U.S. Budget Deficit Forecast Raised to $1.066 Trillion for 2011, CBO Says
Aug. 19 (Bloomberg) -- Vincent Reinhart, resident scholar at the American Enterprise Institute, talks about the U.S. Congressional Budget Office's budget deficit forecast and the outlook for fiscal and monetary policies. The CBO predicted the budget deficit for fiscal year 2011 will be $1.066 trillion, revised upward from an estimate of $996 billion in March. Reinhart speaks with Margaret Brennan on Bloomberg Television's "InBusiness." (Source: Bloomberg)
Aug. 19 (Bloomberg) -- Larry Kantor, head of research at Barclays Capital Inc., talks about the outlook for the U.S. economy, tax cuts and stocks. Kantor says the economy makes it "more likely" that all of the Bush tax cuts will be extended. Kantor speaks with Carol Massar on Bloomberg Television's "Street Smart." (This is an excerpt from the full interview. Source: Bloomberg)
The U.S. Congressional Budget Office predicted the budget deficit for fiscal year 2011 will be $1.066 trillion, revised up from an estimate of $996 billion in March.
The nonpartisan agency’s semi-annual budget report is likely to add fuel to the November midterm election debate over reducing the deficit at a time when the nation’s economic recovery may call for more stimulus. Today’s report estimated that the deficit will be 7 percent of the nation’s gross domestic product in 2011.
CBO Director Doug Elmendorf said the agency’s projections haven’t changed significantly since its March forecast, reflecting an economy that continues to struggle to recover from recession and the prolonged impact of bailouts and other spending designed to spur growth.
“Unfortunately, this is a case where no news is not good news,” Elmendorf said. “The country faces serious budget problems and serious economic problems.”
The CBO projected that the cumulative deficit for the next decade will be $6.27 trillion, compared with its March estimate of $5.99 trillion.
The CBO’s deficit forecasts don’t include changes in tax revenue or government spending not yet approved by Congress. When Congress returns from an August recess for a pre-election session, lawmakers will focus on fiscal policy, including a partisan debate over extending tax cuts enacted in 2001 and 2003 under President George W. Bush.
Income Tax Rates
Those cuts include lower rates on income, capital gains and dividends, a $1,000 child credit and relief from the so-called marriage penalty.
President Barack Obama argues that the nation can’t afford to extend the tax cuts for individuals making more than $200,000 or households with annual incomes over $250,000. The cost of extending the cuts for the most prosperous Americans would be about $700 billion over a decade, said Treasury Secretary Timothy Geithner.
The CBO said today the deficit for the current fiscal year ending Sept. 30 will be $1.34 trillion. That is 9.1 percent of GDP, or the second largest shortfall in the past 65 years, exceeded only by last year’s 9.9 percent.
The agency blamed this year’s shortfall primarily on weak tax revenue and policies enacted in response to the economic decline. Last year’s economic stimulus package accounts for $392 billion of the 2010 deficit, the budget office said.
Republican Response
Judd Gregg of New Hampshire, the top Republican on the Senate Budget Committee, decried a “spending spree” sparked in part by the policies of a White House and Congress controlled by Democrats.
“Today’s CBO outlook only underscores what we already know -- the current pace of U.S. spending is unaffordable and unsustainable, and without a change in direction, this country is headed for fiscal calamity,” Gregg said in a statement.
Democrats in Congress say the report underscores the need to keep the agenda focused on improving the economic recovery and curbing the rising deficit.
“We must start now to enact deficit-reduction policies that will kick in after the economy has more fully recovered,” Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, said in a statement.
Analysts say the report underscores the dilemma facing Obama, who must try to stimulate growth while finding ways to cut the deficit that is becoming a paramount concern of voters.
Hamstrung in Washington
“Washington is pretty much hamstrung,” said Vincent Reinhart, a former Federal Reserve monetary affairs director, in an interview with Bloomberg Television’s “InBusiness with Margaret Brennan.” Reinhart, a resident scholar at the American Enterprise Institute in Washington, said, “The serious concerns about the deficit and the debt make it unlikely that the administration and Congress could come together with a second stimulus package.”
“If you think fiscal policy is basically off the table, that just leaves monetary policy, and with the funds rate already at zero, that means quantitative easing in one form or another,” he said.
The CBO report said economic growth has been “anemic” compared with previous recoveries and predicted the economy will only grow by 2 percent from the fourth quarter of 2010 to the fourth quarter of 2011.
Vacant Homes
“The considerable number of vacant houses and underused factories and offices will be a continuing drag on residential construction and business investment, and slow income growth as well as lost wealth will weigh on consumer spending,” the report said. “All of those forces, along with the waning of federal fiscal support, will tend to restrain spending by individuals and businesses -- and, therefore, economic growth -- during the recovery.”
The CBO anticipated the unemployment rate won’t dip below 8 percent for the rest of Obama’s first term. It said unemployment will drop to 9.0 percent in 2011, 8.1 percent in 2012 and 6.6 percent in 2013.
The report also said the government is spending this year almost as much on unemployment benefits as the wars in Iraq and Afghanistan. It said Congress has appropriated $164 billion for the wars this year, while unemployment costs come in at $160 billion.
The report forecasts that debt held by the public will reach $10 trillion by the end of next fiscal year, and then climb to $16.07 trillion by 2020.
Euro Zone Deficits
The budget deficit is larger as a proportion of the U.S. economy than the 6.1 percent projected for the 16-nation euro zone in 2011. Deficits in the euro area will range from 2.9 percent in Finland to 12.1 percent in Ireland, according to European Commission forecasts from May.
Declining yields on U.S. Treasury notes have cut the costs of financing the deficit. Two-year note yields fell to a record 0.4715 today after reports showing that unemployment claims unexpectedly rose and manufacturing contracted in the Philadelphia area.
“It’s been relatively easy to borrow for Treasury with these big deficits,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “We’re saving a lot on interest costs relative to what we’d be paying if interest rates were at more normal levels.”
To contact the reporter on this story: Laura Litvan in Washington at llitvan@bloomberg.net.
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