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Deficit to Decline by $155 Billion in 2013, New CBO Outlook Says

The Congressional Budget Office, setting new terms for the coming budget debate in Washington, projects that the fiscal 2013 budget deficit will shrink to $845 billion under current law to its lowest level as a share of the economy since 2008.

That figure would be down from $1 trillion in fiscal 2012, the CBO said in its Budget and Economic Outlook, the annual report setting the critical baseline for measuring the impact of tax and spending proposals. The $845 billion deficit would equal 5.3 percent of GDP in the current fiscal year, down from 7 percent last year.

After four years of $1 trillion-plus deficits, the deficit this year would be the first to fall below that level.

The current-law baseline incorporates the effects of the tax changes and assumes that about $85 billion in automatic, across-the-board spending cuts will take place March 1 as scheduled under sequester.

Congress raised tax rates for individuals who earn more than $400,000 in fiscal-cliff legislation (PL 112-240) on Jan. 1, which will raise more than $600 billion over a decade.

The release of the new CBO baseline clears the way for the House and Senate Budget committees to prepare their tax and spending framework for the fiscal year that begins Oct. 1, and budget experts in Congress seized on the new numbers.

House Budget Chairman Paul D. Ryan, R-Wis., warned that the report shows that “unless the President and the Senate offer a credible plan to close the deficit, we will have a debt crisis and the country will suffer.” He said House Republicans “have offered their solutions” and Democrats “must do the same.”

Rep. Chris Van Hollen, ranking Democrat on the Budget Committee, argued that the report lends support to the Democratic call for a “balanced” approach, including more revenue as well as spending cuts, to reduce the deficit.

“CBO’s real-world budget outlook has improved in large part because we ended bonus tax breaks for the very wealthy and used that revenue to reduce the deficit,” the Maryland lawmaker said.

Ryan is writing a GOP budget that will aim to balance the budget in 10 years, a far more aggressive path than the House passed last year, and CBO’s numbers set out stark numbers for the path to balance within the next decade.

At a meeting with reporters Tuesday, CBO Director Douglas W. Elmendorf did not address specific proposals but said the gradual elimination of the deficit over a decade would require about $4 trillion in spending cuts over 10 years to end up with a balanced budget in 2023. Under current law, CBO projects a $978 billion deficit in 2023. That would require cutting annual non-defense discretionary spending by about two-thirds by 2023, based on the CBO projection of spending, if defense spending is not included in the spending cuts.

Overall spending in 2023 is projected to be about $12.9 trillion.

“The gap between spending and revenues is very large, and that means that the changes you would need to eliminate that gap will be large,” Elmendorf said. “The changes in policies needed to balance the budget are very large.”

A rapid cut in spending “would reduce output and employment over the next few years,” he said, but lead to improvement in the economy in later years.

Alternative Scenarios

The agency also provided an alternative fiscal scenario, which estimates the effects of Congress changing some provisions of current law. If Congress eliminated the sequester, prevented cuts in Medicare reimbursements to doctors from taking place and permanently continued other expiring tax provisions that are set to end over the next several years, the deficit would rise to $887 billion in fiscal 2013 and by more than $2 trillion over baseline estimates over the next 10 years.

Despite a more positive scenario with deficits shrinking in the coming years, CBO said deficits would rise later in the decade because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance and growing interest payments on the federal debt.

The agency’s forecast sees economic growth speeding up after this year, cutting into the unemployment rate but also helping to spur inflation and higher interest rates. Under the forecast, unemployment would still exceed 7.5 percent through next year, however.

The agency said debt held by the public will reach 76 percent of GDP by the end of the current fiscal year, the largest percentage since 1950.

The agency’s new outlook suggested that the White House and Congress essentially had split the difference in the high-drama talks over whether to extend some or all of the 2001 and 2003 tax cuts. CBO had estimated last year that if all the tax cuts were allowed to expire, the deficit would shrink to $641 billion in fiscal 2013. But under an earlier alternative fiscal scenario, in which all of the tax cuts were extended, the fiscal 2013 deficit was projected at $1 trillion.

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