WASHINGTON - President Barack Obama's domestic policy proposals will face the reality of skyrocketing deficits on Tuesday when officials release two government reports projecting huge budget shortfalls over the next decade.

The White House budget office and the Congressional Budget Office (CBO), a non-partisan arm of Congress, release updated economic forecasts and deficit estimates on Tuesday, providing further fiscal fodder to opponents of Obama's nearly $1 trillion healthcare overhaul plan.

Many of the figures are already known.

The White House has confirmed that its deficit estimate for the 2009 fiscal year, which ends September 30, will inch down to $1.58 trillion from $1.84 trillion after eliminating billions of dollars originally set aside for bank rescues.

Looking forward, an administration official told Reuters the 10-year budget deficit projection will jump by about $2 trillion to roughly $9 trillion from an original forecast of $7.1 trillion.

One message the numbers will send is that the medium- and long-term deficits need to be addressed, said Chuck Marr, director of federal tax policy at the Washington-based Center on Budget and Policy Priorities, an analysis and research organization.

Obama has promised to do that. The president, a Democrat, says he will cut the deficit in half by the end of his four-year term, and he sees lowering healthcare costs as a key ingredient toward achieving long-term deficit reduction.

But Republicans charge that his proposals to extend coverage to uninsured Americans and create competition for private insurance providers are too expensive, especially as deficits go up.


We're still on a long-run trajectory that's not sustainable, said Rudolph Penner, a fellow at the Urban Institute and former CBO director from 1983-1987.

In an ideal world they would be doing a lot more to get health costs under control and, in my view, we wouldn't be talking about expanding coverage right now, said Penner, who describes himself as a moderate Republican.

The CBO had previously forecast that deficits between 2010 and 2019 would total $9.1 trillion, generating heat for the White House, which stuck to its original $7.1 trillion forecast earlier this year. The new number will bring White House projections into line with the CBO, the official said.

In line or not, the political challenges of the updated deficit projections are numerous. With Congressional elections looming next year, Obama will need to show he is serious about cutting costs in order to neutralize an otherwise politically radioactive issue for both political parties.

Many economists think it is unlikely that the government can curtail spending, which means taxes would have to rise to cover the increasing costs of providing retirement benefits and healthcare to older people. That could slow economic growth.

Stanford University economics professor John Taylor, an influential economist, told Reuters Television on Friday the U.S. budget deficit poses a greater risk to the financial system than the collapse in commercial real estate prices.

If that gets out of control, if interest rates start to rise because people are reluctant to buy all that debt, then that can slow the economy down. So, that's the more systemic concern I have, Taylor said.
(Editing by Eric Walsh)