Federal deficit shrinking, but long-term outlook dim

WASHINGTON – The federal deficit has shrunk to its lowest level since 2008, when President Obama won election at the start of the Great Recession, and is on track to decline even more thanks to an improving economy, higher taxes on the wealthy and reduced federal spending, the nonpartisan Congressional Budget Office said Tuesday.

But even with declining deficits, the nation’s debt keeps piling up, leaving lawmakers with no easy choices to fix the poor long-term fiscal outlook. The public debt is on a troubled trajectory – expected to be equal to 100% of the economy’s annual output, or gross domestic product, by 2038.

“The unsustainable nature of the federal government’s current tax and spending policies presents lawmakers and the public with difficult choices,” the office said in its report. “To put the federal budget on a sustainable path for the long term, lawmakers would have to make significant changes to tax and spending policies.”

As Republicans in Congress and the White House square off for yet another round of budget battles this fall, the short-term improvements are unlikely to temper the GOP’s appetite for further brinkmanship over federal spending.

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After having succeeded in extracting steep spending reductions, Republicans in Congress now are using the threat of a federal government shutdown on Oct. 1 – and the need to raise the nation’s debt ceiling a few weeks later – to demand a repeal, or delay, of the president’s healthcare law.

Sen. Marco Rubio (R-Fla.) said Tuesday that the coming deadline to fund the government “is actually a major opportunity to save our people from the job-killing disaster that is Obamacare.”

“This short-term budget represents our last chance to stop it by defunding it,” Rubio wrote in an op-ed on the conservative website TownHall.com.

The White House has routinely said it will not halt the implementation of the healthcare law, with online markets for purchasing health insurance set to open on Oct. 1. Treasury Secretary Jacob J. Lew reiterated that position on Tuesday during a speech before the Economic Club of Washington.

“That’s just not reality, and they’re going to have to start dealing in reality,” Lew said.

In many ways, the budget outlook is improved from a few years ago, as deficits – the difference between annual revenue and expenditures – soared to nearly 10% of annual GDP during the recession, the budget office said.

From the time Obama took office, “the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing federal debt to soar,” the CBO said.

Those deficits helped push the accumulated public debt, which had already doubled during the George W. Bush administration due in large part to war spending and new prescription drug benefits for seniors, higher than at any point since World War II.

The public debt, at $16.7 trillion, is now about 73% of GDP, the budget office said.

But with the economic recovery, annual deficits began to fall. Federal stimulus spending was phasing out and tax revenue, which had been at all-time lows during the recession, started climbing.

Last year’s fiscal cliff deal, with steep cuts and new taxes on the wealthy, further shrunk deficits. This year’s deficit is about 4% of GDP, according to the budget office.

The future, though, remains grim. Rising healthcare costs from the aging population will help put the budget on an unsustainable course. Public debt will consume GDP.

The choices for lawmakers remain difficult, the budget office said. Congress could cut spending and raise taxes to reduce the debt. But the trade-off would weaken the still-sluggish economy.

“In deciding how quickly to carry out policy changes to make the size of the federal debt more sustainable, lawmakers face other trade-offs,” the budget office said. “On the one hand, waiting to cut federal spending or raise taxes would lead to a greater accumulation of debt.… On the other hand, implementing spending cuts or tax increases quickly would weaken the economy’s current expansion.”

Lawmakers reacted cautiously as the budget fight launches anew.

“Are we going to get control of the debt before it reaches a breaking point?” Rep. Paul D. Ryan (R-Wis.), the chairman of the House Budget Committee, wrote in a tweet.

“Congress must continue the progress we’ve made in putting Americans back to work, rebuilding our economy, and reducing the long-term deficit,” said Rep. Chris Van Hollen (D-Md.), the top Democrat on the Budget Committee.

Staff writer Jim Puzzanghera contributed to this report.

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Lisa.Mascaro@latimes.com

Twitter: @LisaMascaroinDC