UPDATE 1-US budget gap at 5 pct/GDP post-recovery-OMB nominee

Tue Jan 13, 2009 3:47pm GMT

(Recasts, adds details, background)

By Jeremy Pelofsky

WASHINGTON Jan 13 (Reuters) - President-elect Barack Obama's incoming budget director warned on Tuesday that even after the U.S. economy recovers, the budget gap will still be around 5 percent of gross domestic product for up to a decade.

Peter Orszag, Obama's nominee to head the White House Office of Management and Budget, said that the driver of the long-term budget deficits was rising health care costs, but he pledged the new administration would work to wrestle them under control.

"The simple fact is that under current policies, the federal budget is on an unsustainable path," Orszag told the Senate Budget Committee considering his nomination, which must be approved by the panel and the full Senate.

"Even after the economy recovers from the current downturn and again under current policies, the nation faces the prospect of budget deficits that are in the range of about 5 percent of GDP over the next five to 10 years," Orszag said.

He said after that period, they would grow even larger. Even with an economic stimulus plan, he warned that "We're still in for some period of economic difficulty."

The Congressional Budget Office last week forecast that the budget deficit for fiscal 2009, which began Oct. 1, would likely hit $1.2 trillion, or a record 8.3 percent of GDP, blowing away the previous post-World War Two record of 6 percent hit in 1983.

Even with the soaring deficit, the rating agency Standard & Poor's affirmed its "AAA" rating on Tuesday for the United States, but said risks to the country's top sovereign rating have increased since September.

QUICK APPROVAL?

Orszag's nomination won bipartisan praise in the committee, and Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, said he wanted to move quickly to approve his nomination.

Orszag, who already has extensive budget experience from his current job as CBO director, said the Obama administration planned to "set a new standard for how we spend taxpayer dollars."

The incoming administration will likely unveil its new budget and economic overview in middle or late February.

On the health care issue, Orszag said in his testimony to the committee the Medicare and Medicaid health care programs needed to be changed, but in a way that also drives down the rate of growth in costs in the broader health care system.

"Were we to try to slow Medicare and Medicaid spending alone without slowing the rate of growth in health care costs system-wide, we would simply create massive access problems for Medicare and Medicaid beneficiaries," he said.

To address the short-term economic problems, the Obama team has been pushing for a stimulus program that could top $775 billion over two years and includes tax cuts and big infrastructure projects despite skepticism in Congress.

Orszag said the economy could receive a boost from infrastructure projects, particularly those that expend most of the money in the next two years, as well as investments in renewable energy and improving health-information technology.

"There are some concerns I have about the stimulus package, particularly the size of it," said Sen. Jeff Sessions, an Alabama Republican, adding that it could add a burden to the country and economy over the longer term. (Editing by Tom Hals and Philip Barbara)