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CBO Head: Market Faith In Congress Could Keep Interest Rates Low January 25, 2007

Posted by notapundit in Congress, Politics, US News.
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WASHINGTON (Dow Jones)–While public confidence in Congress remains low, market confidence in Washington may be keeping interest rates low, Congressional Budget Office Director Peter Orszag said Thursday.

Orszag was testifying before the Senate Budget Committee on a report on the nation’s budget outlook his agency released Wednesday.

That report shows that higher-than-expected revenues and lower-than-expected spending mean the annual budget deficit will be lower than expected in 2007 and over the next five years.

Despite the good news, the report found that the nation will still amass substantial debt in the near term and will face unsustainable deficits as the baby boom generation retires.

According to Budget Committee analyses of that report, if tax cuts enacted under President George W. Bush’s first term are made permanent, and if U.S. involvement in the war in Iraq is gradually reduced, the U.S. will face annual budget deficits hovering between $200 billion and $300 billion through 2012.

A back of the envelope calculation shows that under those same assumptions, debt subject to federal limit will have risen by 2012 to approach $13 trillion, up from the $8.4 trillion at the end of fiscal year 2006.

This prospect, along with a long-simmering dispute over Bush’s fiscal policies brought discussion at the hearing to Bush’s tax cuts.

Under questioning from committee chairman Sen. Kent Conrad, D-N.D., Orszag noted that while some tax cuts may boost the economy, even those won’t “pay for themselves” as some proponents contend.

“Many tax cuts can generate economic activity,” Orszag said. But revenue generated for the government from that activity “offsets only a modest share of original cost,” he said.

Finance Committee member Sen. Wayne Allard, R-Colo., countered that if that were the case, then savings nationally would fall.

While savings rates continue to decline, Allard wondered, then why hasn’t there been an impact on long-term interest rates.

Orszag responded that the impact has been “muted in terms of the interest rate effect,” but has shown up in the form of increased consumption of U.S. debt overseas.

Asked by Allard whether there might be another explanation, Orszag said that financial markets could be pricing into interest rates the assumption that Congress will take whatever steps necessary to resolve the nation’s dismal fiscal outlook.

If, on the other hand, at some future point financial markets decide that is not the case, “you potentially could have a significant readjustment,” Orszag said.

By John Godfrey, Dow Jones Newswires

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