Tax cut deal pushes deficit to $1.5 trillion

NEW YORK (CNNMoney) -- The federal deficit for 2011 will hit $1.5 trillion, driven higher by the "slow and tentative" economic recovery and the bipartisan tax cut deal passed late last year, the Congressional Budget Office said Wednesday.

The deficit forecast would equal to almost 10% of the economy.

And if lawmakers extend many of today's current policies otherwise set to expire soon, the national debt would likely rise by $12 trillion over the decade from 2012 to 2021. That is about $5 trillion more than would be the case otherwise and would bring total debt to $23 trillion, the CBO said.

More than half of the accumulated debt will be the result of the interest payments.

"Interest will triple in nominal dollars in the next decade, and double as a percentage of GDP," said Douglas Elmendorf, director of CBO.

The bottom line: The country's accumulated debt over the years would hit 97% of GDP by 2021, which would be the highest level in the post World War II period. (Running the government on 8 cents)

The policies in play include the 2001 and 2003 tax cuts, which are now set to expire at the end of 2012; the so-called doc fix that lawmakers regularly pass to stave off Medicare payment cuts to doctors and the measures taken to protect the majority of Americans from having to pay the Alternative Minimum Tax.

Looking past the next decade, the CBO said the aging population and rising costs for health care will push federal spending as a share of the economy far higher than 97%.

"To prevent debt from becoming unsupportable, policymakers 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," the agency warned, as it has many times before.

Economic growth, while not sufficient by itself to restore fiscal balance, is nevertheless a critical support as policymakers strive to drive down deficits.

CBO expects the economy to grow by roughly 3% this year and next after adjusting for inflation.

When it comes to the prospect of more jobs, the picture is mixed. On the bright side, the CBO expects the economy will add 2.5 million jobs a year over the next six years -- which is a pace on par with what occurred in the late 1990s, Elmendorf noted.

But CBO doesn't expect unemployment to fall to around 5% until 2016. The reasons: the prevalence of permanent job loss, the high number of long-term unemployed and the mismatch between job seekers and job requirements.

In terms of inflation, the budget agency expects it to remain low this year and next and average only 2% between 2013 and 2016.