U.S. budget deal brightens fiscal outlook: CBO

WASHINGTON (Reuters) - A sweeping U.S. budget deal has brightened the country's fiscal outlook but its gains could evaporate if Congress extends tax breaks in coming years, nonpartisan congressional forecasters said on Wednesday.

Rock-bottom interest rates also will help slash projected budget deficits nearly in half over the next 10 years, the Congressional Budget Office said, and public debt will shrink to 61 percent of the economy over that time period -- roughly the level that economists consider sustainable.

The good news came with plenty of caveats.

Unemployment will hover well above 8 percent and economic growth will remain anemic through the 2012 elections as the country struggles to recover from the deepest recession since the 1930s, CBO said.

Budget deficits will remain high by historical standards as the population ages and healthcare costs continue to rise, the agency said.

And the $3.3 trillion in new budget savings could disappear entirely if Congress opts to extend a range of tax breaks and other temporary fixes, such as higher payments to doctors and hospitals, that are due to expire at the end of 2012.

Democrats want to extend tax cuts that benefit middle and low income taxpayers, while Republicans want to extend those that benefit the wealthiest households as well.

Extending those provisions would worsen budget deficits by as much as $5 trillion over 10 years, CBO said.

"I don't want to diminish what has happened," CBO Director Doug Elmendorf said at a news conference, referring to the recent budget deal which accounted for most of the improved fiscal outlook. "At the same time there is absolutely no doubt that there are profound budget challenges and economic challenges that remain."

The economic picture is probably worse than outlined by the report as grimmer data has emerged since the agency completed its work in early July, Elmendorf said.

Stocks rose as much as 1 percent and Treasury bond prices fell after the report was released, but other factors then overtook early enthusiasm about the CBO data.

ELECTIONS AHEAD

The report is likely to add fuel to the debate over the economy and the federal budget that is expected to dominate Washington through the November 2012 elections.

President Barack Obama, who is seeking re-election, plans to unveil a job-creation package next month that includes tax breaks and construction spending to prevent the economy from sliding back into recession.

At the same time, lawmakers on a special congressional committee will try to squeeze more budget savings from the tax code and popular benefit programs like Medicare.

That committee was set up by the budget deal that passed earlier this month after months of acrimonious debate.

The deal averted an unprecedented default on U.S. obligations, but still prompted a first-ever downgrade of the country's formerly top-notch credit rating, as ratings agency Standard & Poor's said it fell short of the $4 trillion in savings needed to get the country back on a sustainable path.

The $2.1 trillion in savings called for in the budget deal accounts for the bulk of savings in CBO's new estimate. Reduced interest costs account for much of the rest.

"It does indicate that some progress has been made based on the deal the Republicans and Democrats struck earlier this month," White House spokesman Josh Earnest said. "The report also makes it clear that there is a lot more that we have to do."

Obama's fellow Democrats said Washington will have to implement both short-term stimulus and long-term austerity in the coming months.

That could be a tough sell with Republicans, who said the new report is further evidence that earlier stimulus measures have not borne fruit.

"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," House of Representatives Speaker John Boehner said in a statement. "The president's policies were supposed to keep that from happening."

The unemployment rate, currently at 9.1 percent, will only fall to 8.5 percent by the time voters head to the polls in November 2012, CBO said.

CBO projected the government will post a $1.3 trillion deficit for the current fiscal year, which ends September 30, down from its earlier $1.4 trillion estimate. That would mark the third straight year of trillion-dollar-plus budget deficits.

Gross domestic product will grow by an annual rate of 2.4 percent this year and 2.6 percent next year, CBO said.

(Additional reporting by Richard Cowan in Washington, Chris Sanders in New York and Alister Bull and Laura MacInnis in Martha's Vineyard; editing by Deborah Charles and Vicki Allen)

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Budget deficit slips to $1.28T; red ink continues

WASHINGTON (AP) — After months of unrelieved gloom and discord, Congress and President Barack Obama are starting to make a dent in the federal budget deficit. It's projected to shrink slightly to $1.28 trillion this year, and bigger savings from this month's debt ceiling deal are forecast over the next decade.

No one's celebrating. There will be plenty of red ink for years to come.

The nonpartisan Congressional Budget Office projected Wednesday that annual budget deficits will be reduced by a total of $3.3 trillion over the next decade, largely because of the deficit reduction package passed by Congress earlier this month. The office also forecast persistently high unemployment, a troubling political prospect for President Barack Obama in the crucial months of his campaign to win a second term.

Even with the anticipated big savings, annual budget deficits are expected to total nearly $3.5 trillion over the next decade — and much more if Bush-era tax cuts scheduled to expire at the end of next year are extended. In all, nearly $8.5 trillion would be added to the national debt over the next 10 years if the tax cuts and certain spending programs are kept in place, the budget office report said.

The national debt now stands at more than $14.6 trillion.

The numbers help illustrate the urgency facing a new joint committee in Congress that is charged with finding $1.2 trillion to $1.5 trillion in budget savings over the next decade. Some lawmakers are calling for an even bigger package, a tall order given the bitter debate that produced this month's debt deal.

"CBO's report is yet more evidence that Congress faces a twin challenge of a sluggish near-term economy and a still very serious long-term debt threat," said Sen. Kent Conrad, a Democrat, chairman of the Senate Budget Committee. "Congress cannot afford to ignore either challenge."

Most of the improvement in this year's deficit picture comes from higher than anticipated tax collections from 2010 returns filed in the spring. Over the longer term, the belt-tightening required in the new deficit reduction law will mean even bigger savings, the report says.

Deficits could end up larger if CBO's economic forecast, which is more optimistic than private projections, proves to be too rosy. The agency doesn't foresee another recession but modest economic growth over the next few years. And it expects the unemployment rate to fall only slightly, to 8.5 percent in the last three months of 2012, and staying above 8 percent through the following year.

"A great deal of the pain of this economic downturn still lies ahead of us," said CBO Director Douglas W. Elmendorf.

Democratic leaders say the report shows the need for programs and policies aimed at creating jobs. Republicans say the report is an indictment of Obama's economic policies.

"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," said House Speaker John Boehner, a Republican. "The president's policies were supposed to keep that from happening."

At $1.28 trillion, this year's budget deficit would be the third highest, surpassed only by those of the past two years. The budget year runs through the end of September.

The new deficit projection for this year is $116 billion lower than the one made by CBO in March.

The new deficit reduction law accounts for most of the savings over the next decade: $917 billion in spending cuts already identified in the law, and at least $1.2 trillion in savings to be spelled out by the new joint committee. If the committee of six Republicans and six Democrats fails to agree on a package that is passed by Congress, the law would trigger $1.2 trillion in automatic spending cuts, affecting the Pentagon as well as domestic programs.

The budget office also projects $600 billion in savings over the next decade from lower interest rates.

"This CBO report shows that the budget control act signed by the president earlier this month brought down the deficit significantly, but much more work remains to be done," said Meg Reilly, speaking for the Office of Management and Budget. "We need to get back on a sustainable path and invest in long-term economic growth, which is why the president has called on Congress to take immediate action on pending legislation that will help create jobs."

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Associated Press writers Jim Abrams, Christopher Rugaber and Julie Pace contributed to this report.

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CBO: Budget deficit to hit $1.28T, down slightly

WASHINGTON (AP) — The federal budget deficit will hit $1.28 trillion this year, down slightly from the previous two years, with even bigger savings to come over the next decade, according to congressional projections released Wednesday.

The nonpartisan Congressional Budget Office says budget deficits will be reduced by a total of $3.3 trillion over the next decade, largely because of the deficit reduction package passed by Congress earlier this month.

Nevertheless, the federal budget will be awash in red ink for years to come. Even with the savings, budget deficits will total nearly $3.5 trillion over the next decade — more if Bush-era tax cuts scheduled to expire at the end of 2012 are extended.

There is more bad news in the report: CBO projects only modest economic growth over the next few years, with the unemployment rate falling only slightly by the end of 2012. The agency projects an unemployment rate of 8.5 percent for the last three months of 2012. The presidential election is in November of that year.

"The United States is facing profound budgetary and economic challenges," the new CBO report says. "With modest economic growth anticipated for the next few years, CBO expects employment to expand slowly."

There is good news for the more than 50 million people who get Social Security benefits. After two years without a cost-of-living adjustment, CBO now projects a 2.8 percent COLA for 2012, up from the 1.1 percent increase the agency previously projected. The actual increase for 2012 will be announced in October. It is based on a measure of inflation.

At $1.28 trillion, this year's budget deficit would be the third highest, surpassed only by the deficits registered in the past two years. The budget year runs through the end of September. Through July, the deficit totaled $1.1 trillion, the Treasury Department said.

The new deficit projection for this year is $116 billion lower than the one made by CBO in March. Most of the change is from higher than anticipated tax collections from 2010 returns filed in the spring, the report said.

"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," said House Speaker John Boehner, R-Ohio. "The president's policies were supposed to keep that from happening. Instead they've added trillions to our debt at the expense of our children and helped put our nation's credit rating in jeopardy. Where are the jobs?"

Congress passed a deficit reduction package earlier this month that cuts spending by $917 billion over the next decade for Cabinet-level agencies and the thousands of federal programs they administer. The legislation also created a new joint, bipartisan committee in Congress charged with coming up with $1.2 trillion to $1.5 trillion in additional savings by late November.

If the committee of six Democrats and six Republicans agrees on a package, Congress must vote on it by late December. Failure to pass a package would trigger $1.2 trillion in automatic spending cuts, affecting the Pentagon as well as domestic programs.

The new CBO report projects that the legislation will reduce deficits by a total of $2.1 trillion over the next decade. The agency also projects savings of $600 billion over the next decade from lower interest rates. Much of the rest of the savings came from technical updates to CBO's revenue and spending forecasts, the report said.

The agency, however, warns that spending cuts and caps in the deficit reduction package will limit the government's ability to provide support for the economy, "and thereby restrain economic growth over the next few years."

"CBO's report is yet more evidence that Congress faces a twin challenge of a sluggish near-term economy and a still very serious long-term debt threat," said Sen. Kent Conrad, D-N.D., chairman of the Senate Budget Committee. "Congress cannot afford to ignore either challenge."

Conrad said CBO's projections illustrate the need for the new joint committee to reduce the deficit by much more than $1.5 trillion. Conrad called for a deficit reduction package of at least $4 trillion over the next decade, a target that many economists say is necessary for the government to get its finances in order.

Rep. Chris Van Hollen of Maryland, ranking Democrat on the House Budget Committee, said, "The CBO outlook underscores the need for the joint committee to propose a plan to help put America back to work, coupled with a blueprint to reduce the long term deficit."

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U.S. budget improves, economy weighs: CBO

WASHINGTON (Reuters) - A sweeping U.S. budget deal has brightened the country's fiscal outlook but unemployment will remain high over the near term, nonpartisan congressional forecasters said on Wednesday.

The report by the Congressional Budget Office is likely to add fuel to the debate over jobs and the economy that is set to dominate Washington through the 2012 elections.

The recent budget deal, passed earlier this month after months of acrimonious debate, will help slash projected budget deficits nearly in half over the next 10 years, CBO said.

But economic growth will remain sluggish through 2012, CBO said. It said the unemployment rate, currently at 9.1 percent, will only fall to 8.5 percent by the time voters head to the polls in November 2012.

The economic picture is probably even worse as grimmer data has emerged since the office completed its work in early July, CBO Director Doug Elmendorf said.

"The pace of the recovery has been slow, and the economy remains in a severe slump," Elmendorf wrote in a blog post.

That could complicate President Barack Obama's re-election hopes and give more ammunition to Republican rivals who have criticized his economic policies.

Obama plans to unveil a job-creation package next month to help boost an economy that threatens to slide back into recession. At the same time, lawmakers on a special congressional committee will try to squeeze more budget savings from the tax code and popular benefit programs like Medicare.

Policymakers will have to balance austerity and stimulus efforts over the coming months, Obama's fellow Democrats said.

The report "underscores the need for the Joint Committee to propose a plan to help put America back to work, coupled with a blueprint to reduce the long term deficit," said Democratic Representative Chris Van Hollen, one of 12 lawmakers named to the bipartisan panel.

Republicans said the report showed that Obama's efforts to boost the economy in the wake of the 2008-2009 financial crisis have not borne fruit.

"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," House of Representatives Speaker John Boehner said in a statement. "The president's policies were supposed to keep that from happening."

BUDGET DEAL YIELDS BIG SAVINGS

The United States will rack up $3.487 trillion in cumulative deficits over 10 years, some $3.3 trillion below its previous projection, CBO said.

Nearly two-thirds of that savings is due to the deficit-reduction deal, which passed earlier this month as part of a package to raise the national debt limit. Another one-fifth is attributable to lower projected interest rates during the coming decade, CBO said.

Stocks rose as much as 1 percent and Treasury bond prices fell as the figures revealed a stronger fiscal outlook than previously thought. Both markets later flattened out as other factors overtook early enthusiasm about the CBO data.

The economic picture could worsen considerably if Congress extends temporary tax cuts that were passed under President George W. Bush.

CBO's budget projections assume that those cuts will expire at the end of 2012. Democrats want to extend them for middle and low income taxpayers, while Republicans want to extend the tax cuts for the wealthiest households as well.

An aging population and rising healthcare costs will force Congress to raise taxes or pursue further spending cuts if it wants to keep deficits and debt under control, Elmendorf wrote.

In the current fiscal year, which ends on September 30, the government will spend $1.284 trillion more than it collects, according to CBO's latest estimate. That is a $115 billion improvement over its last estimate in March.

Gross domestic product will grow by an annual rate of 2.4 percent this year and 2.6 percent next year, CBO said.

(Additional reporting by Richard Cowan in Washington and Chris Sanders in New York; editing by Deborah Charles and Vicki Allen)

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