Congressional Budget Office Sees Big Decline In Budget Deficit/GDP Between 2012-2022 (Slides)

A few days ago the Congressional Budget Office (CBO) released its budget and economic projections for the years 2012-2022 (pdf). I embedded the slides after the jump. The blog Pragmatic Capitalism has an interesting post on the release: "CBO: Budget Deficit To Drop “Markedly”, Threatens Economic Stability Stability." Under CBO's baseline scenario, unemployment falls, the budget deficit as a percentage of GDP declines, interest rates rise steadily, inflation stays under control, labor income rises to GDI (gross domestic income), net business fixed investment rises, and residential housing investment remains weak with the number of vacancies. Under their alternative scenario, however, they see the budget deficit/GDP percentage declining less than expected for a number of reasons.

With discretionary spending cuts projected, and tax provisions and emergency unemployment benefits set to expire in 2012-2013, this would help lower the budget deficit; however, if these programs were extended by law, the deficit would go down less than expected. PragCap, like Nomura's Richard Koo, has been saying that fiscal tightening in the U.S. would hurt economic growth because of the balance sheet recession taking place, which is similar to the Japanese experience (lost decade of deflation and deleveraging) in the 1990s. Of course the other view is that fiscal policy is unsustainable at this point (the Keynesian endpoint). Keep an eye on government bond yields in both Japan and the U.S to see when the trend changes. I'll be posting more about both of these topics. It's all about timing it seems.

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