January 31, 2012 / 9:23 PM / 8 years ago

U.S. set for fourth year of $1 trillion-plus deficit: CBO

WASHINGTON (Reuters) - The United States is headed for a fourth straight year with a $1 trillion-plus budget deficit, congressional forecasters said on Tuesday, giving Republicans ammunition to hammer President Barack Obama’s spending record in November’s elections.

Senate Budget Committee staff members stand ready to hand out stacks of U.S. President Barack Obama's proposed 2012 federal budget on Capitol Hill in Washington, February 14, 2011. REUTERS/Jonathan Ernst

The non-partisan Congressional Budget Office said the fiscal 2012 deficit would rise to $1.079 trillion from its previous estimate of $973 billion made last August. If Congress extends payroll tax cuts through year-end, as expected, the deficit would likely rise by another $100 billion through December.

The CBO report is the opening salvo in the 2012 debate over the appropriate size of the federal government in coming years and whether the wealthy should shoulder more of the burden in fixing a fiscal mess highlighted by a national debt that has topped $15 trillion and is racing higher.

Credit rating agencies did not immediately react to the forecast, but another $1 trillion deficit will do little to aid the U.S. case for regaining its top-tier rating cut by Standard & Poor’s during last year’s fight over raising the debt limit.

Credit rating agencies have called for at least $4 trillion in U.S. deficit reduction over the next decade but have expressed concern about partisan gridlock in Congress and a lack of political willingness to tackle the issue.

Budget experts said the CBO figures underscored the seriousness of the U.S. debt problem and the threat it posed to the country’s future economic growth.

Republicans called the CBO figures a “harsh indictment” of Obama’s economic policies. The president is most vulnerable on the economy, with polls consistently showing Americans unhappy with his economic stewardship since he took office in 2009.

The latest CBO analysis was particularly tricky.

In preparing its forecast, CBO tried to lay out the various consequences of some huge decisions that Congress must make by the end of this year - including whether to extend the 2001 and 2003 across-the-board tax rate reductions enacted by former President George W. Bush that are due to expire on December 31.

As a result, some of the deficit and economic forecasts could vary significantly.


Further complicating the U.S. fiscal situation is that demands on the federal government will get worse as Obama’s 2010 law to overhaul the healthcare system goes into effect and more and more elderly Americans qualify for expensive Social Security retirement and Medicare healthcare programs.

Against that backdrop, Democrats and Republicans are expected to mostly tread water on major decisions, leaving voters to decide in November whether the main focus in 2013 should be continuing to downsize government spending - as lawmakers tied to the conservative Tea Party movement have insisted - or to also revamp the tax code in a way that raises rates and closes loopholes for the rich.

Besides providing estimates on the country’s budget and economic profile, the new CBO forecast is important because it provides the official numbers lawmakers will rely on as they write next year’s budget.

Obama has said he wants to continue the Bush tax cuts for the middle class while ending them for upper-tier earners. Republicans oppose any rate hikes, while saying they want to reform the entire tax code and lower top rates. The more radical Republicans backed by the fiscally conservative Tea Party movement want steep spending cuts immediately.

The CBO report, by forecasting higher unemployment through 2013, will fuel debate in Congress over fiscal policy that is expected to rage throughout this election year.

CBO Director Doug Elmendorf said Congress faces a difficult choice. Allowing the Bush tax cuts to expire would hurt near-term growth and push up the unemployment rate to 9.2 percent by the end of 2013 but will aid longer-term growth. Leaving the cuts in place would spur more short-term growth, but would pile up another $8 trillion in deficits by 2022, leaving the United States with an “unsustainable” debt burden.

There was still time to cut a middle path. “To do that requires that fiscal restraint take effect slowly but amount to a very large change from current policies by the end of the decade,” he said.

The report could feed into a central theme of the Republican election strategy to recapture the White House and Senate. They plan to portray Obama as responsible for a spending binge that has seen U.S. deficits and debt surging to record levels.

House of Representatives Budget Committee Chairman Paul Ryan, a Republican, noted “four straight years of trillion-dollar deficits” and “no credible plan to lift the crushing burden of debt” that has grown during Obama’s presidency.

The White House defended Obama’s approach to the deficit and blamed the problem on the recession the president inherited, the tax cut and spending policies pursued by George W. Bush and stiff resistance from Republicans to Obama’s deficit reduction proposals.

Asked how Obama would convince voters he could control the deficit if they gave him a second term, White House spokesman Jay Carney said the president would stick to his strategy of pledging a “broad, balanced approach” to deficit reduction.

Obama proposed a $4 trillion deficit-reduction plan last September but it stalled amid partisan bickering on Capitol Hill. He plans to revive it when he proposes his 2013 budget on February 6, White House officials have said.

The CBO forecast, using the assumption that Bush-era tax cuts expire at the end of 2012, shows the deficit falling to about $585 billion for fiscal 2013, which starts in October. That figure was also slightly above the August forecast.

The deficit for the current fiscal year will stay above $1 trillion mostly due to weaker than expected corporate tax revenues and costs of a two-month extension in the payroll tax.

The U.S. posted $1.3 trillion deficits in each of the past two years after a record $1.4 trillion deficit in fiscal 2009, Obama’s first year in office.

Additional Richard Cowan and Donna Smith; Editing by Ross Colvin and Eric Walsh

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