U.S. budget deficit projected to dip to $1.1T

The dome of the U.S. Capitol is seen in Washington Jan. 4, 2011. AFP/Getty Images

Updated at 2:18 p.m. ET

WASHINGTON - A new budget report released Tuesday predicts the government will run a $1.1 trillion deficit in the fiscal year that ends in September, a slight dip from last year but still very high by any measure.

The Congressional Budget Office report also says that annual deficits will remain in the $1 trillion range for the next several years if Bush-era tax cuts slated to expire in December are extended, as commonly assumed — and if Congress is unable to live within the tight "caps" the lawmakers themselves placed on agency budgets last year.

The report is yet another reminder of the perilous fiscal situation the government is in, but it's commonly assumed that President Obama and lawmakers in Congress will be able to accomplish little on the deficit issue during an election year. The report was slightly more pessimistic than CBO's most recent projections last summer and would mean the fourth straight year of trillion-dollar-plus deficits.

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The first wave of statements from lawmakers had a familiar ring as each party cast blame on the other.

"Four straight years of trillion-dollar deficits, no credible plan to lift the crushing burden of debt," said House Budget Committee Chairman Paul Ryan, R-Wis., "The president and his party's leaders have fallen short in their duty to tackle our generation's most pressing fiscal and economic challenges."

"We will not solve this problem unless both sides, Democrats and Republicans, are willing to move off their fixed positions and find common ground," said Senate Budget Committee Chairman Kent Conrad, D-N.D. "Republicans must be willing to put revenue on the table."

The CBO study also predicts modest economic growth of 2 percent this year and forecasts that the unemployment rate will be 8.9 percent on Election Day. That is based on an assumption that Mr. Obama will fail to win renewal of payroll tax cuts and jobless benefits by the end of next month.

That jobless rate is higher than the rates that contributed to losses by Presidents Jimmy Carter (7.5 percent) and George H.W. Bush (7.4 percent). The agency also predicts that unemployment will average 9.1 percent in 2013 and remain at 7 percent or above through 2015.

CBO Director Douglas Elmendorf, however, told reporters that extending the two percentage point cut in Social Security payroll taxes would only lift the economy by perhaps one-fourth of a percentage point this year and would likely yield only a 0.1 to 0.2 percentage point drop in the jobless rate.

The agency's budget projections are worse than those issued last summer, in large part because its views on the economy are more pessimistic now. Last August, CBO predicted a $953 billion deficit for 2012 fiscal year. Corporate tax receipts are sharply lower than anticipated last year.

On the economy as a whole, CBO now predicts 2 percent growth from the fourth quarter of 2011 to the fourth quarter of this year, a 0.7 percentage point drop from its August numbers. Its predictions of the jobless rate are 0.4 percent higher.

"We have not had a period of such persistently high unemployment since the Depression," Elmendorf said.

The new figures also show that last summer's budget and debt pact has barely made a dent in the government's fiscal woes.

The pact imposed $2.1 trillion in spending cuts over 10 years, but lawmakers are already talking about easing across-the-board spending cuts required under the agreement. The modified estimates predict $11 trillion in accumulated deficits over the 2013-2022 if the Bush-era cuts in taxes on income, investments, large estates and on families with children are renewed. Mr. Obama has proposed largely extending them, but allowing them to expire for upper-income taxpayers.

Extending the full range of the Bush tax cuts costs $5.4 trillion over the coming decade, CBO says. Elmendorf said allowing tax rates to increase for families making more than $250,000 a year as Mr. Obama has proposed would shave perhaps $1 trillion from the 10-year costs of extending the tax cuts.

Last year, Mr. Obama and House Speaker John Boehner, R-Ohio, tried but failed to reach a "grand bargain" on the deficit, an effort that got hung up over taxes and cuts to major benefit programs like Medicare. A subsequent attempt by a congressional "supercommittee" to find smaller saving sputtered over the same issues.

What's left is a heap of unfinished business that comes to a head at the end of the year: expiring tax cuts and painful across-the-board cuts to the Pentagon and many domestic programs. To top it off, another politically toxic increase in the debt limit will be needed at some point shortly after the November elections.

The deficit would require the government to borrow 30 cents of every dollar it spends. Put another way, the deficit will reach 7 percent of the size of the economy, a slight dip from last year's 8.7 percent of gross domestic product.

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