Analysts See $1.3 Trillion Deficit For 2010

WASHINGTON (AP) -- This year's U.S. government deficit will exceed $1.3 trillion, Congress' official budget analysts projected Thursday in a report underscoring election year perils both parties face as they struggle to balance conflicting demands to trim budget shortfalls, spark the economy and cut taxes.

The nonpartisan Congressional Budget Office said this year's budget gap would be $71 billion less than last year's red ink, thanks to a reversal of recent trends that have seen years of steadily rising government spending and falling federal revenues.

Even so, that would leave this year's deficit as the second largest ever in dollars, trailing only last year's $1.4 trillion. To put those numbers in perspective, the shortfalls for 2009 and 2010 are each three times as big as the government's annual deficit had ever been previously.

The report immediately became fodder for partisan finger-pointing over the deficit, a concern of voters in the shadow of this fall's elections, which will determine control of Congress.

Sen. Judd Gregg, top Republican on the Senate Budget Committee, said the report highlighted that a "spending spree" by Congress, including enactment of President Barack Obama's health care overhaul, was driving annual deficits and the cumulative federal debt skyward.

"Today's CBO outlook only underscores what we already know -- the current pace of U.S. spending is unaffordable and unsustainable, and without a change in direction, this country is headed for fiscal calamity," Gregg said.

Senate Budget Committee Chairman Kent Conrad, a Democrat, said helping the economy recover must be the top priority. But he said to address long-term budget pressures like the retirement of baby boomers, "we must start now to enact deficit reduction policies that will kick in after the economy has more fully recovered."

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

Thursday's report clearly etched the challenges lawmakers face in wrestling with the nation's fiscal problems.

The budget office projected that annual deficits will fall to a far more manageable $438 billion by 2014 as the economy recovers. A growing economy means higher federal revenue and lower spending for unemployment benefits and other programs that help low-income people.

But those deficit projections assume that legislators pass no additional laws that cost money, such as extending soon to expire tax cuts or reinforcing efforts to energize the economy. The budget office is legally required to make no assumptions about future legislative action when it issues its projections.

Ominously, the report offers a more downbeat assessment of the economy than it did last year, which highlights the temptations lawmakers will face to do something about it this election year. In its midyear report last August, the budget office projected the economy would grow at a rate of 3.8 percent in 2011. It now expects growth of no more than 2 percent in 2011.

At the same time, unemployment remains stubbornly high. Republicans have criticized Democratic policies by arguing they have not created the number of promised jobs. The budget office report projects 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.

Any effort to prime the economy in hopes of producing more jobs and appealing to voters, however, would increase the deficit. Right now, that is also politically unpalatable.

Republicans face their own dilemmas.

They have been clamoring to renew the huge tax cuts passed a decade ago under President George W. Bush, which are about to expire. Yet Thursday's report projected that renewing those tax reductions would cost the government at least $3.3 trillion over the coming decade, a huge amount to tack onto the budget deficits that are already expected.

While letting tax cuts expire would create deficit-reducing revenue, Obama has only called for ending the tax cuts for wealthier Americans, not everyone. Republicans argue that tax increases on any segment of the population would hurt the economic recovery.

Congress is expected to renew its debate over renewing the tax cuts when lawmakers return next month, though they may take no action until after the November elections.

A bipartisan commission examining ways to control federal deficits won't report its conclusions until after the election.

Associated Press writer Jim Kuhnhenn contributed to this report.

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