WASHINGTON — The budget deficit for the current year is projected to come in well below what was estimated just a few months ago, a development that could further curb the already slowing momentum for a budget pact this year.
The 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.
Last year’s deficit was $1.1 trillion, capping four consecutive trillion dollar-plus deficits during President Barack Obama’s first term. Obama inherited an economy in recession, which stunted tax revenues for several years.
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 improved budget picture also means that the deadline for increasing the government’s borrowing cap has been postponed until October or November. 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 pact.
Positions have hardened since Obama used his leverage in January to force Republicans to accept higher income tax and capital gains rates on the wealthy as a condition for extending the remainder of the Bush-era tax cuts. In response, Republicans vow they won’t raise taxes further, which has cemented an impasse with Democrats over replacing automatic, across-the-board spending cuts that began to take effect in March.
Republicans generally want to replace the cuts, known as sequestration, with spending cuts elsewhere, including popular benefit programs like Social Security and Medicare. Democrats insist further taxes need to be part of the sequestration solution.
Deficit hawks said the improved deficit figures don’t make the nation’s long-term deficit and debt woes any less daunting. The retirement of the baby boom generation in particular highlights the evolving demographics that challenge the nation’s future.
“The rosier-than-expected near-term projections do not change the fact that rising health care costs, an aging population, Social Security’s looming insolvency and ever-increasing interest payments will greatly expand the national debt,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
The current federal debt exceeds $16 trillion, almost double what is was at the end of 2006.
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 good news is the near-term deficit is dropping, but it appears to be dropping primarily as a result of additional, one-time revenues rather than any uptick in economic growth,” said Rep. Chris Van Hollen, D-Md., top Democrat of the House Budget Committee. “That’s why it would be a big mistake to adopt any austerity measures now.”
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 increases the risk of a full-blown fiscal crisis.
One of the reasons for lower deficits is that gridlock in Washington has meant that mandatory, across-the-board cuts have begun to take effect. The cuts are expected to curb spending by about $80 billion in the 2013 budget year ending Sept. 30.
The CBO is the nonpartisan agency that does economic and budget analysis for Congress.