The Congressional Budget Office (CBO) has projected a $1.3 trillion budget deficit for 2011, the third-largest shortfall in the past 65 years, exceeded only by the deficits of the preceding two years.

If the economic recovery continues as CBO expects, and if tax and spending policies in current law are implemented, the deficit will drop markedly as a share of gross domestic product (GDP) over the next few years. However, if some of the changes specified in current law did not occur and current policies continue, much larger deficits could result.

"To prevent debt from becoming unsupportable, policymakers will have to substantially restrain the growth of spending, raise revenues significantly above their historical share of GDP, or pursue some combination of those two approaches," CBO says. The agency adds that its budget projections understate the current challenges in addressing the deficit because they assume that tax code changes and federal spending cuts for some programs, as called for under current laws, would both occur.

CBO's baseline projections incorporate the effects of deficit reduction measures in the Budget Control Act of 2011 and reflect sharp increases in revenues that will occur when alternative minimum tax limitations, extension of emergency unemployment compensation, and the one-year reduction in the payroll tax expire at the end the year. The projections also include expiration of the 2001, 2003, and 2010 tax acts at the end of 2012, reductions in discretionary spending, and an additional $1.2 trillion in deficit reduction from 2012-2021.