Review likely to show smaller deficit

The 2010 federal deficit will be smaller than expected, a White House budget review is expected to show Friday. 

But it’s unclear whether the review will reflect independent forecasts that warn of a slower economic recovery and bigger deficits than expected beyond this year.

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The annual midyear review by the Office of Management and Budget (OMB) will project a roughly $1.3 trillion deficit for the 2010 fiscal year if it tracks the latest projections by the Treasury Department and the Congressional Budget Office (CBO). 

That number is less than the White House’s initial deficit projection of $1.56 trillion thanks to increased corporate tax revenue and the repayment of bank bailout money.

But it’s unclear whether the OMB review will reflect a growing consensus that the economic recovery is more tepid than earlier predicted. Past OMB midyear budget reviews have made only minor alterations to earlier White House economic estimates.

The Federal Reserve this week said unemployment would be higher for the next three years than it estimated in April. The Fed also slightly downgraded its prediction of economic growth for this year, to slightly more than 3 percent. 

The recovery’s pace is held back by uncertainty among household consumers and businesses, the end of stimulus and struggles in the real estate, labor and credit markets, the Fed’s report said.

The International Monetary Fund and Goldman Sachs, in their U.S. economic reports, said GDP growth in coming years will be lower than expected.

Fewer workers and slower GDP growth would mean less revenue for the government and more debt, compounding the economic problem for the Obama administration and Democrats in Congress.

The economy’s struggles have prompted a trio of Senate Democrats to call for an extension of the George W. Bush-era tax cuts for everyone, even though such a move would add to the deficit. President Obama and Democratic congressional leaders have backed prolonging tax cuts only for the middle class — individuals making less than $200,000 and couples making less than $250,000. The tax breaks will expire at the end of this year if Congress doesn’t act.

“We don’t want to do things that exacerbate the weak economy right now,” Sen. Kent Conrad (D-N.D.) said.

Conrad, the chairman of the Senate Budget Committee, had called for the expiration of the tax cuts for the wealthy when he drafted his 2011 budget plan in April. He also has been a critic of the tax cuts, warning they have added to a growing $13 trillion debt that will soon be a long-term drag on the economy.

The other two Senate Democrats who want all of the tax cuts extended are Evan Bayh (Ind.) and Ben Nelson (Neb.).

Conrad told The Hill the uncertainty in the global economy helped change his mind.

“The big change was the European debt crisis,” he said. “Our recovery was going quite well. And if you talk to people who work for big companies in the United States, they’ll tell you that when the European debt crisis hit, it just locked things up.”

Conrad said the cost of tax cuts could be offset in the future, when the economy was stronger.

“You could do things that have a revenue effect beyond two years that would cover the cost of extending [the tax cuts for] two years,” he said.

Conrad’s push to temporarily extend the tax cuts won support from Rep. Paul Ryan (Wis.), the top Republican on the House Budget Committee.

Ryan and other Republicans have called for a permanent extension of the tax cuts despite their concerns about the debt.

“Things are going to hit the economy pretty hard next year, so I think anything to do to assuage that can be helpful,” he said.