Budget analysts sees $1.3T deficit this year, a slight improvement that masks problems ahead

This year's federal deficit will surpass $1.3 trillion, a slight improvement over last year's record red ink, Congress' top budget analysts said Thursday.

It gave no comfort to lawmakers struggling to balance conflicting election-season pressures to cut budget gaps, jolt the economy and reduce taxes.

With polls showing voters unhappy with growing deficits, the issue will confront legislators when they return from their summer recess in September, less than two months from elections that will determine which party controls Congress.

Both parties quickly staked out positions.

Sen. Judd Gregg, R-N.H., blamed the red ink on "unaffordable and unsustainable" spending driven by President Barack Obama's ambitious agenda.

Sen. Kent Conrad, D-N.D., said reviving the economy remains the top priority. He also voiced hope that a bipartisan presidential commission would suggest ways to tame the shortfalls and overcome "political posturing." The two lead their parties on the Senate Budget Committee.

Lawmakers are expected to quickly resume their fight over whether to renew soon-to-expire tax cuts enacted a decade ago under President George W. Bush, though they may not act until after the November elections. The fiscal commission, appointed by Obama, also won't report its recommendations until after the election.

Thursday's report by the nonpartisan Congressional Budget Office largely attributed the budget woes to the wounded economy, which has shrunk federal revenue, boosted spending for low-income people and prompted enactment of costly stimulus programs. A small uptick in tax collections and a drop in spending will help this year's deficit fall $71 billion below last year's $1.4 trillion total.

Despite the slight improvement, the 2009 and 2010 shortfalls are the largest ever in dollars, by far. Each is three times bigger than the government's annual deficit had ever been before.

The budget office is legally required to make its projections assuming Congress makes no changes in tax and spending law. Under that do-nothing scenario, the analysts said deficits would shrink to a far more manageable $438 billion by 2014.

That outcome, however, seems extremely unlikely given pressures to extend at least some of the expiring tax cuts, take additional steps to fortify the economy, and to cut other taxes and boost other spending programs. Such measures would drive deficits higher.

If anything, the budget office report intensified pressures to spur the economy because it projected a painfully slow recovery.

The analysts said they expect the economy to grow at a rate of only about 2 percent next year — half the growth they projected last summer. They also projected that the unemployment rate will remain above 9 percent through this election year and fall to only 8.8 percent at the end of 2011.

In addition, shrinking federal deficits would mean a weaker economy because of the reduced flow of federal dollars into the economic system.

Before leaving for a Martha's Vineyard vacation, Obama said Republicans should stop blocking a bill that would cut taxes for small businesses, calling it "obstruction that defies common sense." Firing back, Republican Party Chairman Michael Steele said a report showing fresh growth in jobless claims illustrates that "Democrats' strategy of reckless spending, ballooning deficits and higher taxes are not the answer."

Republicans say cutting taxes would ease millions of families' financial difficulties while encouraging the creation of jobs. But tax cuts mean higher government deficits, and Thursday's report illustrated that clearly, estimating that extending the entire Bush tax cut package would cost at least $3.3 trillion over the next decade — a huge amount to heap onto deficits already expected to be enormous.

In their cries to reduce the deficit, Republicans don't mention that one way to do it would be to let those tax cuts expire.

Obama has called for ending the tax cuts only for wealthier Americans. Republicans argue that tax increases on any segment of the population would hurt the economic recovery.

The report also said that:

—Because the new health care law not only expands coverage but raises some taxes and cuts Medicare reimbursements to providers, the measure will save the government $179 billion over the coming decade.

—Reducing the alternative minimum tax's growing impact on middle-class families by linking it to inflation would cost more than $700 billion over the next decade. That tax was originally designed to only affect the rich.

—The economic stimulus enacted in early 2009 has a recalculated 10-year cost of $814 billion, up from $787 billion.

—Congress has provided $1.1 trillion for military, diplomatic and other spending in and around Iraq and Afghanistan since the attacks of Sept. 11, 2001.


AP reporter Jim Kuhnhenn contributed to this report.