Politicians tend to release bad news on Friday afternoons because they know that few people are paying attention to the news on the eve of their weekend. Yesterday, the White House released its upwardly-revised forecast for its deficits over the next ten years. It revised the forecast from $7 trillion to $9 trillion, a 28.57% upward revision! Unbelievable!
from 24/7 Wall Street:
The Administration quickly and fairly quietly raised it budget deficit number for the next ten years to $9 trillion from $7.1 trillion, an astonishing 27% increase.
The new estimate is much closer to the number that the Congressional Budget Office posted earlier this year.
One of the reasons for the change is that tax receipts are running below estimates due to the recession. The Administration believed unemployment would peak at 8%.
The shortfall in government revenue could continue for another year or more. The White House budget forecast robust GDP recovery in 2010 and 2011. Many economists expect the improvement will be closer to 2%. Unemployment will almost certainly remain above 9% next year and perhaps even into early 2011.
Tax receipts from businesses are also below forecast. A number of factors, especially consumer spending, have hurt many American companies worse than expected.
The alternatives for fixing the deficit problem are all bad. One is to raise taxes. A much higher burden on individuals would almost certain wound a recovery in consumer spending. Higher taxes on enterprises will make it /more/ likely they will cut more workers. It becomes a vicious cycle which ultimately adds to unemployment.
Another option is for the treasury to sell more debt. The New York Times recently reported that China’s appetite for US debt is falling. The paper writes “Figures released by the Treasury Department this week indicated that China reduced its holdings of Treasury securities by $25 billion in June, the most China had ever sold in a month.” That only leaves the Treasury one option, which is to offer higher interest rates on bonds. That will push up most other interest rates including those essential to the recovery, particularly mortgages.
The only alternative that will work to help the rising red ink is to cut government spending. The Congress and The White House have not shown much interest in that. But, the time is coming when their hands may be forced. That leaves the only open question as what will be what programs will be slashed and which will be preserved.
Douglas A. McIntyre
