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World & Nation

Federal deficit shrinks at surprising rate

WASHINGTON — The federal deficit is shrinking more quickly than expected, and the government’s long-term debt has largely stabilized for the next decade, the Congressional Budget Office said Tuesday in a report that could strengthen the Obama administration’s hand in the budget battles with congressional Republicans.

The budget office continues to say the federal government faces a long-range budget problem — mostly caused by the costs of an aging population — but its new forecast pushes the crunch point for that problem off into a considerably more distant future: well after the 2020 presidential election.

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The deficit projection for this year — $642 billion — is almost 25% less than the deficit the budget office had forecast as recently as February. At the new level, the annual deficit would be back to where it was before President Obama took office. It would continue to fall for the rest of Obama’s tenure, the budget office now projects. By contrast, the deficit for fiscal year 2012 came in at just over $1 trillion.

Three major factors account for most of the long-term improvement: a better economy, a continued slowdown in the rate of medical inflation — which reduces the cost of Medicare and Medicaid — and higher taxes that Congress approved as part of the “fiscal cliff” deal in January, the budget office said.

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In addition, the automatic budget cuts that took effect this spring have reduced spending in the short term. The government also will benefit this year from dividend payments it is getting from the two giant housing finance agencies bailed out during the financial crisis.

The federal government’s annual deficit this year amounts to about 7% of the gross domestic product. By 2015, the budget office forecasts, the deficit will fall to just over 2% of GDP, a level that most economists would consider relatively insignificant. At that point, the deficit would begin to climb slowly again, reaching about 3.5% of GDP by the end of the decade.

The report also forecasts that the federal debt will shrink relative to the size of the economy for the rest of Obama’s term. The budget office expects the debt to begin to rise slowly after 2018 as the effects of an aging population increase the cost of retirement programs.

The federal deficit is the gap between what the government spends each year and its revenue, mostly taxes. The government has run a deficit almost every year for the last half-century. The federal debt represents the accumulated money that the government borrows to cover that deficit.

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The numbers have an important political impact. Republicans have pushed for big reductions in government programs this year, arguing that the country could face a debt crisis if spending is not curtailed. The Obama administration and congressional Democrats have argued that big new reductions have less urgency because the budget picture is already getting better. The new figures from the budget office, which both parties rely on as a nonpartisan arbiter, will probably give more impetus to the Democrats’ position.

The report also signaled that the next confrontation in Washington’s budget wars may not come until late fall. Republican leaders have planned to push for budget cuts when Congress next votes on raising the federal debt ceiling. Because the debt is now growing more slowly than expected, the deadline for that vote probably won’t come until October or November, the report says.

Underscoring the political dynamic, Republicans, who trumpeted news of higher deficits during Obama’s first term, fell largely silent in reaction to the new figures.

The office of House Speaker John A. Boehner (R-Ohio) declined to comment. The House Budget Committee, chaired by Rep. Paul D. Ryan (R-Wis.), issued a short statement calling the report a “fresh reminder of Washington’s out-of-control spending” and noting that by decade’s end the federal government will collect $5 trillion in tax revenue.

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Liberal Democrats, by contrast, said the new numbers showed that government spending was falling too fast and that the sharply lower deficits amounted to an austerity policy that is hurting economic growth.

“It would be nice if policymakers … recognized that we need less austerity now and more health savings [and revenue] later,” Jared Bernstein, a former administration economic advisor, noted on his blog. The deficit, he wrote, “is coming down too fast given the still weak economy.”

Other Washington deficit hawks reacted cautiously. Maya MacGuineas, head of the Campaign to Fix the Debt, issued a statement calling the updated numbers “a good sign” but added that the country still faced a “long-term fiscal imbalance.”

“We need to keep making steady improvements to keep the good news coming,” she said.

The revised outlook comes as congressional Republicans are trying to figure out a budget strategy that can unite their disparate factions.

In January, GOP leaders got a deal through the House to avert the so-called fiscal cliff, but only by relying on Democratic votes. Aides to the leadership admit that no consensus exists among their members about how to raise the debt ceiling and avoid a default by the government when the deadline hits.

The president maintains that the debt ceiling should be raised without any conditions attached. Republicans are expected to continue to insist upon some concessions — either new budget cuts or, perhaps, a commitment to reforming the federal tax code.

“We’re going to have a big conversation with our members … to talk about a way forward,” Boehner said last week. “Dealing with the long-term structural spending problem we have, frankly, is at the core of it. But we also know we can’t cut our way to prosperity. We need real economic growth.”

House Ways and Means Committee Chairman Dave Camp (R-Mich.) and House Majority Leader Eric Cantor (R-Va.) have been meeting with members to discuss options for a tax reform plan. Camp said last month that he expected a tax plan to pass the House but did not hazard a guess about whether agreement could be reached with the Democratic majority in the Senate.

david.lauter@latimes.com

Michael A. Memoli in the Washington bureau contributed to this report.


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