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Federal budget deficit to exceed $1.4 trillion in 2010 and 2011

By Lori Montgomery
Washington Post Staff Writer
Saturday, July 24, 2010; A01

The federal budget deficit, which hit a record $1.4 trillion last year, will exceed that figure this year and again in 2011, the White House predicted Friday, providing fresh ammunition to Republicans who are hammering President Obama for all the red ink as they campaign to regain control of Congress in November.

The latest forecast from the White House budget office shows the deficit rising to $1.47 trillion this year, forcing the government to borrow 41 cents of every dollar it spends. Contrary to official projections, the budget gap will not begin to narrow much in 2011, because of an unexpectedly big drop in tax receipts.

White House budget director Peter Orszag said in a conference call with reporters that Obama is still on track to cut the deficit in half by the end of his first term. But the forecast provides no relief from the gloomy outlook that has been forcing Obama to consider deeper cuts to defense and non-security programs as well as additional tax increases. This week, the administration also repeated its intention to let tax cuts for the wealthy expire in January.

With polls showing high public anxiety over the economy and government borrowing, Republicans wasted no time blasting the new forecast. They accused Obama and congressional Democrats of orchestrating a government expansion that threatens to push the nation toward a European-style debt crisis while failing to create jobs.

"For more than a year and a half, the president and his Democrat allies on Capitol Hill have pushed an anti-business, anti-jobs agenda on the American people while adding trillions to the debt," Senate Minority Leader Mitch McConnell (R-Ky.) said in a statement. "It's time for a new approach, one that listens to the American people rather than forcing Washington-based mandates."

Democrats sought to remind voters that persistently large budget gaps are primarily the result of a severe recession that depressed tax revenue and forced policymakers to spend hundreds of billions of dollars on economic rescue programs, such as last year's $862 billion stimulus package.

Unemployment has nonetheless risen. The White House predicted Friday it will not dip below 8 percent until the end of 2012. Still, many economists say federal action probably saved the nation from a full-blown meltdown.

"That federal response -- including actions by the Federal Reserve, efforts to stabilize the financial sector started by the Bush administration, and last year's economic recovery package -- has successfully pulled the economy back from the brink," Senate Budget Committee Chairman Kent Conrad (D-N.D.) said in a statement. "Although the economy remains fragile and the unemployment rate is still far too high, economic and job growth have begun to return."

But they have not returned fast enough to improve the budget picture -- or the national mood. A CNN/Opinion Research Corporation poll released Friday found that Obama's economic approval rating has fallen to a new low, with 57 percent of those surveyed saying they disapprove of Obama's handling of the economy. In the same poll, 47 percent of respondents ranked the economy as the most important issue facing the country; the budget deficit followed at 13 percent.

In its semiannual fiscal outlook, the White House budget office acknowledged that "the U.S. economy still faces strong headwinds," including tight credit markets, too many unsold houses and state governments burdened by their own budget deficits. Christina Romer, chairman of the president's Council of Economic Advisers, said economic turbulence in Europe has also had an impact, "ever so slightly dampening growth prospects in 2011."

The report said that "despite these headwinds, the administration expects economic growth and job creation to continue for the rest of 2010 and to rise in 2011 and beyond."

The updated forecast had a mixed impact on deficit projections. For 2010, lower spending than expected on unemployment benefits and bank deposit insurance led to a lower deficit projection; the White House had previously predicted a budget gap of $1.56 trillion this year. Meanwhile, lower tax receipts, primarily from capital gains taxes, raised deficit projections for 2011 and 2012.

But the long-term forecast stayed about the same, with the White House predicting additional borrowing of $8.5 trillion through 2020, a sum that would drive the national debt to more than 77 percent of annual economic output. That would be the highest percentage since 1950.

Independent forecasters, such as the Congressional Budget Office, say that number will probably be significantly higher if current policies remain unchanged. Obama has created a bipartisan commission to develop a strategy for stabilizing the debt by 2015.

The White House and senior Democrats say cutting deficits too quickly would threaten the recovery. But Sen. Judd Gregg (R-N.H.), a member of the president's budget commission, called it "worrisome" that the administration seems to be relying solely on the commission. And some independent budget analysts agreed.

"The White House has to use the bully pulpit to spotlight the nation's fiscal challenges," said Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget. "The president cannot afford to sweep this type of fiscal warning under the carpet, or we risk that policymakers will go on their merry way . . . ignoring the warnings and marching towards fiscal calamity."

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