WASHINGTON - The federal budget deficit is likely to grow to $12.6 trillion in 10 years, $5.5 trillion more than was projected by the Congressional Budget Office last month, because of expected policy or statutory changes that were not considered by the CBO, according to a watchdog group.

The Committee for a Responsible Federal Budget, a bipartisan, nonprofit organization based here, said in a Sept. 3 report that the CBO's projections are limited in scope and that the budget reality poses a greater threat to financial markets. To support a $12.6 trillion deficit, the U.S. debt held by the public would need to grow to 90% of gross domestic product by 2019, the report warned.

The longer it takes the U.S. to reduce budget deficits, "the more dangerous it is that markets will push us into a fiscal crisis," said committee president Maya MacGuineas, adding that interest rates could go up as a result of the current budgetary pressures.

In its report, the CRFB made four policy assumptions that the CBO did not: that tax rate cuts will be continued, the alternative minimum tax will be patched again, and that costs associated with Medicare and discretionary spending will rise. Without taking these assumptions into account and offsetting the costs, the federal deficit will rise to $12.6 trillion by 2019, the CRFB said.

"There is no question that the fiscal challenges are tremendous," MacGuineas said. "To move forward, without confronting the issue of how to offset the costs, is irresponsible at a time when we're facing such dangerously large budget deficits."

The CBO revised its baseline budget estimates on Aug. 26 and projected the federal deficit will grow to $7.1 trillion in the next 10 years. But the office's policy is to only consider "spending under current law" and to assume that current laws "continue without change," according to its budget outlooks.

While the CBO's projection took into account that the tax rate cuts enacted by President George W. Bush in 2001 and 2003 will expire at the end of 2010, it did not assume Congress will approve President Obama's proposals for extending the cuts for married couples making $250,000 or less a year and for individuals making $200,000 or less. Though partially offset by raising taxes on the wealthy, the administration said Obama's proposed extensions will cost about $2.1 trillion, according to the CRFB's report.

The CBO also did not consider that Congress may continue to "patch" the alternative minimum tax, as it has done since 2001 to keep it from covering a larger portion of taxpayers. Patching the AMT is projected to cost $450 million over the next 10 years, the CRFB report said.

Additionally, the CBO estimates miss some health care and discretionary spending costs.

Federal law requires Medicare payments to physicians to be modified annually using a formula, which has mandated physician fee cuts almost year since 2003. Congress has taken short-term actions to avoid the cuts, but if it continues to do so the cost to the federal government could be $285 million by 2019, the CRFB said.

Further, the committee said the CBO projections make "unrealistically low" assumptions of discretionary spending. The CBO projects that discretionary spending will grow in tandem with inflation. But historically, discretionary spending - the one-third of the budget that must be appropriated by Congress - has been higher than inflation.

While the CBO assumes discretionary spending will grow 1.8% per year, the figure has grown by an average 6.1% per year since 1970, committee said. Assuming a spending reduction for the Iraq war, discretionary costs will add almost $1 trillion to the deficit by 2019, the CRFB said.

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