CBO Predicts Record $1.5 Trillion Deficit In 2011

The Congressional Budge Office has released a new estimate of the size of the federal budget deficit. The CBO says it will hit a record $1.5 trillion dollars in 2011. Host Melissa Block talks with NPR's John Ydstie about the size of the deficit, and President Obama's plan to reduce it by freezing some domestic spending programs.

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MICHELE NORRIS, host:

As President Obama talked about what government can do to boost job growth and American competitiveness, he got some bad news today - the country's finances are in worse shape than previously thought. The Congressional Budget Office forecast a record federal deficit of one and a half trillion dollars for this year.

NPR economics correspondent John Ydstie joins me to talk about the CBO's deficit forecast. And, John, the president last night said the economy is improving. So, how to explain, then, the higher deficit for this year?

JOHN YDSTIE: Well, the big reason is the agreement between the president and Republicans during the lame-duck session of Congress to extend the Bush tax cuts for another two years. The CBO estimates that will reduce tax revenue by about $400 billion next year. And that represents a huge chunk of this projected record deficit.

The CBO did say that those tax cuts are likely to help boost economic growth next year. So they're predicting the deficit will drop some in 2012, but it would remain above a trillion dollars.

NORRIS: John, last night in the State of the Union, the president proposed a five-year freeze on non-security portions of the federal budget to help with the deficit problem. First of all, what is that non-security portion of the budget and how much of a difference will a five-year freeze make in that sector?

YDSTIE: Well, under the administration's definition, the non-security part of the budget includes all discretionary spending except spending on Defense, Homeland Security, the State department and Veterans Affairs. It also excludes entitlements like Medicare and Social Security. So, as the president admitted last night, the freeze only applies to 12 percent of the overall budget.

NORRIS: Right.

YDSTIE: Now, according to the White House, the freeze will save more than $400 billion over 10 years, so around $40 billion a year, but not a lot when you're trying to fight annual budget deficits of more than a trillion dollars.

NORRIS: And another thing, John, the president talked about last night was the expansion of a number of programs including clean energy, high speed rail, all of those would seem to be non-security spending. So, how do you increase spending on those programs under the freeze that he's talking about?

YDSTIE: Well, the president will do it by cutting spending for other programs in the category. This is not an across the board freeze. Every program will not be treated the same. The administration will be prioritizing. So, some programs like high speed rail will get more money and others will get less. And we'll find out more about the tradeoffs when the president unveils his 2012 budget in a couple of weeks.

But the White House says that all of the spending on the jobs and competitiveness programs that the president talked about last night will be done within the context of the freeze and won't increase the deficit.

NORRIS: Now, at the same time the president is talking about this freeze on discretionary spending, Republicans are also talking about budget cuts. How do those compare?

YDSTIE: Well, the Republicans would cut more deeply. The Republican leadership plan is to go back to spending levels in 2008. That would be a 30 percent reduction across the board in the non-security federal spending immediately. Some Republicans, including members of the Republican study group, want to cut even more.

But, again, we're talking about making cuts in a small category of overall government spending. So it's not going to solve the country's deficit problem. That's going to require tackling spending on Medicare, especially, and to a lesser extent, Social Security.

NORRIS: And those perennial third rails of politics.

YDSTIE: Exactly.

NORRIS: Likely to happen?

YDSTIE: Well, the president did say last night and this is a quote, we have to stop pretending that cutting this kind of spending alone, that is, like non-security spending, will be enough. And he made a reference to the work of his deficit commission which outlined some ways to deal with Medicare and Social Security. But he doesn't appear ready to take the first step at this point.

NORRIS: And a lot more work to come in that department.

YDSTIE: Yes.

NORRIS: NPR's economic correspondent John Ydstie, thanks so much.

YDSTIE: You're welcome.

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