An optimistic outlook fuels Obama's new budget

[February 15, 2011]  WASHINGTON (AP) -- The administration's new budget may not represent a full-fledged appearance by Rosy Scenario, but economists believe its economic assumptions are definitely pink around the edges.

What have raised eyebrows are the growth figures starting in 2012 and running for the rest of the decade. They show the overall economy, as measured by the gross domestic product, growing at significantly higher rates than private forecasts.

That has a direct impact on the administration's estimates for the deficit in those years. Stronger economic growth means more people working and more tax payments to the government -- and thus, lower deficits.

For 2012, the administration is forecasting that GDP will increase 3.6 percent and then climb at rates of 4.4 percent in 2013, 4.3 percent in 2014 and 3.8 percent in 2015.

By contrast, the Congressional Budget Office and many private forecasters see the GDP growing at rates that are as much as a full percentage point below the administration's forecasts. And the administration's forecasts continue to be slightly stronger for the rest of the decade through 2021.

Mark Zandi, chief economist at Moody's Analytics, said because of the stronger growth, the White House Office of Management and Budget is projecting that economic output in 2021 will be $850 billion higher than he has in his forecast. More output translates into higher tax revenues and thus helps the administration show lower deficits than it would have to project with slower growth.

In contrast to the optimism for the future, the administration's GDP forecast for the current year is below the projection of many economists. The administration sees GDP growing 2.7 percent this year while many private forecasters have GDP growth a full percentage point higher at 3.7 percent this year.

"Near-term, the administration is being very cautious, but as you move out, they get quite optimistic," Zandi said.

Part of the explanation for the discrepancy in 2011 has to do with the timing of the administration's forecast. It was done in mid-November, before Congress had passed a tax cut deal which provides major tax relief this year -- for individuals, through a 2 percentage point cut in their Social Security payroll taxes, and for businesses, in tax breaks for buying new equipment. That package has caused economists to boost their forecasts for 2011.

The same pattern of caution followed by optimism is evident in the administration's forecast for the unemployment rate. The White House projects it will end this year at 9.1 percent, slightly above the current 9 percent. However, the administration's forecast would have been done when the jobless rate was at 9.8 percent last November before falling to 9.4 percent in December and to 9 percent in January.

Many private economists believe the past two months have overstated the improvement in the labor market. They are forecasting that the jobless rate could well creep higher in coming months and end the year around the administration's forecast level of 9.1 percent.

But in coming years, because of the higher growth estimates, the administration sees bigger improvements in the jobless rate, dropping to 8.2 percent in the final quarter of 2012, a time when voters will be going to the polls to select a president.

And in future years, the administration is projecting further steady improvements with a drop to 6.3 percent unemployment in 2014 and then declines to a rate of 5.3 percent in 2017 and beyond. Zandi said that a 5.3 percent unemployment rate is lower than the 5.6 percent rate he believes the economy will reach during that time period.

All the pieces of optimism would translate right to the bottom line of the budget, the deficit figure, resulting in a deficit that would be billions of dollars lower in coming years.

Still, private economists said they did not view the administration's economic forecast as totally unrealistic, like some used in previous administrations to mask a deteriorating deficit picture.

"They are not being ridiculously rosy, but they are certainly on the upbeat side," said David Wyss, chief economist at Standard & Poor's in New York.

[Associated Press; By MARTIN CRUTSINGER]

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