$1.35 Trillion

The Congressional Budget Office on Tuesday called the U.S. budget outlook "bleak," in a forecast that hurts the chances for extending Bush-era tax cuts and raises pressure for fiscal belt-tightening.

In its annual report, the nonpartisan CBO pegged the 2010 U.S. budget deficit at $1.35 trillion, a slight decrease from the $1.4 trillion 2009 deficit that set a post-World War II record.

The report also contained grim projections for Americans looking for a brighter employment picture. The CBO predicts that unemployment, currently 10%, won't return to 5% until the middle of the decade. The report projects slightly lower growth in the near term compared with last year's estimates, because of the extent of damage from the recession.

The CBO said the government will run an aggregate deficit of about $6 trillion during the next decade, a level that many economists worry could lead to currency shock, inflation, crippling interest rates or other economic maladies.

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At the end of 2009, debt held by the public exceeded $7.5 trillion, or about 53% of GDP, the CBO said in the report. By the end of 2020, "debt is projected to climb to $15 trillion, or 67% of GDP," CBO director Doug Elmendorf said on his blog post. "With such a large increase in debt…interest payments on the debt are poised to skyrocket."

The CBO estimate is almost certainly an understatement of the deficit problem. For example, the CBO is assuming that annual spending will rise with inflation, but Congress in recent years—even before the recent recession—has been boosting spending at higher rates. And President Barack Obama and many lawmakers in both parties want to extend at least some of the Bush-era tax cuts that are set to expire at year end, though the dire CBO estimate could give ammunition to those who want to extend the tax breaks only on a temporary basis.

President Barack Obama is preparing for his first State of the Union speech. Media specialist T.J. Walker tells WSJ's Kelsey Hubbard what techniques he can employ to convince Americans he will deliver on his promises.

The administration also has been considering ways to develop a broadly bipartisan deficit-reduction plan—for example, through a commission that would develop plans for long-term spending cuts and revenue increases.

But the Senate on Tuesday rejected a relatively powerful version of the commission idea, with top Democrats and many Republicans joining in opposition.

That could lead the administration or Congress to create a watered-down version, leaving the U.S. government's finances adrift for another year, some budget hawks worry.

The projected cumulative deficit for 2010-19 is slightly lower than previous estimates, thanks to higher corporate profits and wages, lower anticipated interest rates, and lower expected costs for some bailout programs. On the other hand, the CBO has assumed higher inflation.

To dramatize its concern over the deficit, the Obama administration on Monday said it is proposing a three-year freeze on some types of domestic spending. But House Republicans were pushing back.

"Since 2007, Democrats in Congress have increased the national debt by 38%," said Rep. Tom Price of Georgia, head of the conservative Republican Study Committee.

"A freeze at anything over prebailout and prestimulus spending levels is a faux freeze," he said.