The warning from the non-partisan Congressional Budget
Office came on top of more bad economic data that heightened concerns about a
return to recession and sent markets roiling. It could also spell trouble for
Democrats facing November elections.
The CBO forecast the US budget deficit will hit $1.34
trillion this year, down slightly from its March projection of $1.368 trillion.
It attributed most of the $27 billion change in its
fiscal 2010 deficit projection to an estimated $50 billion reduction in the
cost of TARP, the US government's bailout of financial institutions in 2009.
But the figures show that without significant changes in
US tax and spending laws, the government will struggle to dig its way out of a
deep fiscal deficit hole.
Congressional Budget Office Director Douglas Elmendorf
painted a picture of a tough recovery from recession, although the CBO
predicted a 3 percent economic growth rate this year.
"The considerable number of vacant houses and
underused factories and offices will be a continuing drag on residential
construction and business investment, and slow income growth as well as lost
wealth will restrain consumer spending," he said.
The unemployment rate will not fall to around 5 percent
until 2014, Elmendorf said. The last time the jobless rate was 5 percent was
April 2008, just as the economy was heading into recession and unemployment was
on the rise.
Anxiety over the economy is likely to punish President
Barack Obama's Democrats at November's midterm elections because of perceptions
of big deficits caused by government spending and high unemployment.
Republican Sen. Judd Gregg warned of fiscal calamity.
"Today's CBO outlook only underscores what we
already know - the current pace of US spending is unaffordable and
unsustainable and without a change in direction this country is headed for
fiscal calamity," said Gregg, the senior Republican on the Senate Budget
Committee.
As if to illustrate the severity of the economic
challenge ahead, the CBO forecast was released as new data dealt another blow
to the fragile US economy, driving prices on US government debt higher and yields
lower.
Concerns about the massive deficit, and the US triple-A
credit rating, are not expected to lift Treasury debt yields from current low
levels any time soon.
The budget and economic outlook are designed to give
lawmakers the most up-to-date nonpartisan assessment of U.S. economic health
and provide the latest projections on deficits that began in 2002 under former
President George W. Bush and then skyrocketed in 2009 during recession and
stimulus spending under Obama.
The CBO's deficit numbers are slightly lower than recent
White House predictions for the fiscal gap, but the two use different
measurements.
Members of Congress will rely on the CBO numbers as they
decide how to tackle the yawning budget gap.
The CBO projected a 9.5 percent jobless rate for this
year, falling only slightly to 9 percent in 2011 and averaging 6.7 percent in
2012-2014, significantly shy of the 4 percent target economists would consider
a full employment level.
Last month, the White House said unemployment will
decline slowly, to 8.1 percent in 2012, when the U.S. presidential election
will be held.
CBO also forecast a $1.066 trillion deficit for fiscal
year 2011, which begins on Oct. 1, up slightly from the March estimate of $996
billion.
The US budget deficit last year was a record $1.413
trillion, 9.9 percent of gross domestic product.
Meanwhile, US employers appear to be laying off workers
again as applications for unemployment insurance reached the half-million mark
last week for the first time since November.
Initial claims for jobless benefits rose by 12,000 last
week to 500,000, the Labor Department said Thursday. It was the fourth increase
in the past five weeks and evidence that the economic recovery has weakened.
The four-week average, a less volatile measure, rose by
8,000 to 482,500, the highest since December.
The increase suggests the economy is creating even fewer
jobs than in the first half of this year, when private employers added an
average of about 100,000 jobs per month.
The number of Americans continuing to receive benefits
fell by 13,000 to 4.5 million, the department said.
A private research group said its gauge of future US
economic activity edged up in July, suggesting growth will be sluggish for the
rest of the year.
The Conference Board said Thursday that its index of
leading economic indicators rose 0.1 percent last month after dropping 0.3
percent in June. Economists polled by Thomson Reuters had expected a gain of
0.2 percent.