UPDATE 2-US trims ’10 deficit forecast, economy faces headwinds

* White House lowers budget deficit estimate for 2010

* Repeats U.S. fiscal path unsustainable

* Economy faces “strong headwinds,” unemployment to linger
(Updates with more remarks, Republican reaction, context)

By Alister Bull

WASHINGTON, July 23 (BestGrowthStock) – The Obama administration
warned on Friday the U.S. economy had encountered “strong
headwinds” and the country’s fiscal challenge remained grim,
but it lowered an estimate for the budget deficit this year.

Outlining the country’s fiscal path over the next decade,
the White House said the numbers were moving in the right
direction but the deficit and debt were too high.

“The economy is still struggling; too many Americans are
still out of work; and the nation’s long-term fiscal trajectory
is unsustainable,” the White House said in the annual
midsession review of President Barack Obama’s budget.

Polls show Americans are anxious about the economy and
could punish Obama’s Democrats in Nov. 2 midterm congressional
elections for perceptions of big government spending and high
unemployment after a severe U.S. recession.

Investors are also eying U.S. debt at a time when European
governments are stressing fiscal consolidation. The White House
said the country was on track to meet its June commitment
to the Group of 20 in Toronto to halve the deficit by 2013.

The administration trimmed an expected funding gap in the
current fiscal year by $84 billion to $1.47 trillion versus the
estimate released in February. This gap was seen narrowing to
$1.42 trillion in 2011.

Republicans jumped on the numbers as proof “Obamanomics”
was not working.

“This report confirms that our national debt will double in
five years and triple in 10 years. It confirms that our
deficits are not sustainable,” U.S. House of Representatives
Republican Leader John Boehner said in a statement.

The review also tweaked White House assumptions about the
economy, which have been criticized as overly optimistic in the
past. The White House forecast growth at 3.2 percent this year,
3.6 percent in 2011 and 4.2 percent in 2012. Unemployment will
only decline slowly, staying above 6 percent until 2015.

The forecasts were based on data available through May and
finalised in early June.

“The most pressing danger we now face is unacceptably weak
growth and persistent unemployment, rather than outright
economic collapse, and that is a very substantial difference,”
White House budget director Peter Orszag told reporters.

Job creation is a vital goal for Obama, and will loom large
in the November poll, but unemployment has lagged growth and
remains at a lofty 9.5 percent.

EUROPEAN RISKS

“The U.S. economy still faces strong headwinds,” the White
House said, citing a weak housing market and doubts about the
recovery in Europe, which could sap demand for exports.

“The European recovery is at risk because of increased
uncertainty while government stimulus is withdrawn, and a
further slowdown in Europe would pose problems for the rest of
the world whose exports to Europe may be reduced,” it said.

Britain and Germany have announced austerity plans to
reassure investors, contrasting with the U.S. preference of
phasing in budget controls going forward.

European Central Bank President Jean-Claude Trichet, in an
article in the Financial Times on Friday, urged countries using
the common euro currency to “implement a credible medium-term
fiscal consolidation strategy.”

In contrast, Federal Reserve Chairman Ben Bernanke argued
this week the economy still needed fiscal support and it did
not make sense to try to rein in this year’s deficit.

But he stressed the country needs to curb the deficit over
the next 2 to 3 years.

Obama signed a $862 billion emergency stimulus last year,
which the White House says helped restore U.S. growth. But his
subsequent efforts to increase aid to cash-strapped states and
small businesses have been thwarted in Congress, mainly by
Republicans in the Senate objecting to more deficit spending.

U.S. government debt held by the public is projected to
rise above 70 percent of gross domestic product in 2012 and
reach 77 percent by 2020.

Critics warn adding to the deficit could sap investor faith
in the administration’s commitment to phase in budget controls,
risking a sovereign debt crisis here that unnerved European
markets earlier this year.

Long-term U.S. interest rates have stayed low despite the
grim U.S. budget outlook, supporting the recovery by holding
down borrowing costs on things like mortgages and auto loans.
But that could quickly change if bond investors took fright.

Obama vows to halve the deficit by 2013, a promise the
larger Group of 20 rich and emerging nations also adopted at a
meeting in Toronto last month, and the president has appointed
a bipartisan commission to suggest how to tackle the fiscal
challenge.

Obama’s 18-strong panel is expected to recommend a mixture
of spending cuts and tax increases when it reports findings by
the end of December, well after the congressional vote.

Investing Research

(Reporting by Alister Bull; Editing by Andrew Hay)

UPDATE 2-US trims ’10 deficit forecast, economy faces headwinds