"The United States is facing profound budgetary and economic challenges," the new CBO report says. "With modest economic growth anticipated for the next few years, CBO expects employment to expand slowly."

There is good news for the more than 50 million people who get Social Security benefits. After two years without a cost-of-living adjustment, CBO now projects a 2.8 percent COLA for 2012, up from the 1.1 percent increase the agency previously projected. The actual increase for 2012 will be announced in October. It is based on a measure of inflation.

At $1.28 trillion, this year's budget deficit would be the third highest, surpassed only by the deficits registered in the past two years. The budget year runs through the end of September. Through July, the deficit totaled $1.1 trillion, the Treasury Department said.

The new deficit projection for this year is $116 billion lower than the one made by CBO in March. Most of the change is from higher than anticipated tax collections from 2010 returns filed in the spring, the report said.

"A slight decrease in the projected deficit is nothing to celebrate, particularly when it is accompanied by the grim news that CBO expects the national unemployment rate to continue to exceed 8 percent well past next year," said House Speaker John Boehner, R-Ohio. "The president's policies were supposed to keep that from happening. Instead they've added trillions to our debt at the expense of our children and helped put our nation's credit rating in jeopardy. Where are the jobs?"

CBO's economic projections are more optimistic than those issued by many private forecasters. If economic growth is weaker than the CBO projects, that could reduce future tax receipts and widen the budget deficit.

The CBO forecasts that the economy will grow 2.3 percent this year and 2.7 percent in 2012. By contrast, economists at Bank of America Merrill Lynch expect an expansion of only 1.7 percent this year and 2.3 percent in 2012. Analysts at JPMorgan Chase are even more pessimistic.

The CBO completed its economic projections in early July, and acknowledged that the outlook has worsened since then. The stock market has fallen sharply since the nation's credit rating was downgraded earlier this month. And in late July the government significantly lowered its estimate of economic growth in the first six months of this year.

"Incorporating that news would have led CBO to temper its near-term forecast for economic growth," the report said.

Congress passed a deficit reduction package earlier this month that cuts spending by $917 billion over the next decade for Cabinet-level agencies and the thousands of federal programs they administer. The legislation also created a new joint, bipartisan committee in Congress charged with coming up with $1.2 trillion to $1.5 trillion in additional savings by late November.

If the committee of six Democrats and six Republicans agrees on a package, Congress must vote on it by late December. Failure to pass a package would trigger $1.2 trillion in automatic spending cuts, affecting the Pentagon as well as domestic programs.

The new CBO report projects that the legislation will reduce deficits by a total of $2.1 trillion over the next decade. The agency also projects savings of $600 billion over the next decade from lower interest rates. Much of the rest of the savings came from technical updates to CBO's revenue and spending forecasts, the report said.

The agency, however, warns that spending cuts and caps in the deficit reduction package will limit the government's ability to provide support for the economy, "and thereby restrain economic growth over the next few years."

"CBO's report is yet more evidence that Congress faces a twin challenge of a sluggish near-term economy and a still very serious long-term debt threat," said Sen. Kent Conrad, D-N.D., chairman of the Senate Budget Committee. "Congress cannot afford to ignore either challenge."

Conrad said CBO's projections illustrate the need for the new joint committee to reduce the deficit by much more than $1.5 trillion. Conrad called for a deficit reduction package of at least $4 trillion over the next decade, a target that many economists say is necessary for the government to get its finances in order.

Rep. Chris Van Hollen of Maryland, ranking Democrat on the House Budget Committee, said, "The CBO outlook underscores the need for the joint committee to propose a plan to help put America back to work, coupled with a blueprint to reduce the long term deficit."

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Associated Press writer Christopher Rugaber contributed to this report.