Published August 26, 2009

White House paints darker economic picture

GDP to shrink 2.8%, joblessness to hit 10% this year

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(WASHINGTON) US unemployment will surge to 10 per cent this year and the budget deficit will widen to US$1.5 trillion next year, reflecting a 'deeper recession' than previously expected, White House budget chief Peter Orszag said.

The Office of Management and Budget (OMB) also forecasts that the US economy will shrink 2.8 per cent this year, worse than the 1.2 per cent contraction that the OMB projected in May.

For next year, the budget office said that the gross domestic product (GDP) will grow 2.0 per cent, less than the 3.2 per cent expected in May. By 2011, the economy would be well on its way to recovery, growing at a 3.8 per cent annual rate, according to the administration's mid-year economic review, released yesterday morning.

The budget shortfall for 2010 will mark the second straight year of trillion- dollar deficits. The projected deficit for the fiscal year that begins Oct 1 is higher than the US$1.26 trillion forecast in May and reflects expectations that economic growth will be slower this year and next because of 'the severity of the crisis in the US and in our trading partners', said Christina Romer, White House chief economist, who along with Mr Orszag briefed reporters on the report.

The deficit and unemployment numbers may weigh down President Barack Obama's drive for his top domestic priority, overhauling the US health care system.



'It throws a wrench in health care reforms,' Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, said in an interview before the report was released. 'No matter the specific numbers, they're a constant reminder that we're in bad, bad shape.'

Separately, Congressional budget analysts project a cumulative US$7 trillion deficit from 2010-2019, a figure roughly US$2 trillion less than the one projected by the White House budget office.

The nonpartisan Congressional Budget Office said that the deficit this year will total US$1.6 trillion, and that putting the US on a sustainable fiscal course will require a mix of lower spending and higher tax revenues than the amounts now projected.

The administration said last week that the deficit for the 2009 fiscal year, which ends on Sept 30, will be US$1.58 trillion, less than the US$1.84 trillion projected in May, because budget officials were able to delete hundreds of billions of dollars that had been set aside for bank bailouts. Last year's deficit was US$459 billion.

Mr Orszag defended the trillion-dollar deficits during a recession and said that it was desirable to reduce them as the economy recovers.

'The first step is to stop making those deficits worse' by enforcing pay-as-you-go legislation so that 'any new tax or entitlement' programmes are paid for, and by adopting a health care system that does not add to the deficit, he said.

'I know there are going to be some who say this report proves we can't afford health reform,' he said. 'I think that has it backwards,' because savings must be squeezed from the system.

Even with economic conditions worse that originally forecast, Ms Romer said, 'we do expect positive GDP growth by the end of this year' for the fourth quarter, as the economy reaches 'a turning point'. This is in line with 94 per cent of Blue Chip economists, according to Mr Orszag.

'A return to employment growth will take longer,' Ms Romer said. -- Bloomberg, AP