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U.S. 2011 Deficit Picture Bleak; Worse May Follow: CBO

Conressional Budget Office Director Douglas Elmendorf at a news conference, Jan. 26, 2011.
Chip Somodevilla
Getty Images
Conressional Budget Office Director Douglas Elmendorf at a news conference, Jan. 26, 2011.

The economists at the Congressional Budget Office, Washington's appointed killjoys, intruded Wednesday to disturb President Obama's victory lap after his widely praised State of the Union address.

They forecast that the 2011 federal deficit will hit nearly $1.5 trillion. That would make it virtually as large a percentage of gross domestic product as it was in 2009 when the economy was still in recession.

This would seem to help the Republican argument that the first priority is to reduce spending not make new "investments" in innovation, education and infrastructure of the sort the president laid out Tuesday evening.

But the CBO had bad news for congressional Republicans, too. Besides the lingering effects of a weak economic recovery, the deficit situation has been exacerbated by tax cuts.

A lengthy excerpt from its analysis:

The recovery now under way might be expected to lessen the budget imbalance in 2011 by increasing tax revenues and decreasing spending for certain income-support programs, such as unemployment compensation.

However, revenue growth will be restrained by the slow and tentative pace of the recovery and by the 2010 tax act. Moreover, outlays for many programs are projected to continue to grow and more than offset the decreases in spending (for unemployment compensation, for example) yielded by improving economic conditions.

The resulting federal budget deficit of nearly $1.5 trillion projected for this year will equal 9.8 percent of GDP, a share that is nearly 1 percentage point higher than the shortfall recorded last year and almost equal to the deficit posted in 2009, which at 10.0 percent of GDP was the highest in nearly 65 years.

By CBO's estimates, federal revenues in 2011 will be$123 billion (or 6 percent) more than the total revenuesrecorded two years ago, in 2009.

The continued slow improvement in economic conditions is anticipated to boost revenues from individual income taxes, corporate taxes, and other sources by nearly $200 billion between those two years; however, revenues from social insurance taxes are projected to decline by more than $70 billion relative to their level two years ago, mostly as a result of a one-year reduction in payroll taxes included in the 2010 tax act.

Spending, for the most part, has been growing faster than revenues. Programs related to the federal government's response to the problems in the housing and financial markets are an exception; outlays recorded for theTroubled Asset Relief Program (TARP), for example,will decrease by $176 billion from 2009 to 2011, CBO projects.

But if current laws remain unchanged, federal outlays other than those for the TARP are projected to be $366 billion (or 11 percent) higher in 2011 than they were in 2009.

According to CBO's projections, mandatory spending excluding outlays for the TARP will increase by $191 billion (or 10 percent) between 2009 and 2011.

Significant growth in many areas—in particular, for Social Security, Medicare, and Medicaid—is expected to be offset only partially by reductions in outlays for other programs, primarily for Fannie Mae, Freddie Mac, and deposit insurance.

That last paragraph points to the nub of the problem and something Obama only lightly touched on in his speech. Entitlement spending is the main driver behind the deficits and expanding debt. Any solution that doesn't seriously tackle entitlements isn't really an answer to the nation's fiscal problems.

More bad news. The CBO said it expected the nation's jobless rate to remain painfully high and not until 2016 fall to a 5.3 percent rate, close to what its economists consider to be full employment, so to speak, until 2016.

The CBO also produced a chart that showed deficits narrowing over the next ten years. But here's the rub. Its assumptions are based on current law, meaning that the Bush era tax cuts are permitted to expire in 2012.

If tax cuts are further extended and the growth in entitlement spending isn't slowed, than those two lines on the chart can be expected to stay pretty far apart, essentially very large deficits as far as the eye can see.

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Frank James joined NPR News in April 2009 to launch the blog, "The Two-Way," with co-blogger Mark Memmott.