Payroll deal deepens fiscal hole

At $1.2 trillion, the federal deficit will be $93 billion larger than previously expected in fiscal year 2012, due almost entirely to the cost of a payroll tax cut , the Congressional Budget Office projected Tuesday in its March baseline update.

The 10-year deficit accumulated by 2022 will fall by $186 billion, according to the CBO.

The deeper fiscal hole could hurt the GOP's ability to brag about slashing deficits during election season. But Democrats are unlikely to gain advantage either because they fought against Republican efforts to identify new spending cuts that would offset the cost of the payroll tax cut.

The annual figure and the $2.9 trillion estimate of cumulative deficits over the 2013-2022 period reflect both legislation enacted and technical adjustments made since the January baseline was prepared. That baseline had forecast a $1.1 trillion deficit for fiscal 2012 and $3.1 trillion over 10 years. 

Even though it reflects more current information, the March baseline is calculated using the same economic assumptions as in January and is still bound by current law, which assumes that a host of regularly extended tax cuts will indeed expire and that automatic sequestrations will kick in at the end of the year.

Under the politically more viable alternative scenario – which assumes the extension of all expiring tax provisions other than the current payroll tax cut; a 10-year doc fix that would prevent Medicare payment cuts to providers; the repeal of the sequestrations set by the Budget Control Act; and an alternative minimum tax indexed for inflation after 2011 – deficits would clock in at $10.7 trillion over the 2013-2022 period.

March's revised baseline projected annual deficits averaging 5.3 percent of GDP over the next decade and a publicly held debt worth 93 percent of GDP in 2022. In January, the projection pegged the deficit at 5.4 percent of GDP with public debt at 94 percent.