Obama budget review may trim 2010 deficit forecast

By Alister Bull

WASHINGTON (BestGrowthStock) – The Obama administration may report somewhat better fiscal news when it delivers its mid-session budget review later this week, but the United States still faces a massive deficit and rising debt.

Higher corporate taxes and Wall Street’s quick repayment of a taxpayer bailout could see the projected 2010 U.S. budget deficit fall a bit when the review is released on Friday.

However, the fiscal funding gap would still be the widest on record, highlighting the tough task faced by President Barack Obama’s Democrats as they try to placate voter anger over government spending in an election year.

Obama’s economic team will update forecasts for the deficit and debt over the next decade, while revising estimates for the pace of growth and level of unemployment.

If the economic outlook is dimmed, as some analysts expect, that would further darken a long-term U.S. fiscal picture that already projects debt climbing above 70 percent of GDP.

Investors tend to focus on the long-term outlook, although U.S. government bond yields remain low despite the country’s fiscal challenges, signaling markets so far believe Obama’s pledge to tackle the deficit and debt going forward.

On the other hand, the White House will have the benefit of some more positive short-term news to deliver on Friday.

Analysts expect the deficit for the fiscal year to September 30 to decline from the record $1.56 trillion funding gap projected in Obama’s February budget.

“My guess is … that the deficit number will in fact be a little lower than it had previously been projected, maybe by $100 billion or so,” said Stan Collender, a partner at Qorvis Communications and longtime budget watcher who served on a commission during the 1990s to study budget issues.

If the 2010 deficit came in at $1.45 trillion, it would still be the widest on record, followed by the $1.41 trillion deficit in 2009.

Some observers see the scale of the short-term deficit as academic, considering the severe recession from which the country is still recovering. But they want more convincing White House efforts to phase in budget controls in the future.


“We know it is going to be a huge number, over a trillion dollars. And that would be perfectly appropriate given the economic downturn … if, and only if, we had a plan to get out of this mess. And we still don’t,” said Maya MacGuineas, president for the Committee for a Responsible Federal Budget.

Obama has established a fiscal commission to weigh how to tackle the deficit and debt. The 18-strong bipartisan panel is expected to recommend a mixture of tax increases and spending cuts when its report is delivered by the end of December.

Critics are skeptical it will be able to forge a genuine consensus on how to proceed that will survive the November 2 midterm congressional elections. They also doubt U.S. lawmakers will be prepared to enact the politically painful measures the commission recommends when they are presented to Congress.

Obama spoke to these doubts on Tuesday when he praised the open-minded spirit maintained so far by his commissioners.

“I think it is going to be a good report. But it is still going to require some tough choices, and we’re committed to pursuing those tough choices after we get that report,” he told a joint press conference with British Prime Minister David Cameron. Cameron has split ways with Obama and announced severe austerity measures to curb Britain’s own towering debts.

In the meantime, the White House may be able to argue the U.S. budget is already moving in the right direction.

Monthly updates from the Treasury show the budget deficit over the first three quarters of fiscal 2010 has accumulated to $1.004 trillion, or only two thirds of the initial projection with three quarters of the time elapsed.

Part of the boost to 2010 revenues could be higher corporate tax revenues, due to stronger profits.

But the big difference is seen coming from the lower-than-expected costs of the Troubled Asset Relief Program, created by Obama’s predecessor, George W. Bush, to save big U.S. banks during the financial crisis.

TARP’s initial $700 billion price tag has been slashed and now stands at $105.4 billion — $11.4 billion less than at the time of Obama’s February budget — while $198.4 had been paid back to the U.S. Treasury by the end of June.

Analysts say this is positive for the short-term budget picture but is by definition providing only temporary relief.

“People are paying it back and it is a positive. … That just needs to be understood in the right context. The banks can only repay the TARP funds once,” said Alex Brill, a research fellow at the American Enterprise Institute in Washington.


(Editing by David Alexander; editing by Todd Eastham)

Obama budget review may trim 2010 deficit forecast