U.S. Deficit Estimated at $1.3 Trillion This Year, CBO Says

The U.S. budget deficit is projected to be $1.3 trillion in the year ending Sept. 30, down from $1.4 trillion forecast in April, because of curbs on federal spending and increased income-tax collections, the Congressional Budget Office said.

The nonpartisan CBO, in its semiannual look at the nation’s fiscal health, projected the deficit for the subsequent 12-month period through Sept. 30, 2012, at $973 billion, rather than the $1.1 trillion forecast in April.

“The economy remains in a severe slump,” CBO Director Douglas Elmendorf wrote on the agency’s website. “CBO expects that the recovery will continue” while the inflation-adjusted gross domestic product “will stay well below the economy’s potential” for several years, he said.

The CBO cited cuts in unemployment insurance, less spending by Fannie Mae and Freddie Mac, and smaller-than-usual increases in Medicare as it lowered this year’s projected deficit. In addition, it said income-tax collections exceeded earlier projections by $74 billion.

“The report validates the progress that’s been made and validates the president’s assessment” that more needs to be done to cut the nation’s long-term deficit, Josh Earnest, a White House spokesman, told reporters at a briefing on Martha’s Vineyard, Massachusetts.

Super Committee

President Barack Obama next month plans to propose ideas to a so-called super congressional committee on the deficit that would go beyond the panel’s mandate to cut $1.5 trillion from the long-term deficit.

The CBO said deficits will continue to shrink as the economy improves, albeit slowly. It projected an 8.9 percent unemployment rate in the fourth quarter and an 8.5 percent rate in fourth quarter of 2012, when Obama will face re-election.

The CBO said unemployment will remain above 8 percent until 2014. The office also forecast a consumer price index rise of 1.5 percent from 2013 through 2016.

The inflation-adjusted gross domestic product is projected to increase by 2.5 percent in the next fiscal year and 2 percent in fiscal 2013 before increasing to 3.4 percent in 2014 and 5.3 percent in 2015, the CBO said.

“A great deal of the pain of this economic downturn still lies ahead of us,” Elmendorf told reporters today at a news conference in Washington.

Bush Tax Cuts

Elmendorf said cuts in federal spending and the scheduled expiration of President George W. Bush’s tax cuts will slow the economy. The challenge to Congress will be to reduce the deficit in the long term while not hurting the economic recovery now, he said. For example, extending the Bush tax cuts would add trillions of dollars to the deficit, the director said.

“Reductions in government spending or increases in taxes will slow economic growth and reduce employment relative to what would otherwise occur,” Elmendorf said. “It’s possible to structure deficit reduction in a way that does not have as large a dampening effect on output and unemployment in the near term while still achieving deficit reduction.”

This year’s deficit would be the third straight year of trillion-dollar shortfalls.

Debt-Limit Increase

Earlier this month, the U.S. avoided default when Congress voted to raise the debt ceiling. Congressional Republicans refused to increase the borrowing authority unless it was accompanied by cuts in federal spending. The measure would make $1.2 trillion in automatic reductions unless the 12-member bipartisan congressional committee creates a deficit-cutting proposal that Congress accepts.

The CBO projected that the measure will reduce projected deficits by $2.1 trillion between 2012 and 2021.

Representative Chris Van Hollen, a Maryland Democrat and a member of the committee, said the report “underscores the need” for the panel to do its work.

“I look forward to working with my colleagues to develop a plan focused on boosting economic growth now and cutting the long-term deficit in a balanced way that addresses both the expenditure and revenue side of the budget equation,” Van Hollen said in a statement.

House Speaker John Boehner, an Ohio Republican, said in a statement, “A slight decrease in the projected deficit is nothing to celebrate, particularly when it is accompanied by the grim news that CBO expects the national unemployment rate to continue to exceed 8 percent well past next year.”

To contact the reporters on this story: Jonathan D. Salant in Washington at jsalant@bloomberg.net; Heidi Przybyla in Washington at hprzybyla@bloomberg.net.

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net.

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