Wed., May 15, 2013 11:30am (EDT)

Is A Smaller Budget Deficit A Lasting Trend?
By John Ydstie
Updated: 1 year ago

Copies of President Obama's budget plan for fiscal 2014 are prepared for delivery at the U.S. Government Printing Office in Washington in April. The Congressional Budget Office has sharply cut the outlook for the federal  deficit.
Copies of President Obama's budget plan for fiscal 2014 are prepared for delivery at the U.S. Government Printing Office in Washington in April. The Congressional Budget Office has sharply cut the outlook for the federal deficit.
As the economy improves, the federal budget deficit is growing dramatically smaller. The Congressional Budget Office has sharply revised its estimates from just a few months ago, knocking off $200 billion in red ink for the current fiscal year. Some temporary factors are being cited for the projected improvement.

CBO now says it expects the budget shortfall to be $642 billion this year. That's still large, but far better than the trillion-dollar-plus deficits of the previous four years. The estimate lowers the relative size of the deficit to 4 percent of the size of the economy, down from just over 10 percent in 2009.

"That's a lot of good news, and when it comes to the budget we should take the good news where we can get it," says Maya MacGuineas. She is the president of the Committee for a Responsible Federal Budget, which has campaigned to reduce the federal deficit.

'Temporary Savings'

"The problem is a lot of this comes from temporary savings, and it doesn't mean that we're on a path that's sustainable," she adds.

There are a couple of big temporary factors behind the dramatic improvement since February. One is news that mortgage giants Fannie Mae and Freddie Mac are making big dividend payments to the government this year. The government bailed them out and took them over during the housing crisis.

The second temporary factor is higher-than-expected tax payments from well-off taxpayers. Many sold stock and other assets late last year to avoid higher tax rates that took effect in January. Since the government's 2013 fiscal year began Oct. 1, the taxes paid on the income from those sales will help to reduce this year's deficit.

While MacGuineas sees a temporary deficit improvement, Dean Baker, co-director of the Center for Economic and Policy Research, a liberal think tank, has a different takeaway from the CBO report.

"I think when you look at it you're really hard-pressed to see what the deficit problem is," he says.

An Argument For Economic Stimulus

Baker points out that the improvement isn't just a one-year phenomenon. He notes that deficits drop through 2015 in the CBO projection and rise in the later years of the decade largely because the CBO projects the interest rates will rise, not because of growing government spending. He argues that deficits could actually be forced lower if Congress provided some stimulus for the economy now.

"If we could have a boost to growth both short-term from boosting demand and long-term by increasing the economy's productive capacities we're likely to be looking at a better budget situation, say come 2020-2021, simply because the economy will be more productive, we'll have more people working," Baker says.

But that's just the kind of talk that has deficit hawk Maya MacGuineas worried. She's a little concerned that the good news will cause Washington to lose the sense of urgency it needs to deal with the longer-term deficit problems.

"We still haven't dealt with the real driving fiscal challenges in our budget the aging of the population, growing health care costs and an outdated tax system that doesn't raise revenues in the best way that it could, that could help grow the economy even more," MacGuineas says.

Baker argues that even on the health care front there's some good news, with costs rising more slowly in recent years. MacGuineas acknowledges some slowdown in health care inflation but says it will take many more bites at the apple to get government spending on health care under control.


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