My Comments: It would be easy to get overly excited about this. Certainly it’s good news but to believe it’s a fundamental shift in the economy is stretching things. For one thing, the sequester that happened recently simply means that the Federal government is spending less money.
But for those of us looking for good economic news, this is worth a look. Keep your fingers crossed, however.
By James Politi in Washington | Financial Times
The US budget deficit is declining faster than expected as the rebound of the world’s largest economy helps the government collect more revenue from businesses, households and the two mortgage companies it rescued in the financial crisis.
The brighter fiscal outlook comes as other advanced economies are struggling to reduce their deficits through drastic spending cuts and tax rises at a time of weak or negative growth. Growth figures to be released on Wednesday are expected to show that the 17-country eurozone contracted again.
New figures released by the non-partisan Congressional Budget Office showed the US budget deficit falling to $642bn, or 4 per cent of gross domestic product.
The CBO figures mark a $203bn improvement over its earlier projection only three months ago and a sharp reduction compared with the $1.1tn deficit of 2012, or 7 per cent of GDP. The CBO predicted the deficit would decrease further to 3.4 per cent of GDP in fiscal 2014 and 2.1 per cent the year after, before it starts rising again.
The figures were released as the New York Fed said households were continuing to reduce debt, by $110bn in the first quarter of the year. The number of loans that are more than 90 days behind on a payment also fell from 6.3 per cent to 6 per cent. The figures show the improvement in household finances, but also suggest that consumers will only increase their spending slowly.
The much lower government deficits will reduce pressure on the White House and Congress to find a solution to the country’s longer-term debt woes, which remain as America faces soaring projected health and pension costs later this decade.
“You don’t want to use the progress we are making as an excuse not to fix the problem, and there’s a very real risk that will happen,” says Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, which has been campaigning for a big deficit grand bargain.
The improved outlook is partly the result of increased tax revenues worth $105bn compared to the earlier projection from both businesses and individuals, as the economy continued to recover. The housing rebound also allowed Fannie Mae and Freddie Mac, the mortgage finance giants under government control, to make $95bn in payments to the Treasury. Automatic spending cuts known as sequestration were already factored into the CBO’s calculations, helping drive the declining deficits.
The better picture has also shifted the deadline by which the US needs to raise its borrowing limit to avoid a default on its debt from August until October or even November, the CBO said.
The US debt limit will be reached over the coming weekend but the US Treasury can take a series of “extraordinary” cash-management measures to stave off default in the absence of a deal on Capitol Hill.
The later timeframe for the US to raise its borrowing limit means congressional negotiations over a fiscal deal have advanced much more slowly than previously expected. Democrats, who control the Senate, and Republicans, who control the House, have been bickering over the process by which they could reconcile their two vastly different budgets.
Meanwhile, the US political debate has been consumed by other matters, from the immigration bill to this week’s furore over reviews of the Tea Party by US tax authorities.
The improving economic indicators have removed some of the incentives for President Barack Obama and congressional Democrats to accept the need for additional spending cuts, particularly if they hit popular government health and pension programmes such as Social Security and Medicare. It will also make Republicans even less willing to consider the need for higher taxes since revenues are already rebounding significantly.
“A lot of the energy and appetite for a substantial [deficit] fix is gone,” said Doug Holtz-Eakin, the former Congressional Budget Office director and head of the American Action Forum, a moderate Republican think-tank in Washington.
But that is not to say all momentum has stalled.
The White House has continued talks with Republicans in the Senate who would be the most likely brokers of a deficit deal, and the president last week played golf with Saxby Chambliss of Georgia and Bob Corker of Tennessee, who could help craft a bipartisan deal.
House Republicans are meeting this week to discuss their demands for a debt ceiling increase. The congressional tax-writing committees led by Max Baucus in the Senate and Dave Camp in the House are also feverishly working on their tax reform plans, which could spur momentum for a broader deal.
Gabe Horwitz, director of the economic programme at Third Way, the centrist Democratic think-tank, said he accepted that “the bigger the fire, the more response you’re going to get out of Congress”.
But he said there should still be the political will to do a big deficit deal. Although short-term deficits are declining, by the end of the decade the US fiscal picture will darken again, as the retirement of the baby-boomer generation drives sharp increases in health and pension costs.
In addition, the White House and many lawmakers on both the right and the left of politics are unhappy with the present composition of deficit reduction, especially the $1.2tn in sequestration cuts.
These reductions, which took effect in March, disproportionately hit domestic agencies and programmes beloved by Democrats and the Obama administration, and hurt the Pentagon much more than Republicans would like. US government agencies have tried to blunt their effect – the Department of Defence on Tuesday announced a decrease in the number of enforced leave days for its civilian workforce from 14 to 11 – but many are still suffering badly.