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

Reuters News
Posted: Jan 31, 2012 11:13 AM
U.S. set for fourth year of $1 trillion-plus deficit: CBO

By David Lawder

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 ammunition to Republicans to hammer President Barack Obama's spending record in November's elections.

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, deficits would likely rise by another $100 billion through December.

The CBO's baseline forecast, which is based on current law and assumes that Bush-era tax cuts and elimination of the alternative minimum tax expire at the end of 2012, shows the deficit falling to about $585 billion for fiscal 2013. That figure was also slightly above the August forecast.

Over the next decade under this scenario - considered by many political observers to be unrealistic - deficits would shrink back to a sustainable average of 1.5 percent of U.S. gross domestic product over the next decade - down from about 7.0 percent in fiscal 2012, which ends September 30.

The deficit for the 2013-2022 period totals $3.072 trillion under this scenario. But CBO said that under an alternative scenario that assumes tax cuts and Medicare payment rates are extended and automatic spending cuts agreed last year do not take place, the 10-year deficit could increase by nearly another $8 trillion.

The deficit for the current fiscal year will stay above $1 trillion due to a slowdown in corporate tax rates, a CBO official said. The agency assumed a conservative growth rate of 2.0 percent for fiscal 2012, but noted that this slows considerably in fiscal 2013 due to the assumption of sharply higher taxes under its assumptions based on current law.

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.

The estimates will provide fodder for both Republicans and Democrats in an election-year battle over spending and taxes.

A central theme of the Republican election strategy to recapture the White House is to portray Obama as responsible for a spending binge that has seen U.S. deficits and debt surging to record levels.

The Obama administration counters that it inherited an economy in free-fall and the outlays were necessary to prevent the 2007-09 recession from becoming another Great Depression.

While both parties agree on the need to put the country on a more sustainable fiscal path, they differ widely on how to get there. Obama and the Democrats want to raise taxes on the wealthy to make up shortfalls in revenue, Republicans argue for deep cuts in discretionary spending and entitlement programs such as Medicare, the health care program for older Americans.

The CBO estimates kick off several months of political posturing over the budget. Obama will unveil his spending wish-list on February 13, and is expected to use the event as an opportunity to press his case for a higher taxes on the wealthy and continued lower taxes on the middle class.

(Reporting By David Lawder; Editing by Neil Stempleman and Jackie Frank)