Administration lowers deficit projection

By Catherine Hollander

September 1, 2011

The Obama administration lowered its projection for the 2011 deficit on Thursday to $1.316 trillion, down 20 percent from February's projection of $1.645 trillion.

The Aug. 2 debt ceiling deal changed the deficit outlook, according to a mandatory review of the budget sent to Congress by the administration. The Mid-Session Review, carried out by the Office of Management and Budget, revised estimates of receipts, outlays, budget authority, and the deficit for fiscal years 2011 to 2021.

The review cited three "significant developments" leading to its new projection. First, the appropriations legislation for the rest of fiscal year 2011 cut $80 billion relative to the president's budget request. The president's revised fiscal framework, which called for $4 trillion in deficit reduction over 12 years, laid the groundwork for the third development: the debt ceiling negotiations this summer, which led to the creation of the so-called super committee charged with finding at least $1.5 trillion in additional deficit reduction.

Despite the recent slowdown, the administration expects GDP growth to eventually reach the previously forecast 2.5 percent in the long run as the impact of recent events dissipates. The reason is that the economy is operating below its capacity and so the potential for a "sharp recovery" is present.

The administration also expects unemployment to average 8.8 percent in 2011, down from its current level at 9.1 percent, and to fall to 7.7 percent by 2013. Its view is rosier than that of the nonpartisan Congressional Budget Office and Blue Chip forecasts, which project unemployment to remain elevated for a longer period of time. All three expect the unemployment rate to eventually settle between 5 and 6 percent.

The revised estimate hinges on a number of assumptions not entirely within the administration's control. It assumes that deficit reductions will be shared across security and non-security programs for the next 10 years, that caps on discretionary spending would generate $420 billion in savings on security programs, and that the 2001 and 2003 Bush-era tax cuts will expire at the end of 2012 and increase the total deficit reduction to $3.1 to $3.4 trillion over the next 10 years.

The review also called the super committee's recommendations "key" to placing the budget on a fiscally sustainable path. President Obama is expected to call for further long-term deficit reduction, exceeding the $1.5 trillion in cuts the bipartisan committee has been charged with finding, in a speech next week. But if the committee fails to reach agreement, automatic triggers will kick in to cut $1.2 trillion.

The administration reduced its near-term growth projections due to economic turmoil in the first half of the year. The persistent weakness of the housing market, fiscal consolidation at the state and local government level, turmoil in the Middle East, the earthquake and tsunami in Japan, and sovereign debt crisis in Europe all contributed to slower economic growth.

In its opening summary, the OMB said the administration would focus on boosting jobs as it works to reduce the long-term deficit. President Obama will introduce a major package of jobs initiatives next week. "Congress must appreciate that the economy is still wrestling with the after-effects of a very severe recession," the review said. The administration has been tight-lipped on what the package will include, but said that tax cuts, infrastructure ideas, and measures targeted at the long-term unemployed and particularly troubled sectors of the economy were all on the table.


By Catherine Hollander

September 1, 2011

http://www.govexec.com/federal-news/2011/09/administration-lowers-deficit-projection/34815/