U.S. budget improves, economy weighs: CBO (Reuters)

WASHINGTON (Reuters) – A sweeping U.S. budget deal has brightened the country's fiscal outlook but unemployment will remain high over the near term, nonpartisan congressional forecasters said on Wednesday.

The report by the Congressional Budget Office is likely to add fuel to the debate over jobs and the economy that is set to dominate Washington through the 2012 elections.

The recent budget deal, passed earlier this month after months of acrimonious debate, will help slash projected budget deficits nearly in half over the next 10 years, CBO said.

But economic growth will remain sluggish through 2012, CBO said. It said the unemployment rate, currently at 9.1 percent, will only fall to 8.5 percent by the time voters head to the polls in November 2012.

The economic picture is probably even worse as grimmer data has emerged since the office completed its work in early July, CBO Director Doug Elmendorf said.

"The pace of the recovery has been slow, and the economy remains in a severe slump," Elmendorf wrote in a blog post.

That could complicate President Barack Obama's re-election hopes and give more ammunition to Republican rivals who have criticized his economic policies.

Obama plans to unveil a job-creation package next month to help boost an economy that threatens to slide back into recession. At the same time, lawmakers on a special congressional committee will try to squeeze more budget savings from the tax code and popular benefit programs like Medicare.

Policymakers will have to balance austerity and stimulus efforts over the coming months, Obama's fellow Democrats said.

The report "underscores the need for the Joint Committee to propose a plan to help put America back to work, coupled with a blueprint to reduce the long term deficit," said Democratic Representative Chris Van Hollen, one of 12 lawmakers named to the bipartisan panel.

Republicans said the report showed that Obama's efforts to boost the economy in the wake of the 2008-2009 financial crisis have not borne fruit.

"A slight decrease in the projected deficit is nothing to celebrate, particularly when it is accompanied by the grim news that CBO expects the national unemployment rate to continue to exceed 8 percent well past next year," House of Representatives Speaker John Boehner said in a statement. "The president's policies were supposed to keep that from happening."

BUDGET DEAL YIELDS BIG SAVINGS

The United States will rack up $3.487 trillion in cumulative deficits over 10 years, some $3.3 trillion below its previous projection, CBO said.

Nearly two-thirds of that savings is due to the deficit-reduction deal, which passed earlier this month as part of a package to raise the national debt limit. Another one-fifth is attributable to lower projected interest rates during the coming decade, CBO said.

Stocks rose as much as 1 percent and Treasury bond prices fell as the figures revealed a stronger fiscal outlook than previously thought. Both markets later flattened out as other factors overtook early enthusiasm about the CBO data.

The economic picture could worsen considerably if Congress extends temporary tax cuts that were passed under President George W. Bush.

CBO's budget projections assume that those cuts will expire at the end of 2012. Democrats want to extend them for middle and low income taxpayers, while Republicans want to extend the tax cuts for the wealthiest households as well.

An aging population and rising healthcare costs will force Congress to raise taxes or pursue further spending cuts if it wants to keep deficits and debt under control, Elmendorf wrote.

In the current fiscal year, which ends on September 30, the government will spend $1.284 trillion more than it collects, according to CBO's latest estimate. That is a $115 billion improvement over its last estimate in March.

Gross domestic product will grow by an annual rate of 2.4 percent this year and 2.6 percent next year, CBO said.

(Additional reporting by Richard Cowan in Washington and Chris Sanders in New York; editing by Deborah Charles and Vicki Allen)

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Somali 7-month-old weighs the same as newborn (AP)

By KATHARINE HOURELD and KHALED KAZZIHA, Associated Press Katharine Houreld And Khaled Kazziha, Associated Press – 2?mins?ago

DADAAB, Kenya – Seven-month-old Mihag Gedi Farah is the frail face of Somalia's famine. He stares out wide-eyed almost in alarm, his skin pulled taut over his ribs and twig-like arms.

At only 7 pounds, (3.2 kilograms), he weighs as much as a newborn but has the weathered look of an elderly man.

Mihag is just one of 800,000 children who officials warn could die across the Horn of Africa. Aid workers are rushing to bring help to dangerous and previously unreached regions of drought-ravaged Somalia.

Famine victims like Mihag bring new urgency to their efforts, raising concerns about how many hungry children still remain in Somalia, far away from the feeding tubes and doctors in the field hospital at this Kenyan refugee camp.

Mihag's fragile skin crumples like thin leather under the pressure of his mother's hands, as she touches the hollows where a baby's chubby cheeks should be.

Sirat Amine, a nurse-nutritionist with the International Rescue Committee, puts Mihag's odds for survival at only 50-50. A baby Mihag's age should weigh about three times what he does.

His mother, Asiah Dagane, fans Mihag with the edge of her headscarf to keep flies away. He cries weakly, and when he does, she bounces him gently to try to soothe him and murmurs softly.

"In my mind, I'm not well," she says softly. "My baby is sick. In my head, I am also sick."

Mihag is the youngest of seven children in his family. His mother brought him and four siblings on the journey from Kismayo to northern Kenya after all their sheep and cattle died in the drought.

Like the tens of thousands of other Somalis fleeing starvation, the family traveled by foot, other times catching rides with passing trucks, cars or buses.

Dagane keeps vigil for her son in the ward, which is painted with cheerful pictures of balloons and fruit, lit with fluorescent bulbs. Other mothers huddle on beds next to babies with IV tubes snaking from their heads or hands.

Some infants cry, others are listless. In the middle of the room hangs a woven basket from a scale — but it's not needed to tell that many of the babies are dangerously malnourished.

Abdi Ibrahim Yara arrived 20 days ago with his four children, including 1-year-old twins. They are unable to drink the fortified milk and must be nourished by an IV.

He and his wife were on the road for 25 days, but she became sick from malnutrition and died. She was four months pregnant.

"We had a comfortable life there, but now there is no one left," Yara says.

Nurse Abukar Abdule says all of those arriving at the field hospital complain of "severe malnutrition." Most have walked from the middle of Somalia, between Kismayo and the capital of Mogadishu.

"We have to treat them for at least a week," Abdule says. "They have no food, shelter or water. Some have diseases. Some died on the road and some were lost. Many mothers who come here have lost children."

The United Nations estimates that more 11 million people in East Africa are affected by the drought, with 3.7 million in Somalia among the worst-hit because of the ongoing civil war in the country.

Somalia's prolonged drought became a famine in part because neither the Somali government nor many aid agencies can fully operate in areas controlled by al-Qaida-linked militants, and the U.N. is set to declare all of southern Somalia a famine zone as of Aug. 1.

Aid organizations including the U.N. World Food Program have not been able to access areas under the control of the al-Shabab militants, who have killed humanitarian workers and banned the WFP.

The U.N. has said it will airlift emergency rations later this week to try to reach at least 175,000 of the 2.2 million Somalis who have not been helped yet.

The new feeding efforts in the four districts of southern Somalia near the border with Kenya and Ethiopia could begin by Thursday, slowing the flow of tens of thousands of people who have fled their homes in hope of reaching aid.

But the WFP hasn't operated there for more than two years and must find and rehire former employees to help with distribution. Transportation is also a substantial obstacle because land mines have severed key roads and a landing strip has fallen into disrepair.

The U.N. Food and Agriculture Organization said a coordination conference would be held Wednesday in the Kenyan capital.

Donations are also desperately needed to sustain the aid effort in the Horn of Africa: The U.N. wants to gather $1.6 billion in the next 12 months, with $300 million of that coming in the next three months.

At the Kenyan refugee camp, Mihag's nurse takes his measurements and describes him as "severely, severely malnourished."

"We never tell the mother, of course, that their baby might not make it," the nurse says. "We try to give them hope."

___

How to help:

http://www.interaction.org/crisis-list/interaction-members-respond-drought-crisis-horn-africa

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Exclusive: Treasury secretly weighs options to avert default (Reuters)

WASHINGTON (Reuters) – A small team of Treasury officials is discussing options to stave off default if Congress fails to raise the country's borrowing limit by an August 2 deadline, sources familiar with the matter said on Wednesday.

Senior officials, including Treasury Secretary Timothy Geithner, have repeatedly said there are no contingency plans if lawmakers do not give the U.S. government the authority to borrow more money.

But behind the scenes, top Treasury officials have been exploring ways to prevent a financial meltdown that would be triggered if the government were unable to pay its bills on time, sources told Reuters.

Treasury has studied the following issues:

- Whether the administration can delay payments to try to manage cash flows after August 2

- If the U.S. Constitution allows President Barack Obama to ignore Congress and the government to continue to issue debt

- Whether a 1985 finding by a government watchdog gives the government legal authority to prioritize payments.

The Treasury team has also spoken to the Federal Reserve about how the central bank -- specifically the New York Federal Reserve Bank -- would operate as Treasury's broker in the markets if a deal to raise the United States' $14.3 trillion borrowing cap is not reached on time.

The U.S. government currently borrows about $125 billion each month. The Obama administration wants Congress to raise the limit by more than $2 trillion to meet the country's borrowing needs through the 2012 presidential election.

The contingency discussions, which have remained a closely guarded secret throughout weeks of negotiations with Congress over the debt ceiling, are being led by Mary Miller, Assistant Secretary for Financial Markets, who is effectively custodian of the country's public debt.

Miller's team has debated whether Obama could ignore Congress and order continued borrowing -- by relying on the 14th Amendment of the U.S. Constitution -- if it fails to raise the borrowing cap.

The fourth section of the 14th Amendment states the United States' public debt "shall not be questioned." Some argue the clause means the government cannot renege on its debts.

Obama dismissed talk of invoking the amendment on Wednesday. "I don't think we should even get to the constitutional issue," he said. "Congress has a responsibility to make sure we pay our bills. We've always paid them in the past."

HINT OF PLAN B COULD HURT TALKS

The White House declined to comment on the discussions at Treasury, but administration officials sought to tamp down talk of relying on the 14th Amendment.

There has been growing speculation in Washington in recent days that the administration could use the amendment to ignore the congressionally imposed limit on the amount of money the United States can borrow.

"Despite suggestions to the contrary, the 14th Amendment is not a failsafe that would allow the government to avoid defaulting on its obligations," said White House spokeswoman Amy Brundage.

Miller's team has discussed the Government Accountability Office's 1985 assessment that Treasury has the authority to prioritize payments in the event of a default -- an option Treasury officials have been wary of.

The administration's nightmare scenario is that investors panic at the prospect of a default, triggering a crisis that eclipses the 2008 financial meltdown. That could plunge the U.S. economy into another recession, something that could doom Obama's re-election prospects in 2012.

Some conservative Republicans have argued the Treasury can prioritize payments and manage a default. The administration wants to keep lawmakers focused on the August 2 deadline, and even a hint of a "Plan B" could lessen the urgency to strike a deal by then.

"As we have said repeatedly over the past six months, there is no alternative to raising the debt limit," Treasury spokeswoman Colleen Murray said when asked to comment on the Treasury discussions.

"The only way to prevent a default crisis and protect America's credit-worthiness is to enact a timely debt limit increase, which we remain confident Congress will do."

TREASURY OFFICIALS MUM

Obama meets leaders from both parties at the White House on Thursday as he seeks to get an agreement to cut trillions from the U.S. deficit, which Republicans have demanded in exchange for their support to raise the debt limit.

The fear of any loss of momentum in the debt and deficit talks is so great that even in their private conversations with former colleagues and investors, administration officials are refusing to admit to contingency discussions.

"There has to be contingency planning," said one former Obama administration official. "But they won't even tell me that."

That view was echoed by numerous former officials from the Clinton, Bush and Obama administrations.

"You have to have a backup plan. If you are relying on Congress to avoid the possibility of an Armageddon, you can't just bet on that," said Keith Hennessey, who headed the White House National Economic Council during President George W. Bush's administration.

In August, the Treasury will take in roughly $172 billion, but is obligated to make $306 billion in payments -- meaning it cannot pay about 45 percent of its bills without borrowing more money, according to the Bipartisan Policy Center, a Washington think tank.

That would force the administration to make some difficult choices, even though officials believe emergency measures will buy little time and cannot stave off an economic catastrophe.

OPTIONS "PRETTY UGLY"

If Treasury were to decide to delay some payments, one option could be to postpone a disbursement of more than $49 billion to Social Security recipients that is due on August 3.

It would be a politically explosive step but one that could allow the government to temporarily pay bondholders to try to avoid foreign investors dumping U.S. Treasuries and the dollar.

The administration has warned that any missed payments, including those to retirees, veterans and contractors, would be default by another name, and the Treasury team still has concerns that any contingency plan would prove unworkable.

Steve McMillin, a former deputy director of the White House Office of Management and Budget under Bush, said Treasury has options but most of them are "pretty ugly."

If Treasury were to decide to delay payments, it would need to re-program government computers that generate automatic payments as they fall due -- a massive and difficult undertaking. Treasury makes about 3 million payments each day.

From their second floor offices in Treasury, Miller and Fiscal Assistant Secretary Richard Gregg, are the lieutenants Geithner is relying on if the administration's first option of negotiating a deal with Republicans falls apart.

"She's dealing with this day in and day out," said a former Treasury official.

The former official said Treasury aides were "speaking with Congress on a daily basis," giving them the latest updates on receipts and when default could occur.

The source said White House Chief of Staff Bill Daley and other officials regularly ask Miller for information.

"Every day they talk about the debt ceiling. The night before, they get the most recent numbers," the source said.

Michael Barr, a former Treasury official who worked closely with Miller, said he spoke with Miller and Gregg a month ago.

"They were exploring if there were any legal and practical alternatives. It was not obvious to them that the president has the legal authority to pick and choose who gets paid," he said.

Barr added: "It is not obvious that even if they had legal authority, that as a practical matter you can do it."

As recently as June 21, Miller told a group of sovereign debt holders in London that there is no Plan B and assured them that the debt limit would be raised before August 2.

Publicly, Treasury has maintained there is no contingency plan. "Our plan is for Congress to pass the debt limit," Geithner said late in May. "Our fall-back plan is for Congress to pass the debt limit, and our fall-back plan to the fall-back plan is for Congress to pass the debt limit."

(Additional reporting by Rachelle Younglai, Tim Reid, and Caren Bohan Editing by Ross Colvin and Jackie Frank)

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