Budget deficit to hit $1.48 trillion

A customer counts U.S. dollar notes at a bank in Hanoi November 29, 2010.

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 CBO "estimates that the act (renewing tax cuts) will increase the deficit by $390 billion in 2011, by $407 billion in 2012 and by $120 billion in 2013," according to the report.

While a deficit of nearly $1.5 trillion in the fiscal year that ends September 30 would be an all-time record in dollar terms, as a percentage of the overall economy it would be slightly below the $1.41 trillion deficit in the 2009 fiscal year.

The $1.48 trillion deficit, CBO said, would be about 9.8 percent of GDP, higher than the 8.9 percent of GDP in 2010, but below the 10 percent in 2009.

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.

Some Republicans looked at the CBO report as further evidence of the need to cut federal spending, ignoring the impact of the tax-cut extension.

"Today's CBO projections underscore what Republicans have been telling the Obama administration and its allies in Congress: The pursuit of a big government agenda is reckless, irresponsible and unsustainable," said Representative Tom Price.

Republicans also are expected to force a debate about whether U.S. borrowing authority should be raised soon, before the Treasury Department bumps up against a statutory ceiling around March 31.

But Senate Budget Committee Chairman Kent Conrad, a Democrat, told reporters that while there was "no choice" but to raise the limit in the short-term, any long-term extension should await a long-term plan for solving the country's fiscal problems "so we keep the pressure on" to accomplish that.

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 economic and 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 relented to in December 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, and then 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.

'DISTURBING' DEFICITS

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 debt to GDP ratio.

"As disturbing as those near-term deficits are, the long-term outlook is even worse," Conrad said.

Greg Valliere, an analyst for investors at the Potomac Research Group, said of the significantly higher 2011 fiscal year 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 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.

(Additional reporting by Donna Smith; editing by Stacey Joyce and Philip Barbara)