CBO: Budget deal cuts U.S. deficit in half over next decade

WASHINGTON (Reuters) - A sweeping U.S. budget deal has brightened the country's fiscal outlook but unemployment will remain high over the near term, nonpartisan congressional forecasters said on Wednesday.

The report by the Congressional Budget Office is likely to add fuel to the debate over jobs and the economy that is set to dominate Washington through the 2012 elections.

The recent budget deal, passed earlier this month after months of acrimonious debate, will help slash projected budget deficits nearly in half over the next 10 years, CBO said.

But economic growth will remain sluggish through 2012, CBO said. It said the unemployment rate, currently at 9.1 percent, will only fall to 8.5 percent by the time voters head to the polls in November 2012.

The economic picture is probably even worse as grimmer data has emerged since the office completed its work in early July, CBO Director Doug Elmendorf said.

"The pace of the recovery has been slow, and the economy remains in a severe slump," Elmendorf wrote in a blog post.

That could complicate President Barack Obama's re-election hopes and give more ammunition to Republican rivals who have criticized his economic policies.

Obama plans to unveil a job-creation package next month to help boost an economy that threatens to slide back into recession. At the same time, lawmakers on a special congressional committee will try to squeeze more budget savings from the tax code and popular benefit programs like Medicare.

Policymakers will have to balance austerity and stimulus efforts over the coming months, Obama's fellow Democrats said.

The report "underscores the need for the Joint Committee to propose a plan to help put America back to work, coupled with a blueprint to reduce the long term deficit," said Democratic Representative Chris Van Hollen, one of 12 lawmakers named to the bipartisan panel.

Republicans said the report showed that Obama's efforts to boost the economy in the wake of the 2008-2009 financial crisis have not borne fruit.

"A slight decrease in the projected deficit is nothing to celebrate, particularly when it is accompanied by the grim news that CBO expects the national unemployment rate to continue to exceed 8 percent well past next year," House of Representatives Speaker John Boehner said in a statement. "The president's policies were supposed to keep that from happening."

BUDGET DEAL YIELDS BIG SAVINGS

The United States will rack up $3.487 trillion in cumulative deficits over 10 years, some $3.3 trillion below its previous projection, CBO said.

Nearly two-thirds of that savings is due to the deficit-reduction deal, which passed earlier this month as part of a package to raise the national debt limit. Another one-fifth is attributable to lower projected interest rates during the coming decade, CBO said.

Stocks rose as much as 1 percent and Treasury bond prices fell as the figures revealed a stronger fiscal outlook than previously thought. Both markets later flattened out as other factors overtook early enthusiasm about the CBO data.

The economic picture could worsen considerably if Congress extends temporary tax cuts that were passed under President George W. Bush.

CBO's budget projections assume that those cuts will expire at the end of 2012. Democrats want to extend them for middle and low income taxpayers, while Republicans want to extend the tax cuts for the wealthiest households as well.

An aging population and rising healthcare costs will force Congress to raise taxes or pursue further spending cuts if it wants to keep deficits and debt under control, Elmendorf wrote.

In the current fiscal year, which ends on September 30, the government will spend $1.284 trillion more than it collects, according to CBO's latest estimate. That is a $115 billion improvement over its last estimate in March.

Gross domestic product will grow by an annual rate of 2.4 percent this year and 2.6 percent next year, CBO said.

(Additional reporting by Richard Cowan in Washington and Chris Sanders in New York; editing by Deborah Charles and Vicki Allen)