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Congress budget agency warns panel of economic ills

By Richard Cowan and Donna Smith

WASHINGTON (Reuters) - A softening U.S. economy means that Congress's "super committee" on deficit reduction must be careful that it does not jeopardize the recovery, the top congressional budget analyst warned on Tuesday.

During the first hearing held by the special bipartisan panel, Congressional Budget Office Director Douglas Elmendorf painted a picture of worsening conditions from just a few weeks ago, when his agency last issued an economic outlook.

"Particularly important given the current state of the economy, immediate spending cuts or tax increases would represent an added drag on the weak economic expansion," Elmendorf told the panel.

The panel is charged with identifying by November 23 at least $1.2 trillion in new government savings over 10 years. Credit-rating agencies have warned that without significantly deeper savings -- more like $3 trillion -- the U.S. government could suffer another credit downgrade.

Standard and Poor's agency downgraded America's top-notch AAA rating in August after an ideological battle between the White House and Republicans over raising the U.S. borrowing limit brought the country to the brink of a debt default and unnerved global financial markets.

Deep divisions among the panel's six Democrats and six Republicans over raising taxes and cutting major benefit programs for the elderly and poor will make it hard if not impossible to reach consensus even as U.S. debt approaches $15 trillion -- nearly the size of the entire U.S. economy.

ROADBLOCKS TO DEFICIT REDUCTION

Bit by bit, lawmakers were closing down avenues to significant deficit reduction -- at least in the early stages of negotiations.

One super committee member, Republican Senator Jon Kyl, last week threatened to walk if new defense spending cuts were considered.

House Majority Leader Eric Cantor said on Tuesday that discussion on a tax code overhaul and other contentious issues might have to be delayed until after the November 2012 elections.

Senate Finance Committee Chairman Max Baucus, a Democratic member of the committee, told Reuters after the panel's hearing that comprehensive tax reform, which could bring in more revenues, "is just so complicated and so important; I don't think we have yet determined whether we can do" it this year.

A broad revamp of the complicated U.S. tax code, which has not been done in 25 years, could include lowering corporate tax rates, eliminating special-interest tax breaks and raising taxes on the wealthy.

CBO now sees economic growth of around 1.5 percent this year and 2.5 percent in 2012. That is down from CBO's August estimate of 2.3 percent and 2.7 percent, respectively.

The jobless rate is expected to remain stuck at around 9 percent through next year's presidential and congressional elections, CBO said.

Adding to the bleak outlook, the U.S. Census Bureau said on Tuesday that a record number of Americans -- 46.2 million -- were living in poverty last year.

While the issues facing the super committee are long on complexity, the panel is short on time.

Elmendorf told the lawmakers that major decisions need to be made by the beginning of November to give CBO time to assess their effectiveness.

"I think we're all really well aware that we have to have a proposal pretty solidly in place long before our due date (of November 23)," Senator Patty Murray, the Democratic co-chair, told Reuters following the hearing with Elmendorf.

(Editing by Eric Walsh)

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