U.S. deficit report highlights Obama''s challenge

WASHINGTON (Reuters) - The U.S. budget outlook is "daunting," with deficits stuck at levels not seen since World War Two, congressional forecasters said on Tuesday in a report that lays out the challenge facing President Barack Obama as he seeks to boost the economy while cutting spending.

Obama, struggling in opinion polls, is expected to propose a three-year freeze on many domestic spending programs -- a measure that would make only a small dent -- and outline other measures to try to tame record budget deficits in his State of the Union speech on Wednesday.

Obama could find skeptics among his fellow Democrats in Congress, who aim to bring down the nation''s 10 percent unemployment rate through additional spending before the November congressional elections.

The nonpartisan Congressional Budget Office said the deficit for the current fiscal year would come in at $1.35 trillion, slightly lower than the record $1.4 trillion posted in the previous fiscal year, which ended last September.

At 9.2 percent of gross domestic product, this year''s deficit still hovers at levels unseen since World War Two and well above the 3 percent level that economists agree is sustainable.

"The federal fiscal outlook beyond this year is daunting," CBO Director Douglas Elmendorf said on his blog.

That will not be welcome news for Obama''s Democrats, who have seen little gratitude from voters after approving a massive economic stimulus effort the CBO estimated will add $400 billion to the deficit this year and cost more than $860 billion by the time it is through -- some $75 billion more than originally estimated.

The controversial Troubled Asset Relief Program that bailed out banks and automakers will end up costing taxpayers $99 billion, much less than originally expected, CBO said.

Obama on Tuesday discussed the economy with executives from JP Morgan Chase & Co, Boston Properties, Exxon Mobil and Anadarko Petroleum.

Other companies were reporting job cuts: Verizon said it would lay off 13,000, or 6 percent of its work force, two days after Wal-Mart Stores Inc''s Sam''s Club said it would cut 11,000.

BORROWING LIMIT

Democrats in coming weeks will have to raise the government''s borrowing limit beyond the current $12.4 trillion, which will give Republicans another chance to paint them as out-of-control spenders.