US budget deficit 'to top $US1 trillion'

The US budget deficit will top a startling $US1 trillion ($A1.5 trillion) this year, according to new projections, threatening to crimp president-elect Barack Obama's economic recovery plans.

Appointing a new watchdog to slash wasteful spending, Obama said the forecast by the Congressional Budget Office (CBO) underlined the need to kick-start the economy now and overhaul government finances in the long haul.

"My own economic and budget team projects that, unless we take decisive action, even after our economy pulls out of its slide, trillion-dollar deficits will be a reality for years to come," he told reporters on Wednesday.

Obama pledged to rein in the government's biggest long-term commitments - "entitlement spending" like Social Security retirement benefits and Medicare health insurance for seniors.

Ahead of his inauguration on January 20, Obama said "our problem is not just a deficit of dollars - it's a deficit of accountability, a deficit of trust", vowing a root-and-branch review to cut waste from the budget.

That review will be conducted by management consultant and former Treasury official Nancy Killefer. Her appointment as the new administration's "chief performance officer", Obama said, "is among the most important I will make".

In a new report, the non-partisan CBO forecast the government deficit of the world's largest economy would reach a record $US1.2 trillion ($A1.7 trillion) in the current fiscal year ending in September.

That is more than double the last fiscal year's $US438 billion ($A616 billion) and amounts to a whopping 8.3 per cent of gross domestic product - its highest level since World War II.

And the sea of red ink does not take into account Obama's plans for a hefty dose of stimulus spending, which Democrats in Congress hope to adopt by mid-February.

Obama is set to make public more details of his economic stimulus plan in a speech on Thursday at George Mason University in Washington's Virginia suburbs.

"Wall Street has not worked, our regulatory system has not worked the way it's supposed to," Obama said in an interview with CNBC a day ahead of the speech, vowing a "substantial overhaul" of US financial markets.

"So it's going to be a substantial overhaul. We're going to have better enforcement, better oversight, better disclosure, increased transparency.

Obama vowed to streamline the "alphabet soup of agencies" and boost inter-agency cooperation. He also warned that his stimulus plan could expand.

"We've seen ranges from 800 (billion) to 1.3 trillion and our attitude was that given the legislative process, if we start towards the low end of that, we'll see how it develops."

The CBO said the budget was under worsening strain from slumping tax revenues allied to higher social spending and a $US700 billion bailout for Wall Street initiated by the administration of President George W Bush.

The year-old recession will "last well into 2009", the CBO said, which would make it the longest US contraction since the war.

The president-elect told CNBC he would soon lay out a plan to prevent mortgage foreclosures and said he hoped the US economy will grow again in the second half of the year.

Republicans in Congress complained of opacity and open-ended promises in the stimulus package, while questioning how much of the huge sums would actually trigger growth.

Senate Republican leader Mitch McConnell said the CBO evaluation was "a stunning and sobering reminder that Congress must strengthen its efforts to be good stewards of the taxpayers' money".

But Democrats accused Republicans of destroying the surpluses bequeathed by Bill Clinton through profligate tax cuts and war spending in Iraq under the Bush administration.

"President-elect Obama is being handed an absolute fiscal disaster," said Senate budget committee chairman Kent Conrad.

"And as we address our economy, it is vital that we simultaneously take steps to put our budget back on a sound long-term fiscal path."

House of Representatives Speaker Nancy Pelosi said Republican complaints about the deficit impact of Obama's stimulus package ignored the depths of the nation's economic crisis.

The bill was "fiscally responsible" because at least 40 per cent of the outlays would be recouped through increased tax revenues, she said in a meeting with Democratic lawmakers.

"Equally important, this legislation will save or create three million jobs and help increase incomes for American workers," Pelosi said.