By John Shaw

WASHINGTON (MNI) - In a week with significant fiscal consequences, the Congressional Budget Office offered a grim fiscal assessment for the nation while the Senate voted to increase the statutory debt ceiling and renew pay-as-you-go budget enforcement rules.

President Obama traveled to Capitol Hill to give his first State of the Union address which focused heavily on economic themes and the Senate voted to confirm Federal Reserve Board Chairman Ben Bernanke for a second term as head of the central bank.

The Congressional Budget Office said Tuesday the U.S. budget deficit for the current 2010 fiscal year will total $1.35 trillion, down slightly from the record deficits of FY'09. But the CBO noted that a budget deficit of $1.35 trillion still represents 9.2% of GDP.

In the report, the CBO said the American economy would grow by 2.1.% in 2010 and then grow by 2.4% in 2011. It sees unemployment in the U.S. falling from 10% in 2010 to 9.5% in 2011 and 6.5% in 2012.

Under budget law, the CBO must make its baseline estimates by assuming that current tax and spending laws are unchanged. In this instance, it means assuming that a raft of tax cuts that are scheduled to expire after 2010 will indeed expire. Many in Congress from both parties support renewing at least some of these tax cuts.

The CBO said that renewing all of the 2001 and 2003 tax cuts and adjusting the alternative minimum tax would cost an additional $4.5 trillion over a decade.

For the shorter-term, the CBO sees deficits of $980 billion in FY'11, $650 billion in FY'12, $539 billion in FY'13, and $475 billion in FY'14 and $480 billion in FY'15.

Looking further forward, the CBO sees deficits of $521 billion in FY'16, $525 billion in FY'17, $542 billion in FY'18, $649 billion in FY'19, and $687 billion in FY'20.

For the FY'11 through FY'15 period, the CBO sees cumulative deficits of $3.124 trillion and $6.047 trillion for the FY'11 through FY'20 period.

The CBO projects the public debt-to-GDP level to be 60% at the end of 2010 and then rise to 67% in 2020. In 2001, debt was only 33% of GDP.

CBO director Doug Elmendorf at a briefing described the U.S.'s budget outlook as "dire" and the nation is moving down a path toward growing debt which poses a number of "risks" to the economy.

"The outlook for the federal budget is bleak," Elmendorf said.

He said that budget deficits "remain substantial through the decade" and then grow worse in the period after 2020.

Elmendorf said the U.S.'s current fiscal path will lead to growing debt levels that could be destabilizing.

After more than a week of debate, the Senate voted Thursday to pass a $1.9 trillion increase in the statutory debt ceiling.

The Senate voted on a number of amendments before moving to final passage on a measure to increase the current debt ceiling of $12.394 trillion to $14.294 trillion.

In late December, Congress voted to increase the debt ceiling by $290 billion to $12.394 trillion.

Before the final vote, the Senate voted to approve an amendment to renew pay-as-you-go budget enforcement rules. It rejected an amendment that would have created a special 18 member deficit reduction panel which would assemble a plan that Congress would vote on.

Now that the Senate has approved debt ceiling legislation, the bill will be sent to the House for its consideration. A House vote is expected next week.

After approving an increase in the debt ceiling, the Senate voted 70 to 30 to confirm Bernanke to second term as Fed chairman. His current term expires Sunday.

In his State of the Union address, Obama focused on job creation and measures to ease the struggles of middle class families. He said he will create a deficit reduction panel by executive order.

Obama defended the administration's policies to pull the economy out of the financial crisis he inherited. He acknowledged that this caused deeper deficits, but were necessary steps to prevent the economy from melting down.

Obama called for Congress to complete work on financial regulatory reform, saying his motive is not in "punishing banks" but "in protecting our economy."

"But that can only happen if we guard against the same recklessness that nearly brought down our entire economy," he said.

The president called for renewed attention to control the deficit, making the case for a budget reform panel.

"If we do not take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery -- all of which could have an even worse effect on our job growth and family incomes," Obama said.

** Market News International Washington Bureau: (202) 371-2121 **