U.S. Budget Deficit Shrinks Far Faster Than Expected

U.S. Budget Deficit Shrinks Far Faster Than Expected
By ANNIE LOWREY
The New York Times

WASHINGTON — Since the recession ended four years ago, the federal budget deficit has topped $1 trillion every year. But now the government’s annual deficit is shrinking far faster than anyone in Washington expected, and perhaps even faster than many economists think is advisable for the health of the economy.

That is the thrust of a new report released Tuesday by the nonpartisan Congressional Budget Office, estimating that the deficit for this fiscal year, which ends on Sept. 30, will fall to about $642 billion, or 4 percent of the nation’s annual economic output, about $200 billion lower than the agency estimated just three months ago.

The agency forecast that the deficit, which topped 10 percent of gross domestic product in 2009, could shrink to as little as 2.1 percent of gross domestic product by 2015 — a level that most analysts say would be easily sustainable over the long run — before beginning to climb gradually through the rest of the decade.

"Revenues have been strong as the economy has outperformed a bit," said Joel Prakken, a founder of Macroeconomic Advisers, a forecasting firm based in St. Louis.

Over all, the figures demonstrate how the economic recovery has begun to refill the government’s coffers. At the same time, Washington, despite its political paralysis, has proved remarkably successful at slashing the deficit through a variety of tax increases and cuts in domestic and military programs.

Perhaps too successful. Given that the economy continues to perform well below its potential and that unemployment has so far failed to fall below 7.5 percent, many economists are cautioning that the deficit is coming down too fast, too soon.

“It’s good news for the budget deficit and bad news for the jobs deficit,” said Jared Bernstein of the Center on Budget and Policy Priorities, a left-of-center research group in Washington. “I’m more worried about the latter.”

Others, however, are warning that the deficit — even if it looks manageable over the next decade — still remains a major long-term challenge, given that rising health care spending on the elderly and debt service payments are projected to eat up a bigger and bigger portion of the budget as the baby boom generation enters retirement.

“It takes a little heat off, and undercuts the sense of fiscal panic that prevailed one or two years ago when the debt-to-G.D.P. ratio was climbing,” said Mr. Prakken, of referring to the growth of the country’s debt relative to the size of the economy. “These revisions probably release some pressure to reach a longer-term deal, which is too bad, because the longer-term problem hasn’t gone away.”

With the government running a hefty $113 billion surplus in the tax payment month of April, according to the Treasury, analysts now do not expect the country to run out of room under its debt ceiling — a statutory borrowing limit Congress needs to raise to avoid default — until sometime in the fall. That has left both Democrats and Republicans hesitant to enter another round of negotiations over painful cuts to entitlement programs like Social Security and Medicare, and tax increases on a broader swath of Americans, despite the still-heated rhetoric on both sides.

For the moment, the deficit is largely repairing itself. Just three months ago, the Congressional Budget Office projected that the current-year deficit would be $845 billion, or about 5.3 percent of economic output.

The $200 billion reduction to the estimated deficit comes not from the $85 billion in mandatory cuts known as sequestration, nor from the package of tax increases that Congress passed this winter to avoid the so-called fiscal cliff. The office had already incorporated those policy changes into its February forecasts.

Rather, it comes from higher-than-expected tax payments from businesses and individuals, as well as an increase in payments from Fannie Mae and Freddie Mac, the mortgage finance companies the government took over as part of the wave of bailouts thrust upon Washington in the darkest days of the financial crisis.

The C.B.O. said it had bumped up its estimates of current-year tax receipts from individuals by about $69 billion and from corporations by about $40 billion. The office said the factors lifting tax payments seemed to be “largely temporary,” due in part, probably, to higher-income households realizing gains from investments before tax rates went up in the 2013 calendar year.

It also reduced its estimated outlays on Fannie and Freddie by about $95 billion. The mortgage giants, which have required more than $180 billion in taxpayer financing since the government rescued them in 2008, have returned to profitability in recent quarters on the back of a stronger housing market and have begun to repay the Treasury for the loans.

But there is a darker side to the brighter outlook for the deficit. The immediate spending cuts and tax increases Congress agreed to for this year are serving as a partial brake on the recovery, cutting government jobs and preventing growth from accelerating to a more robust pace, many economists have warned. The International Monetary Fund has called the country’s pace of deficit reduction “overly strong,” arguing that Washington should delay some of its budget cuts while adopting a longer-term strategy to hold down future deficits.

In revising its estimates for the current year, the budget office also cut its projections of the 10-year cumulative deficit by $618 billion. Those longer-term adjustments are mostly a result of smaller projected outlays for the entitlement programs of Social Security, Medicaid and Medicare, as well as smaller interest payments on the debt.

The report noted that the growth in health care costs seemed to have slowed — a trend that, if it lasted, would eliminate much of the budget pressure and probably help restore a stronger economy as well. The C.B.O. has quietly erased hundreds of billions of dollars in projected government health spending over the last few years.

It did so again on Tuesday. In February, the budget office projected that the United States would spend about $8.1 trillion on Medicare and $4.4 trillion on Medicaid over the next 10 fiscal years. It now projects it will spend $7.9 trillion on Medicare and $4.3 trillion on Medicaid.

Yeah!!!!!

Let's celebrate the government spending money it doesn't have only because they seem to be spending slightly less of the money they still don't have!!!!

Let's celebrate a debt that will still be growing only because it is growing slightly less fast as it was!!!!!

I notice the GAO still hasn't backed off of its claim from earlier this year. The one that simply stated that the dollar will collapse before 2016 if drastic changes aren't made.

Lets put this on an individual level

Last year, you made $10,000 - but spent $14,000 - so you are now $4,000 in debt
This year, you made $10,000 - but spent $12,000 - so you are now $6,000 in debt

and those amounts do not include interest!

Folks - we need to stop spending money. There are way too many programs out there that are either unneeded and or unconstitutionaltuional.

What re overy? 5 years on we still have anemic growth at 1.8% and 7+% unemployment. And just wait til next year when obama are is fully implemented, because i guarantee you it wont shrink the deficits as billed.

And the only reason the stock markets are doing anything is because bernanke keeps printing money. But thats clearly not a fix, its only driving the inflation we all feel but doesnt official exist.