Wednesday, August 26, 2009

Deficit fears put Obama’s reforms in jeopardy
By Edward Luce and Sarah O’Connor in Washington
Published: August 25 2009 20:44 | Last updated: August 25 2009 20:44

Tuesday’s sharply upgraded forecasts for growth in US national debt over the ext decade could hardly have come at a worse time for Barack Obama. Shortly after he was elected last November, the president let it be known he preferred the “big bang” approach to domestic reforms.

As Rahm Emanuel, the White House chief of staff put it, you should “never allow a crisis to go to waste”. In other words, the financial meltdown was seen as an opportunity for Mr Obama to enact as many of his key reforms, including healthcare, within the first year of taking office.

But fears of the Great Depression have receded only to be replaced by mounting concern over the country’s long-term creditworthiness. Rather than shoring up the appetite for domestic reform, the rising tide of fiscal panic could threaten large chunks of Mr Obama’s agenda.

In particular, prospects for enacting Mr Obama’s proposed $1,000bn (€700bn, £610bn) 10-year expansion in healthcare coverage this autumn are beginning to look dicey given the projected rise in the national debt of more than $9,000bn in the next decade.

Even though Mr Obama has promised the healthcare reforms will be self-funding, some believe the sharply altered mood in Washington could force the president to reorientate his priorities. Recent polls show the deficit ranking second only to jobs among the public’s chief worries. Healthcare comes a distant third.

“The national debt doubled under George W. Bush and it is set to almost double under Barack Obama,” says David Walker, head of the Peterson Foundation and former head of the General Accountability Office. “Unless we see a dramatic fiscal course correction we are likely to see all sorts of negative consequences, including a reduction in trend growth rates and growing international distaste for holding American debt.”

Mr Walker is among a growing body of observers who believe America’s deteriorating debt position could have consequences for the country’s national security – even compromising its superpower status. Pointing to the UK, which saw it’s triple A credit rating put on negative outlook earlier this year, Mr Walker says the US faces a similar spectre unless it changes course.

“At the moment we have a home team bias [the credit rating agencies are based in New York] and we are benefiting from having the dollar as the international reserve currency,” he says. “But we cannot take the reserve currency status for granted. The Chinese have already made a shot across our bows and these numbers will only reinforce their concerns.”

However, some economists caution against taking the latest forecasts as gospel. On Tuesday the Congressional Budget Office caused as much confusion as clarity when it brought out its own 92-page report alongside the White House’s 74-page document. Back in March the CBO said that if Mr Obama’s policies were implemented, the 10-year deficit would reach $9,300bn. Yesterday the White House seemed to acknowledge the CBO was more or less right. But the CBO had already been at work on new revisions.

To seasoned economists it was a reminder that projections are not always right. “The first thing you learn in doing these projections is to be very humble,” said James Horney, director of federal fiscal policy at the Center on Budget and Policy Priorities. “You know they’re going to be wrong and you know they’re going to be wrong by huge dollar amounts.”

Copyright The Financial Times Limited 2009.