US acknowledges recession deeper than thought

THE OBAMA administration yesterday acknowledged that the US recession had been deeper and more damaging to the country’s fiscal position than it had thought, and projected the budget deficit would be $2,000 billion (€1,398 billion) higher over the next 10 years than forecast.

The impact of the White House’s figures were partly blunted by its announced reappointment of Ben Bernanke as US Federal Reserve chairman, which was greeted warmly by the stock markets.

But taken together with a separate forecast yesterday by the independent Congressional Budget Office (CBO), the announcements presented a bleak picture of the US’s deteriorating debt position.

The CBO released sharply higher deficit projections predicting the 10-year deficit would reach $7,140 billion, some $2,700 billion 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, senior economist at the Brookings Institution.

The White House said the economy would shrink by 2.8 per cent this year compared with its 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 new assumptions push the expected cumulative 10-year deficit to $9,050 billion, as the downturn shrinks tax receipts and sucks resources from the government in the form of benefits and food stamps.

Peter Orszag, director of the White House’s budget office, said the new data “underscores the dire fiscal situation that we inherited and the need for serious steps to put our nation back on a sustainable fiscal path”.

The White House and CBO agreed that the US economy would start growing again by the end of the year.

Data yesterday suggested the recession could be petering out. House prices rose for the second month running in June. The confidence of American consumers also appeared 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 boost, with homebuilders and consumer discretionary stocks pulling the SP 500 to a fresh 10-month high.

As the economy pulls out of free-fall, attention increasingly turns to the US budget deficit, with many Republicans and some economists calling the level of public debt dangerous and unsustainable.

This year the budget deficit will be about $1,600 billion according to the White House and the CBO, the highest since the second World War at 11.2 per cent of gross domestic product (GDP).

The deficit will come down to 5 per cent of GDP by 2012, the White House predicted, but public debt as a percentage of GDP will rise from 48 per cent this year to almost 69 per cent in 2019. – Copyright The Financial Times Limited 2009