Projected lower deficit could slow any budget deal
WASHINGTON The good news is the budget deficit for the current year is projected to come in well below what was estimated just a few months ago. The bad news for deficit hawks is that the development could further curb the already slowing momentum for a budget pact this year.
A Congressional Budget Office study released Tuesday cites higher tax revenues and better-than-expected payments from government-controlled mortgage giants Fannie Mae and Freddie Mac as the key reasons for this year’s improved outlook. The budget office now predicts a 2013 budget deficit of $642 billion, more than $200 billion below its February estimate. This year’s shortfall would register at 4 percent of the economy, far less than the 10.1 percent experienced in 2009, when the government ran a record $1.4 trillion deficit.
While the recovering economy is producing greater revenues, the improving deficit picture also reflects the accumulating effects of prior rounds of spending cuts — mostly tamping down day-to-day agency budgets — and January’s tax hike on wealthier earners.
Often lost amid Washington’s budget battles is that the nation’s dysfunctional capital city actually has had success in cutting the deficit — up to $3.9 trillion over the upcoming decade, depending on how one does the math.
Now, the improving picture seems likely to make it more difficult for events to force Washington’s exhausted budget combatants closer to a deal. For starters, it means that the deadline for increasing the government’s borrowing cap has been postponed until October or November, the CBO said. It had been expected that lawmakers would have had to act this summer to increase the so-called debt limit, which could have been a catalyst for a broader budget deal.
Last year’s deficit was $1.1 trillion, capping four consecutive trillion dollar-plus deficits during President Barack Obama’s first term. The accumulated federal debt currently exceeds $16 trillion, almost double what is was at the end of 2006.
The deficit picture is expected to continue to improve next year and beyond, with the 2015 deficit now projected at $378 billion, just 2.1 percent of the economy. All told, the budget office predicts deficits over the coming decade of $6.3 trillion, down $618 billion from earlier projections.
The CBO report comes as Washington has again hit budget gridlock after enacting a $600 billion-plus tax increase on upper-bracket earners in January. The report could sap momentum from further deficit-cutting efforts since the shortage will fall below 3 percent of the economy for several years, levels considered by many economists to be sustainable.
The deficit cuts enacted in previous, hard-fought battles between Obama and Republicans have come disproportionately from the category of the federal budget known as “discretionary” spending. That’s the money provided annually in congressional appropriations acts. Such funding goes toward the day-to-day operations of government agencies, including the Pentagon and domestic agencies. Examples include federal aid to schools, medical research, the military and operating national parks and the air traffic control system.
The cuts to discretionary programs began in 2011 with two rounds of appropriations bills that have wrung more than $1.5 trillion from projected agency spending over the 2014-2023 time frame. Such savings generally are claimed by taking away much of the inflation increases assumed under Washington’s arcane budget rules. There’s an additional $300 billion in interest savings because the government has to borrow less money.
And $850 billion in deficit cuts over the coming decade comes from the January tax increase on higher-bracket earners and commensurate interest savings. Added to the cuts to agency budgets, and there’s a total of $2.7 trillion in deficit savings
There’s disagreement over how to count $1.2 trillion in additional deficit savings over a decade from across-the-board cuts known as sequestration, which result from the failure of a 2011 deficit “supercommittee” to agree on a plan to replace them. The original idea behind the cuts was that they would be so harsh as to drive the supercommittee to strike a deal. A subsequent “fiscal cliff” solution in January only partially repealed the sequester cuts.
Democrats leave the sequester out of their calculations, preferring to replace them in their entirety. But under the rules binding the CBO, the nonpartisan agency that does economic and budget analysis for Congress, they are included in official projections.
If one adds in the sequester savings, the amount of already accomplished deficit reduction — measured over the upcoming 2014-2023 budget window — gets as high as $3.9 trillion.
The White House’s math is a little different, but top advisers to Obama say much of the deficit problem is taken care of.
“We have already achieved $2.5 trillion in deficit reduction and believe achieving $1.5 trillion-$1.8 trillion more in a balanced way is the best way to hit that target,” White House economic adviser Gene Sperling said in a White House online chat earlier this year. By Sperling’s calculations, finding $1.2 trillion in spending cuts or new revenues to eliminate the across-the-board sequester cuts would solve most of the remaining problem.
One of the reasons for the burst of additional income tax revenues, the budget office says, is that upper-income taxpayers claimed more income late last year in order to avoid paying the higher capital gains tax rates enacted in January.
The CBO predicts that publicly held U.S. debt, currently estimated at 75 percent of gross domestic product, will shrink to 71 percent of gross domestic product over 2017-2019 before inching up again at decade’s end. As recently as 2007, the budget office notes, federal debt was just 36 percent of GDP.
“Such high and rising debt later in the coming decade would have serious negative consequences,” the CBO says, citing longstanding arguments that high deficits and debt reduce national saving and investment and increase the risk of a full-blown fiscal crisis.
Last updated: 10:36 am Tuesday, July 2, 2013