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NEW YORK (Reuters) - Projected U.S. budget deficits are too high and could force up interest rates and crowd out investment unless the country takes action, the head of the White House budget office said on Tuesday.
The Obama administration reported a record U.S. budget deficit for last fiscal year of $1.4 trillion, or 10 percent of GDP, after it rescued the economy and some of the United States' biggest banks from the worst recession in 70 years.
Next year's fiscal shortfall is expected to be about the same size, and current projections show $9 trillion in deficits over the next 10 years, averaging about 5 percent of GDP, Office of Management and Budget Director Peter Orszag said.
"Deficits of this size are serious - and ultimately unsustainable," Orszag said in remarks prepared for delivery at New York University.
He blamed the funding gap on the failure of the administration of Republican President George W Bush to finance its tax cuts and subsidies to Medicare prescription drugs, as well as the recession.
The White House of President Barack Obama is weighing up its options on how to put things right, Orszag said.
"The President and his economic team are busy working on a range of options as we prepare for the fiscal year 2011 budget to be released in February," Orszag said.
Obama has pledged not to raise taxes on American families who make less than $250,000, but critics say that they cannot see how tax hikes of some form or other can be avoided.
Orszag did not provide details, beyond noting several steps to cut costs that have already been taken, but he reiterated Obama's pledge to cut the deficit "we inherited" in half by January 2013.
Failure to act could force up U.S. interest rates, deter investment and force the country to rely on foreign lenders to finance its spending needs, Orszag said.
He also cautioned that the current situation of low rates, despite the record deficit, was "a product of the extraordinary economic environment in which we currently find ourselves" that would likely not last as the economic recovery gathered steam.
"It is at this point that we are likely to observe a rise in interest rates, an increase in borrowing from abroad, or some combination thereof due to the deficits," Orszag said.
(Reporting by John Parry, writing by Alister Bull; Editing by Andrew Hay)
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