Peter Orszag of CBO on the Outlook--and on the GSEs
But, Peter, if ever circumstances impelled one to play the dismal scientist now is the time:
Update to the budget and economic outlook: CBO released the annual summer update to the Budget and Economic Outlook for Fiscal Years 2008 to 2018 today.... Today’s report makes it challenging to avoid playing the dismal economist, which I generally dislike doing. The budget deficit has risen substantially over the past year. And according to CBO’s updated economic forecast, the economy is likely to experience at least several more months of weakness. (Whether this period will ultimately be designated a recession or not is still uncertain, but the increase in the unemployment rate and the pace of economic growth are similar to conditions during previous periods of mild recession.)...
CBO estimates that the [unified] deficit for [fiscal] 2008 will be $407 billion, substantially higher than last year’s $161 billion. As a share of the economy, the deficit is projected to rise to 2.9 percent of GDP this year, up from 1.2 percent of GDP in 2007.... Since March, the bottom line in CBO’s baseline over the next ten years has worsened by an average of nearly $260 billion per year. Some of that deterioration is due to the weakened economy, near-term inflation, and other economic variables; those factors increased projected deficits (or decreased projected surpluses) by about $85 billion a year. However, the larger component of the changes results from extrapolating into future years the supplemental appropriations enacted in June (in accordance with the rules governing the baseline)....
An unusual amount of turbulence has roiled the U.S. economy this year, weakening the near-term outlook since CBO’s previous forecast. Specifically, CBO forecasts that GDP will grow by about 1.5 percent in real terms in calendar year 2008 and 1.1 percent in calendar year 2009....
Significant government actions regarding Fannie Mae and Freddie Mac occured as this report went to press. The actions were taken to reduce the risk of a systemic shock to the financial system and to stabilize the mortgage markets.... Given the steps announced by the Treasury Department and the Federal Housing Finance Agency on September 7, it is CBO’s view that the operations of Fannie Mae and Freddie Mac should be directly incorporated into the federal budget. The GSEs’ revenue would be treated as federal revenue and their expenditures as federal outlays, with appropriate adjustments for the manner in which credit transactions (like a mortgage guarantee) are reflected in the federal budget.
