CBO projects $1.08 trillion deficit, 8.9 percent jobless rate in 2012

The Congressional Budget Office on Tuesday predicted the deficit will rise to $1.08 trillion in 2012. 

The office also projected the jobless rate would rise to 8.9 percent by the end of 2012, and to 9.2 percent in 2013. 

These are much dimmer forecasts than in CBO's last report in August, when the office projected a $973 billion deficit. The report reflects weaker corporate tax revenue and the extension for two months of the payroll tax holiday.

ADVERTISEMENT
A rising deficit and unemployment rate would hamper President Obama's reelection effort, which in recent weeks has seemed to be on stronger footing. 

If the CBO estimate is correct, it would mean that the United States recorded a deficit of more than $1 trillion for every year of Obama’s first term. 

CBO Director Doug Elmendorf told reporters that Congress will have to make important choices this year regarding the supercommittee trigger and tax policy that will have huge effects on the deficit.

While unable to recommend choices, Elmendorf said that addressing the deficit sooner rather than later is easier.

The deficit was $1.4 trillion in 2009, $1.3 trillion in 2010 and $1.3 trillion in 2011. The largest deficit recorded before that was $458 billion in 2008.

CBO had forecast an 8.5 percent unemployment rate for the end of 2012 in its August report. It now expects the jobless rate to be higher and to still be at 7 percent in 2015.

The higher unemployment numbers are due to lower economic growth than previously estimated. Gross domestic product for 2011 is now estimated to have grown 1.6 percent in 2011, down from the 2.3 percent forecast in August. CBO a year ago had predicted 3.1 percent growth for 2011.

The outlook for 2012 has also worsened. GDP is forecast to grow only 2 percent this year, compared to a previous estimate of 2.7 percent.

Budget cuts from the August debt deal and projected tax increases set to kick in when the Bush tax rates expire at the end of the year, will “restrain economic growth this year and significantly restrain growth in 2013,” according to CBO. But it says the fiscal prudence will help growth in the out years.

It is unclear whether the Bush tax cuts will be allowed to expire. Republicans want all of the tax rates to be extended, and the White House wants Bush tax rates for families with annual income below $250,000 to be extended.   

Gross federal debt would rise from $14.8 trillion at the end of 2011 to $21.7 trillion under CBO's projections.

The CBO uses a “current policy” baseline that assumes the Bush-era tax rates will not be extended after 2013, however.

The deficit will be much higher if Congress takes several actions that many expect.

If the Bush tax rates are extended, for example, the deficit would rise.

It would rise if Congress patches the Alternative Minimum Tax, which lawmakers have routinely done to prevent higher taxes from being imposed on middle class taxpayers.

It would also rise if Congress continues to pass the “doc fix” that prevents a cut to Medicare payments to doctors, something that Congress has done on a near-annual basis.

Finally, if Congress does not follow through on cuts mandated by the failure of the supercommittee, the deficit will grow. Lawmakers are already talking about canceling scheduled cuts to the Pentagon’s budget.

In the “alternative fiscal scenario” where these things happen the gross federal debt rises to $29.4 trillion by 2022.

Elmendorf noted that allowing the lower tax rates to be extended or for the triggered cuts to be dodged would boost short term growth by as much as 2.9 percent in 2013 and lower unemployment to as low as 7.4 percent.

But he said such a choice would come with a steep price, with $400 billion added to the deficit in 2013 alone.

“There is no plausible scenario where the alternative fiscal scenario is sustainable,” he said.

Elmendorf noted that extending all the Bush era tax rates and patching the AMT adds $5.4 trillion to the deficit. He said that just ending tax reductions for the wealthy could contribute about $1 trillion to deficit reduction.

Despite political rhetoric that focuses on discretionary spending, Elmendorf made clear that the bigger driver of the deficit increase are entitlement programs.

“Clearly the deficit will not be brought under control without changes in either revenues or Social Security and federal healthcare programs,” he said. “The gap that has opened between what we are used to getting from the government and the revenue that we are used paying into the government has widened and will only get wider in the coming decade.”

Obama will release his 2013 budget request on Feb. 13. He is expected to included in it recommendations for reducing the deficit by $4 trillion over a decade and to call for the end of Bush-era tax rates for the wealthy.

By the end of March, House Republicans plan to vote on their alternative budget, authored by House Budget Committee Chairman Paul Ryan (R-Wis.). Ryan hopes to release a budget similar to his 2012 budget, which included changing Medicare into a private insurance system for future retirees.

"With four straight years of trillion-dollar deficits, no credible plan to lift the crushing burden of debt, and a Senate majority that has failed to pass a budget for over 1,000 days, the president and his party’s leaders have fallen short in their duty to tackle our generation’s most pressing fiscal and economic challenges," Ryan said in reaction to the CBO report.

This story was posted at 10 a.m. and last updated at 12:43 p.m.