data showing a second consecutive monthly rise in house prices showed that the “boat has turned” in the US housing market. “That’s very good for the future of this financial problem. It is real and it looks like a turn,” he told Bloomberg Radio.
The confidence of American consumers also looked to be on the mend as the Conference Board’s index of consumer confidence rose to 54.1 in August from 47.4 in July. The data gave Wall Street a fillip, with homebuilders and consumer discretionary stocks pulling the S&P 500 to a fresh 10-month high.
The White House said the economy would shrink by 2.8 per cent this year compared with its previous 1.2 per cent estimate. It also expects unemployment to pass 10 per cent and stay higher than 8 per cent until the end of 2011.
The assumptions push the expected cumulative 10-year deficit to $9,050bn, as the downturn shrinks tax receipts and sucks resources from the government in benefits and food stamps.
Peter Orszag, director of the White House’s budget office, said the data “underscores the dire fiscal situation that we inherited”.
The White House was criticised this year for using rosy predictions in its budget that looked increasingly out of touch with economic reality.
The White House and CBO agreed that the US economy would start growing again by the end of the year.
“The rise in confidence presumably reflects the recent surge of the S&P 500 above 1,000,” said Paul Dales, US economist at Capital Economics. “But confidence remains well below its historical average and it has yet to regain the level seen before the collapse of Lehman Brothers almost a year ago.”
This year the budget deficit will be around $1,600bn, according to both the White House and the CBO. The deficit will come down to 5 per cent of GDP by 2012, the White House predicted, but debt as a percentage of GDP will rise to 69 per cent in 2019.Additional reporting by Kiran Stacey in New York
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