Bright short-term fiscal forecast

The federal deficit will dip below $1 trillion for the first time in five years, a substantial improvement in the fiscal outlook, but one that masks a persistent budget gap that will probably worsen later this decade, according to the Congressional Budget Office.

The last two years of budget battles between the White House and congressional Republicans, coupled with the recovering economy, have slowed the government’s gush of red ink. But steps to reduce the deficit have acted as a drag on the economy, slowing the recovery, the budget office said. Automatic spending cuts that are scheduled to take effect March 1 would probably chisel further into economic growth this year and cost about 750,000 jobs, the nonpartisan budget experts project.

President Obama called Tuesday for Congress to swap out those cuts, which he helped engineer as part of a 2011 deal with Republicans, for a package that includes higher revenue.

Such a trade could, for the short term, prevent a “damaging” hit to the economy, he said.

“While it’s critical for us to cut wasteful spending, we can’t just cut our way to prosperity,” Obama said during an afternoon appearance in the White House briefing room. “Deep, indiscriminate cuts to things like education and training, energy and national security will cost us jobs, and it will slow down our recovery. It’s not the right thing to do.”

Obama’s allies in the Senate are already at work on such a proposal. At their annual retreat in Annapolis, Md., Senate Democrats floated alternatives for generating new revenue. Among them: ending tax breaks used by the oil and gas industry and owners of corporate jets, and otherwise limiting itemized deductions used by wealthier households.

The Democratic package could postpone the cuts for a few months or up to a year, according to aides who requested anonymity in discussing the private talks. It also could put Republicans in the politically difficult position of having to vote in favor of unpopular tax breaks.

That approach does not sit well with Republicans, particularly conservatives in the House, who see spending as the problem.

Republicans view the automatic cuts, called a sequester, as their best opportunity to extract reductions in federal programs they have failed to get in earlier showdowns with the White House. Senate Minority Leader Mitch McConnell of Kentucky has called proposals to generate new revenue by closing the tax loopholes “gimmicks.”

As the budget office indicated Tuesday, even though the deficit will dip this year to $845 billion in fiscal 2013, the nation’s record-high debt remains troubling.

Revenue is increasing as the economy improves and as higher taxes on wealthier households take effect. The deficit is also shrinking because spending on unemployment insurance and other government assistance programs goes down as the economy improves. But the continued growth in healthcare costs and the increase in the nation’s population of senior citizens eligible for Medicare will keep the budget on an unsustainable path.

Even though health spending has slowed in recent years for reasons analysts do not fully understand, the sheer volume of new Medicare and Medicaid recipients means costs will rise. The number of people eligible for Social Security retirement benefits will be 40% higher in 10 years than in 2012, the budget office’s director, Douglas W. Elmendorf, told reporters Tuesday.

The national debt has roughly stabilized for now, Elmendorf noted, but at a level that is high by historical standards. By the end of the decade, the public debt is expected to equal 77% of GDP, a debt load not seen since 1951, when the country was paying off the debt from World War II.

Eliminating the deficit rapidly, as House Republicans want to do with a plan to achieve balance in 10 years, comes with its own costs.

Another $4 trillion in reductions would be needed by 2023 to accomplish that goal. If defense accounts were to be spared, as Republicans prefer, that would require either a substantial reworking of the Medicare or Social Security programs or wiping out about two-thirds of most domestic programs.

That sort of cutting involves a trade-off, Elmendorf said: “Deficit reduction in the short run would have negative short-term effects on the economy. Deficit reduction later would have positive medium- and long-term effects on the economy.”

House Budget Committee Chairman Paul D. Ryan (R-Wis.), who is preparing the new GOP blueprint, said the report was “yet another warning that we need to get spending under control.”

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lisa.mascaro@latimes.com

christi.parsons@latimes.com