U.S. budget deficit to hit $1.48 trillion
WASHINGTON (Reuters) - The U.S. budget deficit this year will jump nearly 40 percent over prior forecasts, mostly due to the mammoth tax-cut package brokered by President Barack Obama and lawmakers last month, the Congressional Budget Office said on Wednesday.
The CBO said the fiscal 2011 deficit will hit $1.48 trillion, up from last August's $1.07 trillion estimate, which was crafted before Bush-era tax rates were extended at a cost of $858 billion over 10 years.
"The United States faces daunting economic and budgetary challenges," the CBO said.
The new forecast is part of a semi-annual economic review by the CBO, the nonpartisan budget analyst for Congress.
The latest CBO estimates could exacerbate a deeply partisan debate in Congress and with Obama over the best way to tackle the $14 trillion federal debt.
Congress is grappling with spending levels for the rest of this year and committees are starting to look at budget blueprints and spending for fiscal 2012 as well.
In his State of the Union speech to Congress on Tuesday, Obama called for tackling the country's fiscal problems through tax reform and a five-year spending freeze for many domestic programs, which he said would save $400 billion over 10 years.
Obama also warned the tax breaks for the wealthy that he went along with in December to win Republican support were unsustainable.
"We simply cannot afford a permanent extension of the tax cuts for the wealthiest 2 percent of Americans," Obama said.
That tax-cut deal extended low tax rates for all Americans, renewed jobless benefits, gave workers a payroll tax break and let business more quickly write off investments, among other provisions.
The CBO also said the U.S. economy will expand 3.1 percent this year and 2.8 percent in 2012, with real gross domestic product growing an average of 3.4 percent in 2013-2016.
"Revenue growth will be restrained by the slow and tentative pace of the recovery and by the 2010 tax act," the CBO said.
CBO also said the $1.48 trillion deficit would be about 9.8 percent of GDP, up from 8.9 percent of GDP in 2010.
The severe impact of annual budget deficits was noted by CBO Director Douglas Elmendorf, who wrote in an Internet posting that "debt held by the public will probably jump from 40 percent of GDP at the end of fiscal year 2008 to nearly 70 percent at the end of fiscal year 2011."
The debt held by the public could keep rising, reaching 77 percent of GDP in 2021 if current spending and tax policies are unchanged, the CBO said. Analysts say the United States should strive for a more sustainable 60 percent public debt to GDP ratio.
"As disturbing as those near-term deficits are, the long-term outlook is even worse," Senate Budget Committee Chairman Kent Conrad said.
"It is the deteriorating, long-term outlook that is the biggest threat to the country's economic security," Conrad said. "The fiscal challenge confronting us is enormous. To solve this problem, it will require real compromise and a great deal of political will."
Greg Valliere, an analyst for investors at the Potomac Research Group, said of the significantly higher 2011 deficit estimate: "It's going to be difficult for the Republicans to complain about it because they were part of the deal in December" to extend tax breaks.
With about 14 million people looking for work amid a 9.4 percent unemployment rate, job creation has lagged the recovery of the rest of the economy and congressional budget experts said it would remain stubbornly high for several years.
The economy will add about 2.5 million jobs from 2011 through 2016, CBO estimates.
The jobless rate will gradually fall to 9.2 percent in the fourth quarter of 2011, 8.2 percent in the fourth quarter of 2012 and 7.4 percent at the end of 2013.
Only by 2016, in CBO's forecast, does it reach 5.3 percent, close to the agency's forecast of the what is considered a "natural" jobless rate.
Meanwhile, spending on expensive entitlement programs, including those that provide retirement benefits and healthcare for the poor and elderly will rise from about 10 percent of gross domestic product in 2011 to about 16 percent over the next 25 years, Elmendorf said.
That estimate also includes federal health insurance subsidies in the newly enacted healthcare law that Republicans want to dismantle.
"The longer the necessary adjustments are delayed, the greater will be the negative consequences of the mounting debt, the more uncertain individuals and businesses will be about future government policies and the more drastic the ultimate policy changes will need to be," Elmendorf said.
(Additional reporting by Donna Smith, editing by Stacey Joyce)
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