UPDATE 2-US budget gap widens, tops $1 trln for 3rd year

Fri Oct 14, 2011 3:22pm EDT

Related Topics

* September deficit widens less than expected

* Political battle over budget still raging

* Debt panel has tall task before looming deadline

By Pedro Nicolaci da Costa

WASHINGTON, Oct 14 (Reuters) - The U.S. budget gap widened slightly in fiscal 2011, staying above $1 trillion for a third straight year and providing fodder for a political battle over taxes and spending ahead of next year's presidential election.

The Treasury Department report on Friday comes just over two months after an epic showdown over the nation's debt ceiling that pushed the United States close to a debt default and led to a downgrade of America's prized AAA credit rating.

The shortfall in September, the final month of the fiscal year, widened to $64.57 billion compared to the same month a year earlier, although it came in at a few billion dollars less than economists had projected. The annual deficit was $1.299 trillion, up from 1.294 trillion in fiscal 2010.

The U.S. economy, the world's largest, has escaped the painful sovereign debt crisis the euro zone is now suffering, although the deterioration in its fiscal stance has roiled domestic politics.

Many experts argue anemic U.S. growth and a dire job market call for near-term fiscal stimulus or, at the very least, restraint in implementing spending cuts.

President Barack Obama has proposed a $447 billion plan to create jobs, but it was rejected by the Senate this week and now lawmakers are trying to pick up the pieces.

Republicans in Congress have been pushing hard for deep spending cuts to address the budget gap.

While the budget deficit widened in dollar terms in the latest fiscal year, it narrowed to 8.7 percent of U.S. gross domestic product from 9 percent in fiscal 2010. Economists say the GDP gauge is a more meaningful metric than the size of the budget shortfall measured in dollars.

U.S. GDP expanded under 1 percent in the first half of the year while unemployment has remained stuck above 9 percent for several months, raising fears of a new recession. Such concerns recently prompted Ben Bernanke, Chairman of the Federal Reserve, to warn lawmkers during testimony earlier this month that sharp reductions in government spending at a time of fragile recovery could be dangerous.

"(A) factor likely to weigh on the U.S. recovery is the increasing drag being exerted by the government sector," Bernanke told the Joint Economic Committee of Congress.

Even as he called for steps to bring the long-term deficit under control, the Fed chief urged legislators to "avoid fiscal actions that could impede the ongoing economic recovery."

After the debt ceiling fiasco in August, Congress created a special deficit panel charged with reaching a deal to cut $1.2 trillion over the next decade by Nov. 23. If they fail, automatic budget cuts will be triggered starting in 2013 that would cut funding to selected agencies and programs across the board and hit defense spending hard.

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