The federal budget deficit will hit $1.28 trillion this year, down slightly from the previous two years, with even bigger savings to come over the next decade, according to congressional projections released Wednesday.
The nonpartisan Congressional Budget Office says budget deficits will be reduced by a total $3.3 trillion over the next decade, largely because of the deficit reduction package passed by Congress earlier this month.
Nevertheless, the federal budget will continue to be awash in red ink for years to come. Even with the savings, budget deficits will total nearly $3.5 trillion over the next decade—more if Bush-era tax cuts scheduled to expire at the end of 2012 are extended.
There is more bad news in the report: CBO projects only modest economic growth over the next few years, with the unemployment rate falling only slightly by the end of 2012. The agency projects an unemployment rate of 8.5 percent for the last four months of 2012. The presidential election is in November of that year.
"The United States is facing profound budgetary and economic challenges," the new CBO report says. "With modest economic growth anticipated for the next few years, CBO expects employment to expand slowly."
At $1.28 trillion, this year's budget deficit would be the third highest, surpassed only by the deficits registered in the past two years. This year's deficit projection is $116 billion lower than the one made by CBO in March. Most of the change is from higher than anticipated tax collections.
Congress passed a deficit reduction package earlier this month that cuts spending by $917 billion over the next decade for Cabinet-level agencies and the thousands of federal programs they administer. The legislation also created a new joint, bipartisan committee in Congress charged with coming up with at least $1.2 trillion in additional savings by late November.
If the committee of six Democrats and six Republicans agrees on a package, Congress must vote on it by late December. Failure to pass a package would trigger $1.2 trillion in automatic spending cuts, affecting the Pentagon as well as domestic programs.
The new CBO report projects that the legislation will reduce deficits by a total of $2.1 trillion over the next decade. The agency also projects savings of $600 billion over the next decade from lower interest rates.