U.S. economy improving, health reform key: White House

By Steven C. Johnson

NEW YORK (Reuters) - The U.S. economy is no longer on the brink of disaster but recovery will be slow and the jobless rate will remain "stubbornly high" in coming quarters, White House Budget Director Peter Orszag said on Wednesday.

Healthcare reform is also crucial to a sustained recovery, Orszag told the Council on Foreign Relations, as rising healthcare costs are the top threat to the U.S. fiscal future.

Orszag said healthcare reform "is further along than it's been in decades" and stressed that President Barack Obama would only sign a "deficit-neutral" reform bill that includes savings over the next decade.

"The economy is no longer on the brink, but it is not yet the robust economy we desire," he added. "Job losses may not be as severe, but job growth will not return for some time."

Orszag defended the Obama administration's $787 billion stimulus package, saying money was being allocated at a faster-than-expected pace. He said the U.S. economy is likely to have shrunk at a much slower pace in the second quarter of the year than it did in the final three months of 2008.

The U.S. economy shrank at about a 5.5 percent annual rate in the first quarter and the jobless rate hit 9.5 percent in June, the highest in nearly 26 years. The Federal Reserve said recently that that rate could exceed 10 percent by year-end.

Republicans have criticized the stimulus spending and its impact on swelling U.S. deficits. But Orszag said it was designed to have an impact over a two-year horizon and said measuring it against current payroll data was "misleading."

The White House has forecast a record budget deficit of $1.84 trillion, or 12.9 percent of gross domestic product, for the fiscal year ending September 30 but has said the shortfall will shrink quickly as the economy recovers.

HEALTHCARE CRISIS

Orszag made a fresh push for reforming the United States' $2.5 trillion U.S. healthcare industry, a White House priority. Obama has said he wants a bill passed before Congress adjourns for its August recess.

Republicans and some Democrats have balked at the price tag on reform, but Orszag said Obama would only sign a bill that was "deficit-neutral," with productivity and technology gains and other savings offsetting spending over the next decade.

He conceded that extending coverage to many of the 46 million uninsured Americans would increase costs temporarily but said it would in the long run reduce premiums.

"By reducing the number of people who are uninsured, whose costs are shifted onto those who are insured, you help hold down premiums for those who are currently insured," he said, answering a question following his luncheon speech.

In prepared remarks, Orszag said "if we fail to do more to move toward a high-value, low-cost healthcare system, we will be on an unsustainable fiscal path no matter what else we do."

The House of Representatives and Senate are working on versions of a reform bill. The nonpartisan Congressional Budget Office said recently that a House of Representatives committee version of the bill could swell the federal budget deficit by $239 billion over 10 years.

(Editing by James Dalgleish)