US facing daunting economic and budget crises - Congress

10 February 2011 21:17  [Source: ICIS news]

WASHINGTON (ICIS)--The US faces daunting economic and budget challenges over the next few years, the top congressional economist said on Thursday, and the nation’s debt load will become unsupportable unless federal spending is restrained or taxes are raised.

Douglas Elmendorf, director of the Congressional Budget Office (CBO), told the House Budget Committee that unless the federal government changes course, “The deficits that will accumulate under current law will push federal debt to significantly higher levels”.

He said that the federal deficit - the difference between government spending and its revenues - would likely reach $1,500bn (€1,095bn) this year, the highest since World War II. The CBO is the financial and budgetary analysis arm of Congress

Although growth in US gross domestic production (GDP) would likely be 3.1% this year, it will cool to 2.8% in 2012.

And while the recovering economy can be expected to add as many as 2.5m new jobs this year and annually through 2016, unemployment would remain stubbornly high, Elmendorf said.

“Even with significant increases in the number of jobs, a substantial reduction in the unemployment rate will take some time,” he added.

He said that the jobless rate would likely ease from its current 9.4% to about 9.2% by the end of this year, then slide slowly to 8.2% by the end of 2012 and 7.4% by the end of 2013.

“Only by 2016, in CBO’s forecast, does unemployment reach 5.3%, close to the agency’s estimate of the natural rate of unemployment, 5.2%,” he said.

He noted that federal debt has expanded sharply in recent years, climbing from just under $6,000bn or 40% of GDP in 2008 to $9,000bn or 62% of GDP at the end of last year.

By the end of 2021, he said, federal debt was projected to climb to $18,000bn or 77% of GDP.

“With such a large increase in debt, plus an expected increase in interest rates as the economic recovery strengthens, interest payments on the debt are poised to skyrocket over the next decade,” he said.

“Further increases in federal debt relative to the nation’s output almost certainly lie ahead if current policies remain in place,” Elmendorf  warned.

“To prevent debt from becoming unsupportable, policymakers will have to substantially restrain the growth of spending, raise revenues significantly, or pursue some combination of those two approaches,” he said.

President Barack Obama was expected to propose his budget for fiscal year 2012 next week. 

His budget proposal was expected to include sharp cuts in spending programmes, but the president’s reductions may be chopped even further by Congress, which has final word on federal spending levels.

($1 = €0.73)

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