Budget Deficit to Reach $1.35 Trillion for 2010

JOHN D. MCKINNON

Congressional experts pegged the 2010 U.S. budget deficit at $1.35 trillion, a slight improvement from the $1.38 trillion estimate in August.

But the overall picture of the government's finances remains bleak, according to the annual report released Tuesday. The Congressional Budget Office said the government will run an aggregate deficit of almost $6 trillion during the next decade, a level that many economists worry is unsustainable in the long run, and could lead to a currency shock, inflation, crippling interest rates or other economic maladies.

The CBO estimate is almost certainly an understatement of the long-term problem. President Barack Obama and many lawmakers in both parties plan to extend many of the Bush-era tax cuts that are set to expire at year end. Officials also want to continue providing relief to taxpayers from the alternative-minimum tax, another break that's costly to the government's finances. Those tax policies—if enacted later this year—would add several trillion more to the deficits that aren't counted under CBO's system.

AM Report: Obama Tackles Deficit

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The Obama administration is proposing freezing non-discretionary spending as an effort to tackle the deficit. The News Hub panel discusses the possible political fallout.

CBO also is assuming that annual spending rises with inflation, while Congress in recent years—even before the recent recession—has been boosting spending at higher rates.

"Under current law, the federal fiscal outlook beyond this year is daunting," CBO Director Doug Elmendorf said on his blog Tuesday morning. "Projected deficits average about $600 billion per year over the 2011–2020 period….Those accumulating deficits will push federal debt held by the public to significantly higher levels.

"At the end of 2009, debt held by the public was $5.8 trillion, or 53% of GDP; by the end of 2020, debt is projected to climb to $15 trillion, or 67% of GDP. With such a large increase in debt, plus an expected increase in interest rates as the economic recovery strengthens, interest payments on the debt are poised to skyrocket."

CBO also predicts that economic growth in the next few years will be muted in the wake of the financial crisis of 2008.

To dramatize its concern over the deficit, the Obama administration is proposing a three-year freeze on some types of domestic spending. But the effort won't have much impact on the short-term deficit. The freeze would affect about 17% of the federal budget that covers non-security-related discretionary spending.

House Republicans scoffed at the policy move.

"This must be the political season that David Axelrod suggested," House Republican aide Brian Patrick wrote in a blast email to reporters, "since just 41 days ago, the President himself signed an omnibus bill with a 12% spending increase into law. …If the President has had a change of heart since signing the omnibus just 41 days ago, perhaps he'd consider rescinding the 12% increase that he supported, as well as ruling out more wasteful stimulus spending."

The administration also has been considering ways to develop a broadly bipartisan deficit-reduction plan—for example, through a commission that would develop plans over the next year for long-term spending cuts and revenue increases. The Senate was expected to vote on Tuesday on a relatively powerful version of the commission, one with the ability to place its plans directly before Congress for an up-or-down vote.

But passage was doubtful. Congressional leaders and rank-and-file members alike are concerned that a deficit-reduction commission would rob them of much of their authority over spending and taxes.

That could lead to more the administration to create a weaker version—one that could have difficulty securing a congressional vote for its recommendations. That would leave the U.S. government's finances adrift for another year, without a solution to the long-term deficit problem.