Payroll tax extension adds to deficit, analysis finds

WASHINGTON (Reuters) - This year's budget deficit will swell by an additional $92 billion from estimates made in January after Congress later extended a payroll tax cut without reducing spending elsewhere, the nonpartisan Congressional Budget Office said on Tuesday.

The CBO, in an update to its budget estimates, said it now expects a $1.171 trillion deficit for the 2012 fiscal year, based on current law. Previously, it forecast a $1.079 trillion deficit for the fiscal year, which ends September 30.

The increase is in line with the $100 billion price tag for the tax cut, and leaves both Democrats and Republicans with a deeper near-term fiscal hole as they consider how to deal with the expiration at the end of December of tax cuts begun under former President George W. Bush.

"The fundamental story about the federal budget has not changed: Although the deficit is starting to shrink, it remains very large by historical standards," the CBO said in the report.

"How much and how quickly it declines will depend in part on how well the economy performs over the next few years. Probably more critical, though, will be the fiscal policy choices made by lawmakers as they face the substantial changes to tax and spending policies that are slated to take effect within the next year under current law."

The baseline projections - which assume that the tax cuts enacted by Bush will expire on December 31 - show a reduction of $186 billion in the cumulative deficits for the subsequent 10 years compared with the January estimate.

This is largely attributed to revised revenue estimates of the 2010 healthcare law signed by President Barack Obama.

Under the CBO's alternative fiscal scenario, which assumes that the Bush-era tax cuts and some other policies are left in place, the 10-year cumulative budget deficits would shrink by $250 billion from the January estimate, to a cumulative $7.845 trillion.

(Reporting By David Lawder; Editing by Will Dunham)