Big deficit for 2011, but some improvement on tap

@CNNMoney August 24, 2011: 11:12 AM ET

NEW YORK (CNNMoney) -- The United States is still set to rack up large deficits in the next decade, but not quite as large as previously estimated. At the same time, economic growth is expected to be modest and the unemployment rate is likely to stay high for a few more years.

Those are just a few of the conclusions that the Congressional Budget Office draws in its update to its 10-year budget and economic outlook.

"The United States continues to face profound budgetary and economic challenges," CBO director Douglas Elmendorf noted in his blog.

The country is on track to accrue a $1.3 trillion deficit this year, marking the third straight year the country has built up $1 trillion-plus deficits, the official scorekeeper for Congress reported Wednesday.

This year's deficit would be the third-largest shortfall in the past 65 years -- the first two largest were in 2009 and 2010.

Over the next decade, the country is set to rack up a total of $8.5 trillion in new debt, with annual deficits averaging 4.3% of gross domestic product, the Congressional Budget Office said in its budget and economic outlook update. The deficit for this year will be twice that, at 8.5% of GDP.

By 2021, the debt held by the public -- which excludes money owed to government trust funds such as Social Security -- would reach 82% of the size of the economy, the highest it has been since 1948.

On the bright side, those estimates are an improvement over what CBO was forecasting in January, when it estimated that the country would accrue $12 trillion in new debt over the next decade.

Since the start of the year Congress has passed a 2011 budget deal that called for modest spending cuts and a larger debt-reduction deal in August.

"About two-thirds of that reduction stems from the effects of enacting the Budget Control Act, which set caps on future discretionary spending and created a process for adopting additional deficit reduction measures," CBO director Doug Elmendorf said in a blog post.

CBO: Debt ceiling deal cuts at least $2.1 trillion

The CBO 10-year estimates assume many of the policies in effect today will continue rather than expire as they are scheduled to under current law.

Such policies include the Bush tax cuts which are 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.

If, by contrast, lawmakers stick to current law -- meaning they let various expensive policies expire as scheduled -- the debt picture improves. Under such a scenario, cumulative 10-year deficits are estimated at $3.5 trillion, or $5 trillion less than if today's policies are extended.

The CBO estimates also assume that lawmakers will enact the $1.2 trillion of additional deficit reduction on top of the $917 billion called for by the debt-ceiling deal in August.

The picture for economic growth is modest. CBO forecasts GDP at 2.4% for this year, 2.6% for 2012 and then an average of 3.6% for the next three years.

That's due to a few factors, including the aftermath of the financial crisis that hit three years ago and the removal of stimulus from the economy.

"It takes time for households to rebuild wealth and pay down their debts, for financial institutions to restore their capital bases and the supply of credit and for businesses to regain the confidence necessary to invest in new facilities and equipment," the CBO wrote.

Modest economic growth also means the unemployment rate is likely to stay high. The CBO expects it will remain above 8% until 2014 then average 7% from 2013 to 2016, before falling to 5.2% on average from 2017 to 2021.

The CBO's forecasts do not take into account several recent events since early July, including the wild swings in financial markets and various signs of economic weakness. If the agency had, near-term growth forecasts would have been lower.

The ripple effects from the European debt crisis could pose problems for the U.S. economic recovery and so, too, potentially could the incessant partisan fighting over how best to spur economic growth.

The inability of lawmakers to come to a sensible compromise over the nation's borrowing limit earned the United States its first-ever credit downgrade this summer and called into question Congress's ability to smartly negotiate solutions to the country's long-term fiscal shortfalls while supporting economic growth in the process.

-- Additional reporting by Jennifer Liberto To top of page

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