Jan. 31 (Bloomberg) -- The U.S. budget deficit will shrink this year to $1.1 trillion, the Congressional Budget Office said today in a report sure to inflame the election-year debate over the government shortfall.

The deficit, which would be down from last year’s $1.3 trillion, will fall because of strengthening tax revenue and a slowdown in government spending, the nonpartisan agency said.

Outlays this year will climb by 0.1 percent, or $3 billion, it said, while tax revenue will be up by 10 percent. It would be the fourth consecutive year the government runs a trillion- dollar deficit.

The report is a reminder of the stakes in the presidential and congressional elections because it shows future deficits will vary depending on budget decisions lawmakers are unlikely to make until after the November vote.

“How much and how quickly the deficit declines will depend in part on how well the economy does over the next few years,” the report said. “Probably more critical, though, will be the fiscal policy choices made by lawmakers as they face the substantial changes to tax and spending policies that are slated to take effect within the next year.”

Income-tax cuts first enacted during George W. Bush’s presidency are scheduled to expire at the end of this year, while $1 trillion in automatic spending cuts will begin taking effect in January 2013 if Congress doesn’t intervene.

8.9 Percent Unemployment

In addition, a payroll-tax break and expanded unemployment benefits are scheduled to expire at the end of February. The deficit would be higher if lawmakers extended those measures without covering the full cost with savings elsewhere.

The CBO said the economy will expand this year by 2 percent while the unemployment rate will probably climb to 8.9 percent from the current 8.5 percent.

Lawmakers traded blame over the deficit.

“This report from the Congressional Budget Office serves as a harsh indictment of President Obama’s failed policies,” House Budget Committee Chairman Paul Ryan, a Wisconsin Republican, said in a statement. The Republican-controlled House has “fought to put the brakes on the president’s spending spree and continues to advance pro-growth solutions.”

Senate Budget Committee Chairman Kent Conrad said President Barack Obama “called for a balanced approach to reducing the debt with both spending cuts and new revenue.” Conrad added, “Republicans must be willing to put revenue on the table and accept a tax code where everyone, including the wealthiest, pay their fair share.”

Budget Request

Obama is scheduled to release his latest budget request to Congress on Feb. 13.

If lawmakers permanently extend the Bush-era tax cuts, abandon the automatic spending cuts and continue to protect doctors from scheduled cuts in Medicare payments, the CBO said, the deficit will total at least $900 billion annually for the foreseeable future.

The deficit would reach $1.5 trillion by 2022, CBO estimated, and the debt would reach levels unseen since the government was paying off its World War II expenses.

If policymakers instead decide to allow all of the scheduled tax increases and spending cuts to take effect, CBO said, the deficit would shrink to $200 billion by 2018. The agency said that would be a blow to the economy that would drive the jobless rate up to 9.2 percent by the fourth quarter of next year.

Trust Funds

Three government trust funds, meanwhile, are projected to run dry in coming years, the CBO said. A highway trust fund financing road construction projects will run out sometime next year. The Social Security disability program’s trust fund will be exhausted in 2016. Six years later, a Medicare trust fund that makes payments to hospitals will be also exhausted, CBO said.

This year’s spending slowdown, partly the result of a budget agreement reached last year, contrasts with recent years. Spending grew by 4 percent in 2011, and in the decade before that expenditures grew by an average 7 percent annually, the CBO said.

Defense and non-defense discretionary spending will both fall this year by 3 percent, the report said. So-called mandatory spending on entitlement programs will grow by 2 percent, in part because of cost-of-living adjustments provided to Social Security beneficiaries.

The projected cost of the government’s bailout of the financial industry, known as TARP, is also likely to climb, CBO said. That’s because investments the Treasury Department still holds in General Motors Co. and insurer American International Group Inc. have declined in market value.