No stemming red ink: Federal deficit to hit $1.5T

[January 27, 2011]  WASHINGTON (AP) -- Far from slowing, the government's deficit spending will surge to a record $1.5 trillion flood of red ink this year, congressional budget experts estimated Wednesday, blaming the slow economic recovery and last month's tax-cut law.

The report was sobering new evidence that it will take more than President Barack Obama's proposed freeze on some agencies to stem the nation's extraordinary budget woes. Republicans say they want big budget cuts but so far are light on specifics.

Wednesday's Congressional Budget Office estimates indicate the government will have to borrow 40 cents for every dollar it spends this fiscal year, which ends Sept. 30. Tax revenues are projected to drop to their lowest levels since 1950, when measured against the size of the economy.

The report, full of nasty news, also says that after decades of Social Security surpluses, the vast program's costs are no longer covered by payroll taxes.

The budget estimates will add fuel to the already-raging debate over spending and looming legislation that would allow the government to borrow more money as the national debt nears the $14.3 trillion cap set by law. Republicans controlling the House say there's no way they'll raise the limit without significant budget cuts, starting with a government funding bill that will advance next month.

Democrats and Republicans agree that stern anti-deficit steps are needed, but neither Obama nor his resurgent GOP rivals on Capitol Hill are -- so far -- willing to put on the table cuts to popular benefit programs such as Medicare, farm subsidies and Social Security. The need to pass legislation to fund the government and prevent a first-ever default on U.S. debt obligations seems sure to drive the two sides into negotiations.

Though the analysis predicts the economy will grow by 3.1 percent this year, it foresees unemployment remaining above 9 percent.

Dauntingly for Obama, the nonpartisan agency estimates a nationwide jobless rate of 8.2 percent on Election Day in 2012. That's higher that the rates that contributed to losses by Presidents Jimmy Carter (7.5 percent) and George H.W. Bush (7.4 percent). The nation isn't projected to be at full employment -- considered to be a jobless rate of about 5 percent -- until 2016.

The latest deficit figures are up from previous estimates because of bipartisan legislation passed in December that extended George W. Bush-era tax cuts and unemployment benefits for the long-term jobless and provided a 2 percentage point Social Security payroll tax cut this year.

That measure added almost $400 billion to this year's deficit, CBO says.

The deficit is on track to beat the record of $1.4 trillion set in 2009. The budget experts predict the deficit will drop to $1.1 trillion next year, still very high by historical standards.

Republicans focus on Obama's contributions to the deficit: his $821 billion economic stimulus plan, boosts for domestic programs and his signature health care overhaul. Obama points out that he inherited deficits that would have exceeded $1 trillion a year anyway.

The chilling figures came the day after Obama called for a five-year freeze on optional spending in domestic agency budgets passed by Congress each year.

Republicans were quick to blame Obama for the rising red ink. Rep. Jeb Hensarllng of Texas, chairman of the House Republican Conference, said the report "paints a picture that is more dangerous than most Americans could anticipate."

"What is our leader in the White House doing about it? Asking Congress to raise the debt ceiling, proposing new spending and sticking future generations with a multi-trillion dollar tab," Hensarling said.

Democrat Kent Conrad, chairman of the Senate Budget Committee, pointed to a problem lawmakers are sure to keep facing:

"When the American people are asked what they want done and to prioritize what they want, they want the deficits and debt dealt with. But when they are asked very specifically, will they support changes in Social Security, the polls say no. Changes in Medicare? The polls say no. Changes in defense spending? The polls say no."

"I would've liked very much if the president would have spent a bit more time helping the American people understand how really big this problem is," added Conrad, D-N.D.

Republicans are calling for deeper cuts for education, housing and the FBI -- among many programs -- to return them to the 2008 levels in place before Obama took office.

But those nondefense programs make up just 12 or so percent of the $3.7 trillion budget, which means any upcoming deficit reduction package -- at least one that begins to significantly slow the gush of red ink -- will require politically dangerous curbs to popular benefit programs. That includes Social Security, Medicare, the Medicaid health care program for the poor and disabled, and food stamps.

Neither Obama nor his GOP rivals on Capitol Hill have yet come forward with specific proposals for cutting such benefit programs. Successful efforts to curb the deficit always require active, engaged presidential leadership, but Obama's unwillingness to thus far take chances has deficit hawks discouraged. Obama will release his 2012 budget proposal next month.

"The proposals we've seen so far from the president and congressional Republicans amount to little more than tinkering around the edges," said Concord Coalition Executive Director Bob Bixby.

"Somebody is going to have to bite the bullet and get this process going," said Maya MacGuineas of the Committee for a Responsible Federal Budget, a bipartisan group that advocates fiscal responsibility. "And that somebody has to be the president."

Obama has steered clear of the recommendations of his deficit commission, which in December called for difficult moves such as increasing the Social Security retirement age and reducing future increases in benefits. It also proposed a 15-cents-a-gallon increase in the gasoline tax and eliminating or scaling back tax breaks -- including the child tax credit, mortgage interest deduction and deduction claimed by employers who provide health insurance -- in exchange for rate cuts on corporate and income taxes.

CBO predicts that the deficit will fall to $551 billion by 2015 -- a sustainable 3 percent of the economy -- but only if the Bush tax cuts are wiped off the books. Under its rules, CBO assumes the recently extended cuts in taxes on income, investment and people inheriting large estates will expire in two years. If those tax cuts, and numerous others, are extended, the deficit for that year would be almost three times as large.

Tax revenues, which dropped significantly in 2009 because of the recession, have stabilized. But revenue growth will continue to be constrained. CBO projects revenues to be 6 percent higher in 2011 than they were two years ago, which will not keep pace with the growth in spending.

[Associated Press; By ANDREW TAYLOR]

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.