Federal Deficit Hits Near-Record $1.3 Trillion In 2010

The Obama administration says the federal deficit hit a near-record $1.3 trillion for the just-completed budget year.

That means the government had to borrow 37 cents out of every dollar it spent as tax revenues continued to lag while spending on food stamps and unemployment benefits went up as the economy slowly pulled out of recession.

The eye-popping deficit figures provide Republican critics of President Barack Obama's fiscal stewardship with fresh ammunition less than three weeks ahead of the midterm congressional elections. The deficit was $122 billion less than last year, a modest improvement.

Republicans have tapped into voter angst over the deficits, using the $814 billion economic stimulus and $700 billion Wall Street bailout to paint Obama and his party as big spenders.

Democrats say the recession would have been worse if the government didn't step in with those programs to prop up the economy. They also note that most of the bailout, which began during the Bush administration and was supported by many Republicans in Congress, has been repaid.

Both parties have acknowledged that rising deficits will present headaches for policymakers regardless of which party controls Congress after November.

Obama has appointed a bipartisan commission to study the deficit and recommend policy changes. Those recommendations are expected in December, after the elections, and the panel needs the backing of 14 of its 18 members to trigger a congressional vote.

Building that level of consensus will be difficult. Republicans are strongly opposed to a plan that includes tax increases to chip away at the deficit. Democrats are less inclined to move a package that relies solely on spending cuts.

Even if Congress doesn't vote on a deficit-cutting proposal, it faces the challenge of reaching a consensus on what to do with the Bush-era tax cuts that are set to expire on Dec. 31.

The Republicans are fighting to renew all of the tax cuts. Obama and the Democrats want to extend the tax cuts for every family making less than $250,000, but let them expire for the wealthiest households.

The difference between the two parties amounts to $700 billion that will be added to projected deficits over the next decade if the tax cuts for the wealthy are extended along with the other tax cuts.

So far, the huge deficits have not been a threat to the country. That's because interest rates have been so low coming out of the recession and the United States has been seen as a safe haven for foreign investors willing to keep buying U.S. Treasury bonds.

But the situation could change once the economy gains more momentum, analysts warn.

"If we get to 2013 and policymakers don't look like they have a credible plan to deal with the deficit, then interest rates are likely to rise significantly and that will jeopardize the recovery we have under way at that time," said Mark Zandi, chief economist at Moody's Analytics.