March 18, 2011 / 7:39 PM / 9 years ago

UPDATE 2-Obama budget would worsen deficits - CBO report

* Deficits would be nearly 1/3 higher over coming decade

* Won’t help in negotiations with Republicans

* White House takes issue with methodology (New throughout)

By Andy Sullivan

WASHINGTON, March 18 (Reuters) - In a blow to President Barack Obama, an independent analysis released on Friday found that his latest budget proposal would worsen the country’s fiscal situation over the coming decade.

The estimate by the nonpartisan Congressional Budget Office is doubtless unwelcome news to the White House as it grapples with Republicans on fiscal issues ranging from current spending levels to a possible overhaul of taxes and entitlement programs like Medicare.

CBO found that Obama’s policy proposals would lead to a total of $9.5 trillion in budget deficits between 2012 and 2021 — 28 percent more than if current policies were kept in place.

The wider gap stems primarily from Obama’s tax proposals, which would lower government revenue and boost annual deficits, CBO said. That in turn would lead to higher interest payments, which would widen deficits further.

Interest payments on the debt would increase over the coming decade to 3.9 percent of gross domestic product from 1.7 percent, CBO said.

Both taxes and spending would remain well above historical averages, the report found.

The budget deficit — the annual gap between taxes and spending — has exploded in recent years as a deep recession has compounded the unpaid cost of tax cuts and wars in Iraq and Afghanistan. A pending wave of retirees is expected to push public healthcare and pension costs higher over the coming years.

RECORD FIGURES

Deficits have topped $1 trillion in recent years, the highest levels when measured against the economy since World War Two.

CBO projects that budget deficits will shrink in the next few years as the economy recovers before widening again.

CBO projected a $1.4 trillion deficit, below the White House estimate, for the fiscal year ending Sept. 30.

But CBO’s outlook for the following years was wider than the estimate the White House released with its budget proposal in February.

Republicans, who are trying to fulfill a campaign promise to slash spending, said the report undercuts Obama’s claim of fiscal responsibility.

“The Congressional Budget Office’s report exposes the widening gulf between the President’s rhetoric and his budget’s reality,” House Budget Committee Chairman Paul Ryan, a Republican, said in a statement.

White House budget director Jack Lew took issue with the CBO’s assumptions about economic growth and said that some programs would be canceled if the White House could not find a way to pay for them.

But he did not quibble with the report’s main finding that the country is on an unsustainable fiscal course.

“If we stay on our current course and do nothing, the fiscal situation will hurt our recovery and hamstring future growth,” Lew wrote in a blog post. (Additional reporting by Caren Bohan; Editing by Xavier Briand)

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