Ahead of the Bell:
Budget deficit

[October 14, 2011]  WASHINGTON (AP) -- The government is expected to report Friday that it ran a $1.3 trillion deficit in the budget year that ended last month, the third straight year that it has operated more than $1 trillion in the red.

A decade ago, the government had a surplus and trillion-dollar deficits seemed unimaginable. Now, they are looming over tense negotiations in Washington, where lawmakers must agree by Thanksgiving on where they can cut $1.2 trillion over the next decade.

The Congressional Budget Office predicts the deficit for the 2011 budget year, which ended Sept. 30, will come in just above the previous budget year's $1.29 trillion deficit and slightly below the record $1.41 trillion deficit hit in fiscal 2009.

A slightly improved job market helped boost income tax revenue this year. From October 2010 through last month, the economy added 1.3 million net jobs. That compares with only 339,000 net job gains in the previous 12-month period.

Still, that hasn't been enough to bring the millions of Americans who lost jobs during the recession back into the work force. The unemployment rate in September was 9.1 percent, down only slightly from 9.7 percent when the budget year began.

The government collected more income tax because of those jobs. But it lost revenue because of the 2 percentage point cut in Social Security taxes, and also it had to pay for an extension of emergency unemployment benefits. Congress approved both in December to boost the sluggish economy.

And the CBO estimates a 17 percent increase in interest payments on the public debt. Those borrowing costs are expected to go up even faster once the economy improves and interest rates rise.

The nation's debt is now $14.8 trillion. The enormity of that figure has stoked intense partisan debate in Congress over spending and taxes. Polls show growing voter anger with the inability of both parties to reach solutions to the country's budget problems.

Congress reached a last-minute deal in August to raise the government's borrowing limit in stages. But as part of the deal, lawmakers tasked a 12-member deficit-cutting panel with finding at least $1.2 trillion in savings over the next decade.

The committee, which is evenly split between Democrats and Republicans, has until Thanksgiving to come up with a plan. It would then go before the House and Senate in December for up-or-down votes.

As the committee members deliberate in secret, party leaders have jousted in public over their conflicting priorities. For Republicans, that means no tax increases. For Democrats, it means no curbs on popular entitlement programs, such as Medicare, without tax increases.

If the supercommittee fails to produce a deal that wins congressional approval, automatic cuts of $1.2 trillion over a decade would go into effect starting in 2013.

The August budget deal is projected to trim future deficits by $2.1 trillion. That includes the cuts made by the supercommittee and another $900 billion in savings from caps on discretionary spending.

The cuts are expected to begin in the 2012 budget year. CBO estimates $21 billion in cuts to this year's deficit, which is estimated to be $973 billion. The Obama administration is estimating that the 2012 deficit will total $956 billion.

[Associated Press]

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