August 19, 2010 / 2:09 PM / 9 years ago

UPDATE 1-U.S. 2010 budget deficit at $1.342 trln - source

* Latest 2010 CBO estimate down from March figure

* Obama worried about thwarting tepid economic recovery (Recasts with numbers throughout)

By Richard Cowan and Donna Smith

WASHINGTON, Aug 19 (Reuters) - The U.S. budget deficit will hit $1.342 trillion this year, the Congressional Budget Office forecast on Thursday, down slightly from its March projection of $1.368 trillion, according to a government source.

CBO, the Congress’ nonpartisan budget analyst, also forecast a $1.066 trillion deficit for fiscal year 2011, which begins on Oct. 1, up slightly from the March estimate of $996 billion.

The numbers show that without significant changes in U.S. tax and spending laws, Washington will struggle to dig its way out of a deficit hole that is expected to play a major role in this year’s Nov 2 midterm congressional elections as American anxiety about the economy grows.

That anxiety could punish President Barack Obama’s Democrats at the polls given the perceptions big deficits resulting from big government spending and high unemployment.

The CBO is due to formally release the budget figures later on Thursday morning.

The CBO’s budget and economic outlook is designed to give lawmakers the most up to date nonpartisan assessment of U.S. economic health and provide the latest projections on deficits that began in 2002 under Bush and then skyrocketed in 2009 during recession and stimulus spending under Obama.

Members of Congress will rely on the CBO numbers as they decide how to tackle the yawning budget gap.

The U.S. budget deficit last year was a record $1.413 trillion, 9.9 percent of gross domestic product.

In fiscal year 2012, the CBO projected a $665 billion deficit, that would then fall to $525 billion the following year, the source said.

The expiration of tax cuts enacted by former President George W. Bush at the end of this year is reflected in the CBO’s 2011 and 2012 numbers although Obama says he wants to maintain some of the reductions.

In financial markets, U.S. government debt prices have risen and yields, which move in the opposite direction, have fallen despite the deficits. The benchmark 10-year Treasury note yield US10YT=RR fell to a 17-month low of 2.56 percent this week.

However, some warn Treasury yields could rise sharply if investors lose confidence in Washington’s ability to rein in the deficit. (Editing by Alistair Bell& Theodore d’Afflisio)

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