CBO warns on deficit threat to US growth

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The Congressional Budget Office on Thursday issued its latest warning on America’s

fiscal outlook, saying long-term economic growth was threatened by high budget

deficits and the rising debt burden.

Even as it trimmed its forecast for this year’s deficit to $1,342bn, or 9.1 per cent

of gross domestic product, below the record $1,413bn fiscal gap recorded in 2009,

the CBO said the US faced “daunting” challenges to rebalance its finances.

“Continued large deficits and the resulting increases in federal debt over time

would reduce long-term economic growth,” said the agency, which offers non-partisan

analysis on the budgetary impact of bills to members of Congress.

“Putting the nation on a sustainable fiscal course will require policymakers to

restrain the growth of spending substantially, raise revenues significantly above

their average percentage of GDP of the past 40 years, or a combination of both.”

Although it reduced its estimate for the 2010 budget deficit, the CBO increased

its projection for next year’s fiscal gap to $1,066bn, or 7 per cent of GDP. In

the 2012 election year, the CBO expects the deficit to shrink further to 4.2 per

cent of GDP, or $665bn.

The agency also updated its economic forecast, which now has real GDP expanding

at a rate of 2.8 per cent in 2010, followed by slower growth of 2 per cent next

year. The average unemployment rate this year will be 9.5 per cent, falling to

9 per cent in 2011, the CBO estimates.

Compared with the Obama administration’s forecasts, the CBO is projecting both a

quicker reduction in the budget deficit and slower growth. This is because the

CBO estimates are based on the expiry next year of more than $3,000bn in tax

cuts enacted under George W. Bush. But the administration and congressional

Democrats are pushing to extend these provisions for Americans earning up to

$250,000, which would add to the deficit while boosting growth in the coming years.

America’s budgetary problems and the role of government spending have become a big

political flashpoint heading into the November congressional elections, where

Republicans are expected to make some gains.

On Wednesday, in a discussion with Ohio families on the economy, Barack Obama, US

president, said the deficit was “obviously” something that many Americans had on

their minds.

“We’re also going to have to look at how do we, over the long term, get control of

our deficit,” he said. “The key is to make sure that we do so in a way that doesn’t

impede recovery, but rather gives people confidence over the medium and the long term.”

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