There is some good economic news. The red ink the US is swimming in is not as bad as projected in February. Yes, at $1.471 trillion, it's still huge – 10 percent of the nation's gross domestic product – but an improvement of $84 billion from earlier estimates.
But bad news still looms large. In the next fiscal year, according to the mid-season review released by the White House Office of Management and Budget (OMB) Friday, the US deficit will be $150 billion more than earlier projections. It is expected to come in at $1.416 trillion, or 9.2 percent of GDP.
The White House, which released the change in budget estimates, was careful not to overplay the changing numbers.
“These are not substantial changes and nothing we want to make too big a deal about,” said Peter Orszag, director of the OMB in a press call with reporters. “The economy remains weaker than we would like and the unemployment rate higher than we would like.”
The deficit numbers are an important part of the election debate this year with many voters concerned about the implications of the red ink. In addition, since the US government is the largest borrower, any changes in the US deficit could make a difference to pension funds or retirees who have investments in US Treasury securities. And, the deficit will be watched carefully by other industrial nations, who vowed at the Toronto summit earlier this year to reduce their own budget gaps.
Only this week, four Democrats in the House introduced legislation called the REDUCE Acts, which they claim could save $70 billion over the next decade. Also this week, however, Congressional Democrats led the way in passing legislation to extend federal unemployment insurance benefits at a cost of $34 billion in deficit spending.
House minority leader John Boehner of Ohio issued a statement Friday, pointing to the higher deficit projections for 2011 and 2012. The deficits will rise by $150 billion in 2011 and $83 billion in 2012. “Today’s report is a stark reminder of the legacy of Obamanomics: more spending, more debt and fewer jobs,” said Representative Boehner.
Some of the improvement this year is the result of lower than expected mandatory outlays, particularly for unemployment. For example, in February, the White House estimated unemployment would be 10 percent instead of the 9.7 percent estimated today. That saves $34 billion.
The largest change in the budget numbers was the result of the passage of the president’s health care bill. As a result of that passage, Mr. Orszag says budget savings will start to come in faster than increases in cost. This will lower the deficit in later years. For example, by 2016, Medicare will cost $17 billion less than the February estimate.
Indeed, according to the OMB, the deficit as a percent of GDP will fall from 10 percent this fiscal year to 5.6 percent in 2012 and 3.9 percent by 2014.
“It’s the fastest deficit reduction since the end of World War II,” says Orszag. However, Orszag says even though the long-term fiscal gap will be reduced, “more will need to be done.”
OMB’s economic assumptions have changed slightly from February since more economic data has come in. “We did not have the data from the strong fourth quarter in February,” says Christina Romer, the chair of the Council of Economic Advisers, who was on the call with reporters.
This year, OMB is expected GDP growth, after inflation, will come in at 3.1 percent compared to the 3 percent estimate in February. However, next year, the White House is forecasting growth will accelerate to 4.3 percent. This is considerably higher than the 3.1 percent forecast by the Blue Chip Economic Indicators, a compilation of the forecast of many private economists.