CBO sees $1.5 trillion deficit

The Congressional Budget Office projects that the deficit for fiscal 2011, if current laws remain unchanged, will be $1.5 trillion, or 9.8 percent of the gross domestic product.

CBO expects economic growth to remain moderate this year and next. As measured by the change from the fourth quarter of the previous year, real GDP is projected to increase by 3.1 percent this year and by 2.8 percent next year, an assessment that takes into account legislative achievements of the lame-duck session of the last Congress, including the tax-cut deal.

"That forecast reflects CBO's expectation of continued strong growth in business investment, improvements in both residential investment and net exports, and modest increases in consumer spending," the report said.

CBO projects that inflation will remain very low both this year and next, because of the large amount of unused resources in the economy, and will average no more than 2.0 percent a year between 2013 and 2016.

Senate Budget Committee Chairman Kent Conrad, D-N.D., said that the CBO report should be another wake-up call to the nation.

"In the near term, due to passage of the tax-extension package and the slow pace of the economic recovery, CBO is now expecting to see deficits of more than $1 trillion a year continuing through at least 2012," Conrad said in a statement. "And as disturbing as those near-term deficits are, the long-term outlook is even worse. It is the deteriorating long-term outlook that is the biggest threat to the country's economic security."

He said that the problem needs a bipartisan solution and everything must be on the table.

"We can't continue to put this off," Conrad concluded. "We need to reach an agreement this year. The president's fiscal commission provided a model for a bipartisan way forward. Now it is up to the administration and members on both sides of the aisle in Congress to come together to finish the job."

House Budget Committee ranking member Chris Van Hollen, D-Md., said, "The report confirms two important things: that our economy is starting to recover from the worst recession since the Great Depression, and that we must tackle the deficit and put our nation on a path to long-term fiscal sustainability."

Van Hollen praised President Obama on his proposal to freeze nonsecurity discretionary spending for five years. But he was wary of a plan by House Republicans to roll back that type of spending to fiscal 2008 levels.

"There is no question that we must act to put a long-term, bipartisan plan in place for deficit reduction, and the president took another important step with some serious belt-tightening proposals in the State of the Union last night," Van Hollen said. "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."

Payroll employment, which declined by 7.3 million during the recent recession, rose by only 70,000 jobs, on net, between June 2009 and December 2010, CBO said. "The recovery in employment has been slowed not only by the slow growth in output but also by structural changes in the labor market, such as a mismatch between the requirements of available jobs and the skills of job seekers," the report said.

CBO expects the economy to add about 2.5 million jobs a year from 2011 to 2016. But, the report cautions, "even with significant increases in the number of jobs, a substantial reduction in the unemployment rate will take some time."

The unemployment rate should fall to 9.2 percent by the end of 2011, 8.2 percent by the end of 2012, and 7.4 percent by the end of 2013 - reaching 5.3 percent only in 2016, according to CBO's forecast. The 2012 jobless rate could be a major factor in the presidential election next year. Political analyst Charlie Cook has speculated that only a rate below 8 percent would grant Obama a solid win, and that unemployment betwen 8 and 9 percent would mean a tight race.

Katy O'Donnell contributed to this report.