Bloomberg News

Deficit to Shrink Below $1 Trillion, U.S. Agency Predicts

February 06, 2013

The federal budget deficit will total $845 billion this year, the first time in five that the gap between taxes and spending will be less than $1 trillion, according to a government report.

A combination of budget cuts and economic growth will pare the deficit to the lowest level since 2008, the Congressional Budget Office said in its first comprehensive analysis of the government’s finances since last month’s deal to put off the so- called fiscal cliff. Next year’s gap will be $616 billion, the nonpartisan agency said.

The long-term budget outlook nevertheless remains grim, with baby boomers steadily swelling the ranks of Medicare and Social Security beneficiaries, according to a CBO report. The government will rack up at least $7 trillion in deficits over the next decade, the agency said, pushing the publicly held debt up to almost $20 trillion by 2023.

“Although modest progress has been made on short-term fiscal issues, the CBO outlook shows us that the nation has by no means solved its debt problem,” said Michael Peterson, president of the Peter G. Peterson Foundation, which promotes deficit reduction.

The CBO also said it anticipates economic growth will be slow this year, with real gross domestic product rising by just 1.4 percent, in part because of budget-cutting in Washington. It predicted faster growth next year, with the economy expanding by 3.4 percent. The jobless rate will remain above 7.4 percent through next year, according to the CBO.

Budget Time

The agency’s biannual report issued yesterday arrives in Congress just as lawmakers gear up for another round of battles over deficits.

President Barack Obama is expected to submit his fiscal 2014 budget request to Congress in mid-March, according to a budget official who requested anonymity to discuss the administration’s plans in advance of a formal announcement. House Budget Committee Chairman Paul Ryan, a Wisconsin Republican, and Senate Democrats will follow with their own budget blueprints.

About $85 billion in automatic spending cuts, part of the “fiscal cliff,” are set to begin March 1, and a stopgap measure funding government operations for the first six months of fiscal 2013 expires on March 27. The latest debt-limit increase, which Obama signed into law Feb. 4, lapses May 19.

Democrats in the Senate, where their party holds a majority, are meeting in Annapolis, Maryland, to discuss strategies for coming budget showdowns. Obama, who has urged Congress to postpone the cuts set to begin March 1, will address the caucus today.

Republicans Balking

Majority Leader Harry Reid of Nevada has said that he wants to pare back the automatic reductions, perhaps several months at a time, with a combination of tax revenue increases and spending curbs.

That’s what Congress did when it agreed to reduce the automatic cuts to $85 billion from $110 billion, drawing from both sides of the fiscal ledger.

Many Democrats now call that a template for future agreements. Republicans are balking, and without some compromise, the cuts will kick in.

The CBO analysis offers a yardstick against which lawmakers can compare possible changes. The report “shows us how far we have come towards restoring fiscal discipline and strengthening our economy, while also reminding us that more work remains,” said House Minority Whip Steny Hoyer, a Maryland Democrat.

Reliable Forecast

The report is a more reliable guide than similar studies in recent years because the almost $4 trillion fiscal-cliff deal made longer-term fixes to a number of short-term tax and spending policies that had made deficit-forecasting difficult.

For the next decade, the CBO projects government spending at about $47 trillion while revenue will be about $40 trillion.

Receipts will rebound from recent lows, reflecting an expanding economy, the end of reduced Social Security payroll taxes and higher tax rates. By 2015, revenue will climb to 19.1 percent of GDP, above the historic average and the highest level since 2001, according to the CBO. Republicans seized on those figures to rebut Democrats’ demands for more revenue.

“In two years’ time, tax revenue will soar past the historical average, but structural deficits will continue due to runaway spending,” said Senator Rob Portman, an Ohio Republican. “More taxes won’t solve our deficit problems.”

Slower Growth

The agency said that health-care spending is growing less quickly than anticipated. In 2012, Medicare costs rose by 3 percent, or $16 billion, the smallest annual gain since 2000.

This year, the expense is projected to climb 4 percent. That has helped prompt the CBO to ratchet back its long-term projections of Medicare and Medicaid spending by 15 percent compared with what it had predicted three years ago.

It also said that the fiscal-cliff agreement will mean that 3 million additional Americans won’t receive health-care coverage through their employers. That’s because by extending lower marginal-tax rates for those earning less than $400,000, the law also reduced the relative tax benefits that accompany employer-sponsored coverage.

Many of those losing coverage through their jobs will instead receive aid through the so-called exchanges created under the Affordable Care Act, according to the CBO report.

Interest payments on the debt will become a growing burden, the CBO estimated, as the economy strengthens and borrowing costs rise. By 2023, the government will spend more than $850 billion annually on interest on the debt -- more than it is projected to spend that year on the Defense Department.

Spending Cuts

The long-term budget challenge facing lawmakers will be especially acute for Ryan, who says the tax-and-spending blueprint his committee produces this year will be designed to erase the deficit within a decade.

That would require much steeper cuts than the Ryan-written version that the House passed last year; that proposal wouldn’t have eliminated the deficit until 2040.

The deficit will total $978 billion in 2023, according to yesterday’s report, and erasing that without raising taxes means that Ryan’s budget would have to curb all spending that year alone by 16 percent. It could require an additional $4 trillion in reductions over the next decade on top of the $1.2 trillion in coming automatic cuts, according to the report.

That may require an even deeper scaling back of entitlement programs, including Medicare -- reductions that Ryan has sought to phase in so as not to affect those in or near retirement.

“The CBO’s report is yet another warning that we need to get spending under control,” Ryan said yesterday in a statement. “We need to budget responsibly, so we can keep our commitments and expand opportunity.”

To contact the reporter on this story: Brian Faler in Washington at bfaler@bloomberg.net

To contact the editor responsible for this story: Katherine Rizzo at krizzo5@bloomberg.net


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