CBO: Federal deficit projected at $1.35 trillion

WASHINGTON The special deficit panel would have attempted to produce a plan combining tax cuts and spending curbs to be voted on after the November elections. The measure went down because anti-tax Republicans joined in opposition with Democrats wary of being railroaded into cutting Social Security and Medicare.

The vote to kill the deficit task force came hours after the nonpartisan Congressional Budget Office predicted a $1.35 trillion deficit for this year as the economy continues to slowly recover from the recession.

"Yet another indication that Congress is more concerned with the next election than the next generation," said Sen. Judd Gregg, R-N.H., a sponsor of the plan.

The budget deficits facing Obama and Congress are large and intractable, and the CBO's new deficit prediction is roughly equal to last year's record $1.4 trillion ocean of red ink. That means the government is borrowing to cover 40 percent of the cost of its programs.

Economists say sustained high deficits would force interest rates higher and "crowd out" private investment -- and could have severe implications for the value of the dollar.

The report predicts a sluggish economic recovery and continued high unemployment -- which presages big political problems for Obama and his Democratic allies heading into the midterm elections.

The report sees unemployment averaging 10.1 percent this year as the economy grows by slightly more than 2 percent. It would grow only a little more next year with an unemployment rate of 9.5 percent.

"CBO expects that the pace of economic recovery will be slow," said agency chief Douglas Elmendorf.

The latest estimates also project that the deficit will drop to $980 billion next year and $480 billion in five years -- but only if a host of tax cuts enacted under President George W. Bush are allowed to expire. Most budget experts see deficits nearing or exceeding $1 trillion each year over the next decade once tax cuts and other policies are factored in.

It's a sobering reminder of the fundamental imbalance of the federal government's budget that comes just days before Obama's Feb. 1 budget submission. The White House says Obama will propose a three-year freeze on domestic agency spending. It hasn't said whether Obama will propose tax hikes or benefit cuts to spiraling programs such as Medicare, Medicaid and Social Security.

The 2010 deficit figure is in line with previous estimates, but plans afoot on Capitol Hill for a new jobs bill and a coming Obama request for war funds would add to the total.

The spending freeze, expected to be proposed by Obama in his State of the Union address on Wednesday, would apply to a relatively small portion of the federal budget, affecting a $477 billion pot of money available for domestic agencies whose budgets are approved by Congress each year. Some of those agencies could get increases, while others would have to face cuts; such programs got an increase of almost 10 percent this year in the $3.5 trillion federal budget.

Also Tuesday, Sens. Claire McCaskill, D-Mo., and Jeff Sessions, R-Ala., said support was building for a plan to impose binding "caps" on spending similar to Obama's. It would take 67 votes to bust through the spending limits.

The freeze on so-called discretionary programs would have only a modest impact on the deficit. The steps needed to tackle such huge deficits include tax increases and curbs on benefit programs like Medicare, Medicaid and Social Security.

That was the idea behind the Obama-backed plan to create a special task force to find a way to curb the spiraling budget deficit. Obama may decide to create a weaker version of the task force by presidential order. But unlike the plan rejected Tuesday, there would be no way to force a Senate vote on the task force's plan.

Supporters garnered 53 votes for the plan, which was co-sponsored by Gregg and Budget Committee Chairman Kent Conrad, D-N.D. But 60 votes were required under procedural rules. Thirty-six Democrats and independent Joe Lieberman of Connecticut voted for the plan, as did 16 Republicans.

The task force was rejected after the powerful seniors lobby, led by AARP, objected to a potential fast-track debate of cuts to Social Security and Medicare. Anti-tax activists and GOP-friendly editorial pages pressed Republicans to oppose it.

The plan was offered as an amendment to a deeply unpopular bill to permit the government to borrow an additional $1.9 trillion to finance its operations and prevent a first-ever default on U.S. obligations.