By Erik Wasson - 01/27/11 01:12 AM EST
A record $1.5 trillion deficit projection Wednesday from the Congressional Budget Office provided ammunition for both sides in the raging debate over spending and the size of government.
The CBO blamed the dismal picture on December’s tax deal, which extended all of the Bush-era tax rates for two years and will add $390 billion to the deficit.
Yet the size of the deficit also strengthened GOP arguments that Congress must make significant spending cuts to this year’s budget and that a five-year freeze to non-security spending offered by Obama is not sufficient.
The CBO report could give momentum to conservatives who want to lower 2011 spending levels to a rate not seen since 2006.
House Budget Committee Chairman Paul Ryan (R-Wis.) has been charged with setting non-security spending budget ceilings at 2008 levels or lower, but the conservative Republican Study Committee has called for even steeper cuts.
In the Senate, 21 Republicans led by Sens. Orrin Hatch (Utah) and John Cornyn (Texas) cited the report in introducing a bill to start the process of adding a balanced-budget amendment to the Constitution.
The increase in the deficit would bring it to 9.8 percent of gross domestic product, the CBO said, following deficits of 10 percent and 8.9 percent during the previous two years.
Aside from the tax deal, CBO cited the sluggish economic turnaround — which led the Federal Reserve on Wednesday to vote to continue its $600 billion plan to spark the economy — as the other major factor in its new projection.
“The United States faces daunting economic and budgetary challenges,” CBO Director Douglas Elmendorf said at a press conference. “Unfortunately, it is likely that a return to normal economic conditions will take years.”
Elmendorf said reducing spending this year to 2008 levels would lead to an $82 billion cut from the current resolution funding the government, which provides the government $461 billion for non-security discretionary items on an annualized basis.
In his address to the nation on Tuesday, Obama called for a five-year spending freeze but also said the nation should invest in education and green energy to ensure the country remains competitive in a global economy.
CBO’s score would seem to toughen the climate for any new spending, but the Office of Management and Budget (OMB) insisted the news would not affect Obama’s budget, due the week of Feb. 14.
“Budget decisions have been made so the projections will not affect them,” said OMB spokesman Kenneth Baer.
“The CBO numbers underscore the seriousness of the fiscal situation, and the president’s budget will lay out his plan for how he plans to put the country on a sustainable fiscal path so that we can grow the economy, create jobs and win in the world economy,” he said.
The $1.5 trillion deficit projection for 2011 compares to $1.3 trillion for the fiscal year that ended Sept. 30. The CBO noted that those are the largest deficit levels since the end of World War II.
If the nation continues on its current path, the CBO said, the total national debt will rise from 40 percent of GDP in 2008 to 77 percent by 2021.
The CBO predicts dramatically declining deficits after 2012, but this is based on the assumption that Congress will allow all the Bush-era tax cuts to expire in 2012, an election year.
“To prevent debt from becoming unsupportable, the Congress will have to substantially restrain the growth of spending, raise revenues significantly above their historical share of GDP or pursue some combination of those two approaches,” Elmendorf wrote in a blog post announcing the report.
CBO projects that unemployment will fall to 9.2 percent by September and 8.2 percent a year later. Unemployment of 5.3 percent is only expected to return by 2016, under the projections.
CBO also examined Obama’s five-year spending-freeze proposal, finding that it would save $400 billion over 10 years. While substantial, that cut is less than 10 percent of the $7 trillion in total deficits the CBO is now projecting over 10 years, Elmendorf said.
House Budget Committee ranking member Chris Van Hollen (D-Md.) said the CBO’s report is not surprising given the tax-cut deal in December. He said it shows the need for deficit reduction but said the steep cuts proposed by Republicans will hurt the economy.
Senate Budget Committee Chairman Kent Conrad (D-N.D.) said the CBO numbers show there should be a bipartisan summit to craft a long-term debt plan. He also said he opposes cuts this year below the level of the current spending bill, which was already lower than what Obama asked for last year.
Amid the flurry of activity, Elmendorf received the news that despite GOP grumblings about his estimates over the years, he would be reappointed. Speaker John Boehner (R-Ohio) has signed off on another four years for the director, whose term expired at the beginning of January.
Sam Youngman contributed to this story.