By Erik Wasson - 01/26/11 03:05 PM EST
The nonpartisan Congressional Budget Office made it official on Wednesday morning: America's free fall into debt is accelerating.
The budget deficit is now estimated to have widened this year to $1.5 trillion, the CBO said. That compares to a budget deficit of $1.3 trillion for the fiscal year that ended Sept. 30.
The CBO's projections assume that current laws remain unchanged. 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 70 percent by the end of 2011, reaching 77 percent of GDP by 2021.
“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 the those two approaches,” CBO Director Douglas Elmendorf wrote in a blog post announcing the report.
He added that Congress may want to implement these policies gradually to avoid “a sudden negative impact on the economy.”
In potential bad news for President Obama and his reelection chances, the CBO projects continued high unemployment through 2012. It predicts unemployment falling to 9.2 percent by September and 8.2 percent a year later.
The CBO's numbers will shape spending decisions for 2011 and 2012. Congress has to pass legislation to fund the government after the current spending bill runs out March 4, and then must tackle funding the government after the fiscal year runs out Sept. 30.
The CBO numbers will be used by House Budget Committee Chairman Paul Ryan (D-Wis.) to come up with spending ceilings for the rest of 2011. Those ceilings will be used by the House Appropriations Committee to come up with a continuing resolution funding the government after March 4.
Under the terms of a House resolution passed Tuesday, Ryan is to set ceilings at 2008 levels or less. The funding bill is to be voted on the week of Feb. 14, at which point the Senate will grapple with it.
President Obama in the State of the Union proposed a five-year domestic spending freeze to tackle the deficit, but his proposal garnered almost no applause in the House chamber. Liberals are wary of any cuts coming before the economic recovery takes hold.
Speaker John Boehner (R-Ohio) led Republicans in denouncing the proposal as not going nearly far enough toward balancing the budget.
House Budget Committee ranking member Chris Van Hollen (D-Md.) said the CBO's report shows the need for deficit reduction but said the steep cuts proposed by Republicans will hurt the economy.
"There is no question that we must act to put a long-term, bipartisan plan in place for deficit reduction. ... But we also know that blindly slashing investments in important priorities that will help us win the future will slow down our fragile economic recovery and put more people out of work. Unfortunately, draconian cuts are exactly what House Republicans are proposing," Van Hollen said in a statement.
House Minority Whip Steny Hoyer (D-Md.) said on Tuesday that there's "no doubt" the tax-cut deal negotiated in December by the White House and Senate Republicans would exacerbate the nation's enormous debt.
"It was a compromise that was positive for the economy, but it was not without cost. On balance it was a good agreement, but it did make the budget deficit numbers a lot worse, and CBO's report will undoubtedly reflect that," Hoyer said.
The CBO predicts dramatically declining deficits after 2012 but this is based on the assumption that taxes increase revenue by 4 percent after that. This assumes Congress allows all the Bush-era tax cuts to expire that year, for example.
“The United States faces daunting economic and budgetary challenges,” Elmendorf said at a press conference. “Unfortunately it is likely that a return to normal economic conditions will take years.”
He said the tax-cut compromise is the most important reason the deficit is increasing again. CBO estimates that the deal added $390 billion to the deficit.
A second important reason is the “anemic” recovery that is proceeding slower than historical averages, but is on pace with the way other nations recover from financial crises. The slow recovery means fewer taxes are collected, while more in unemployment and food stamps is paid out.
He said that normal 5.3 percent unemployment will return only in 2016.
The CBO has also looked at President Obama’s proposal to freeze spending for five years. The savings of $400 billion over 10 years is substantial, but is less than 10 percent of the $7 trillion in total deficits the CBO is now projecting over 10 years, Elmendorf said.
As for the GOP approach, Elmendorf estimated that, based on what has been talked about, the Ryan cuts would be $82 billion.
He said that 2008 regular appropriations excluding defense, veterans, military and homeland security spending were $378 billion. The current CR is spending $461 billion on an annualized basis.
Asked whether such a cut would hamper the economic recovery, Elmendorf said policymakers face a difficult trade-off: Waiting to deal with the debt makes it exponentially worse, but moving tax and spending policies too quickly can be too disruptive.
This post was updated at 12:12 p.m.