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« Obama Stays The Course At The Fed | Blog Home Page | Club for Growth Targets Utah Republican »

OMB Explains Growing Deficit Forecast

The mid-session review released this morning by the Office of Management and Budget today is a case of good news bad news. As leaked previously, the forecast budget deficit for this fiscal year has dropped by $262 billion to $1.58 trillion, which represents a change of 1.7 percent of GDP.

But the long-term forecasts show a markedly different picture. The new 10-year projected deficit is $9.05 trillion, up $2 trillion from OMB's original estimate. As Peter Orszag explains in a blog post:

In line with the current consensus among professional forecasters, the Administration's economic projections show that we inherited a deeper recession than projected in February. These revisions are based on new data on the severity of the recession that weren't available last winter.

As a result of a deeper-than-expected recession, certain spending programs (such as unemployment insurance and food stamps) are projected to automatically increase and revenues are projected to automatically decline, compared to our previous projection. Although these effects help to ameliorate the economic downturn by stimulating demand, they also lead to higher medium-term deficits both directly and indirectly (through higher interest costs on a higher level of public debt).

Orszag continues to say that in an economic downturn, "one wants to allow the deficit to increase." Steps toward future deficit reduction will be taken in the future, he said. But he concedes that the current forecast means that deficits "hover in the range of 4 percent of GDP, which is higher than desirable."

He ends on a positive note, however:

On inauguration day, the Administration inherited the greatest economic crisis and the largest deficits since the end of World War II. The economic freefall has been arrested, and, while too many people remain out of work, the consensus among private forecasters is that the economy will return to positive growth in the second half of this year. As the economy recovers, the Administration is committed to putting the nation on a fiscally sustainable path.