Congressional Budget Office Predicts 2010 Deficit Second Largest Since WWII

By Matt Cover | August 19, 2010 | 5:27 PM EDT

( – The Congressional Budget Office (CBO), in its mid-year budget update, has projected that the 2010 budget deficit will be the second highest on record since the end of World War II, eclipsed only by the deficit of 2009.
The CBO says that the total 2010 deficit will reach $1.3 trillion, down slightly from 2009’s $1.4 trillion record. All told, CBO projects that the government will run up a total of $6.2 trillion in new deficits between 2011 and 2020.
Relative to the size of the economy, the 2010 deficit will reach 9.1 percent of the Gross Domestic Product, according to the CBO’s projection. The deficit in 2009 was 9.9 percent of GDP.
“As was the case last year, this year's deficit is attributable in large part to a combination of weak revenues and elevated spending, associated with the economic downturn and the policies implemented in response to it,” the CBO explained
The current economic downturn is expected to last for several more years, the non-partisan office said, predicting that unemployment will not fall to around a healthy 5 percent until at least 2014.
“CBO projects that the economy will grow by only 2.0 percent from the fourth quarter of 2010 to the fourth quarter of 2011; even with faster growth in subsequent years, the unemployment rate will not fall to around 5 percent until the end of 2014,” the CBO said.
That slow growth and high unemployment will be driven by an economic recovery that the CBO described as “anemic” when compared to other economic recoveries. The sluggish recovery was the result of the lingering effects of the financial crisis and the recession it spawned. Recessions caused by financial crises typically take longer to recover from than other types of recessions, the CBO explained.
“Such weak growth tends to occur in recoveries from recessions spurred by financial crises,” stated the CBO report. “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 weigh on consumer spending.”

House Speaker Nanacy Pelosi (D-Calif.) is hugged by President Barack Obama at the White House, March 23, 2010. (AP Photo)

The CBO also noted that economic growth will be slow because most of the country – individuals and businesses – has lost considerable amounts of wealth during the collapse of the housing market. This loss of wealth adversely affects their spending behavior,  causing them to retract planned spending and investment, and thereby slowing economic growth.
The CBO said that while stimulus spending may have a short-term effect on economic growth, real recovery will not take place until consumers and businesses adjust their behavior to account for the loss of wealth.
“Following such a crisis, it takes time for consumers to rebuild their wealth, for financial institutions to restore their capital bases, and for non-financial firms to regain the confidence required to invest in new plant and equipment; all of those forces tend to restrain spending,” the CBO explained.
Unemployment also apparently will be equally sluggish in returning to normal. The CBO projected that unemployment would fall to 9.3 percent by the end of 2010 and 8.8 percent by the end of 2011 before leveling off at 5.1 percent at the end of 2014.
The federal government’s spending does not appear to be as constrained as the private sector’s, said the CBO.
The government is projected to spend a total of $44.5 trillion between 2011 and 2020, according to the CBO, including $19.3 trillion between 2011 and 2015.
That spending, all of it deficit-financed, will eventually drive the national debt to $23.1 trillion by 2020, up from 2010’s projected total of $13.5 trillion.
The CBO said that running an average deficit of $620 billion per year for an entire decade is economically unsustainable, requiring the government to significantly curb its appetite for spending.
“Continued large deficits and the resulting increases in federal debt over time would reduce long-term economic growth,” stated the CBO. “Putting the nation on a sustainable fiscal course will require policymakers to restrain the growth of spending substantially, raise revenues significantly above their average percentage of GDP of the past 40 years, or adopt some combination of those approaches.”