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Tuesday, August 25, 2015 - 10:34

UPDATE:US CBO Improves Deficit View;Sub-2% PCE Seen to Mid-'17

--Updating 10:03 ET Story, Adds Details
--Debt Limit Deadline Seen Between Mid-November, Early December

WASHINGTON (MNI) - Larger than anticipated tax receipts are shrinking the U.S. budget deficit, the Congressional Budget Office projected Tuesday, with this fiscal year's red ink down to $426 billion, $59 billion less than last year and $60 billion less than last estimated in March.

At 2.4% of GDP, the current year's deficit will be the smallest since 2007 and below the 50-year average relative to the size of the economy. However, three years of favorable budget trends will give way to higher interest rates and an accelerating pace of debt accumulation, CBO warned.

The next debt-limit deadline, when Treasury's borrowing power will be exhausted, will fall between mid November and early December, generally in line with earlier estimates, CBO projected.

For the 2016 fiscal year, which begins in October, the deficit will be smaller, at $414 billion and 2.2% of GDP, followed by a third year of good budget news in 2017, when the deficit is seen at $416 billion or just 2.1% of GDP.

After that, however, the budget picture gets worse, with deficits rising until they again hit $1 trillion a year in 2025. Deficits will add $7 trillion to the national debt between 2016 and 2025 in the 10-year outlook which did not see much revision from the CBO's outlook in March.

The CBO saw personal consumption expenditures rising at a rate below the Federal Reserve's 2% target until mid 2017.

GDP, the CBO said, is picking up in the second half of this year and will be growing 3.1% next year. The growth estimates are for slightly slower acceleration than seen previously for this year and slightly faster growth between 2016 and 2019.

Interest rates, as gauged by the 10-year Treasury note, will average 2.4% this year, climbing to a 4.2% yield in 2019. Three-month bills will climb from near zero where they have been since the end of 2009 to 3.4% by the end of 2019, in the updated outlook.

"Projected interest rates will be dampened by lower inflation as well as by slower growth in the labor force and slightly slower growth of productivity," the CBO said.

The CBO repeated its warnings about deteriorating U.S. credit conditions later in the decade in contrast to the historically favorable situation now. "The government's interest payments on debt held by the public are projected to rise sharply over the next 10 years because of two factors: rising interest rates and growing federal debt," the CBO report said.

"Because interest rates are now very low by historical standards, net outlays for interest are similar to amounts recorded 15 to 20 years ago, when federal debt was much smaller," the CBO said. "As those rates rise, and as debt continues to mount, the government's cost of financing will climb."

Looking far ahead, without congressional action, the country enters a fiscal nightmare a decade from now, with debt held by the public at 77% of GDP, roughly twice the average of 38% of the past five decades, and debt levels starting to rapidly accelerate relative to the size of the economy.

"Such high and rising debt would have serious negative consequences both for the economy and the federal budget," the CBO said. "When interest rates rise to more typical levels - as CBO expects will be the case in the next few years - federal spending on interest payments will increase considerably."

As deficits grow and pile on top of one another, the use of tax and spending policies to respond to future recessions or crises and, "finally, continued growth of the debt might lead investors to doubt the government's willingness or ability to pay its obligations," which would raise interest rate further.

--MNI Washington Bureau; tel: +1 202-371-2121; email:

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