Last updated: February 5, 2013 10:06 pm

US budget deficit expected to shrink

US President Barack Obama at the Minneapolis Police Department Special Operations Center in Minneapolis, Minnesota, US©EPA

The US budget deficit will this year shrink to $845bn, or 5.3 per cent of economic output and the lowest level of Barack Obama’s presidency, congressional analysts said as a new round of budgetary warfare flared up between the White House and Congress.

According to the Congressional budget office, the improvement in America’s fiscal position will continue through 2015, when the budget deficit is projected to reach a trough of 2.4 per cent of gross domestic product.

However, after that, as America’s population ages and more baby boomers retire, the cost of health and pension schemes for the elderly, combined with revenues just slightly above their historical average, will cause deficits to gradually start rising again.

By 2023, the US deficit will be worth 3.8 per cent of economic output, with total debt held by the public of $20tn, or 77 per cent of gross domestic product – and the outlook will darken further from there.

One source of comfort in the report was that government health spending – a big driver of long-term deficits – has slowed in recent years, though Doug Elmendorf, CBO director, said it remains unclear whether this is a transitory or permanent trend.

The CBO data showed the first annual US budget deficit below $1tn since Barack Obama took office in 2009, driven by a mix of steady albeit sluggish economic growth, slower spending, and higher taxes on the wealthy. The report is a critical reference for Congress and the White House as they prepare for their next fiscal fight, over $1.2tn in automatic across-the-board spending cuts – known as “sequestration” – due to take effect on March 1 and last for ten years.

On Tuesday, Mr Obama urged Congress to act quickly to temporarily delay those cuts by replacing them with a small package of budget savings, including both spending reductions and curbs to tax breaks for the wealthy and corporations.

“There is no reason that the jobs of thousands of Americans who work in national security or education or clean energy should be put in jeopardy just because folks in Washington couldn’t come together to eliminate a few special interest tax loopholes or government programmes that we agree need some reform,” Mr Obama said.

The CBO assumed the automatic cuts would occur in its projections – which forecast economic growth of 1.4 per cent this year, followed by an acceleration to 3.4 per cent next year. The unemployment rate is expected to tick up to 8 per cent this year, then drop back to 7.6 per cent in 2014, the CBO said.

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Although the automatic cuts are disliked by many lawmakers from both parties, since they would hammer the Pentagon and other government agencies, Republicans and Democrats cannot agree on how to replace them with other savings.

The sequestration cuts were agreed in August 2011 as unpalatable to both Republicans and Democrats – a way of forcing lawmakers to bridge their differences on fiscal policy and converge around a deficit deal. But the two sides failed to reach an agreement, and the cuts have continued to loom.

Republicans want any package to include only spending cuts and to shift the composition away from defence to other programmes such as food stamps.

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“We believe there is a better way to reduce the deficit, but Americans do not support sacrificing real spending cuts for more tax hikes,” said John Boehner, the Republican Speaker of the House of Representatives.

Many Republicans see the automatic cuts as a better alternative to a deal that includes tax increases. “Sorry, President Obama, but no more tax increases for even more government spending. We should keep our word to the American people and keep the spending cuts you signed into law,” said Pat Toomey, a Republican senator from Pennsylvania.

As well as a political divide over how to deal with the automatic cuts, there was also a split reaction to the CBO figures. Democrats stressed the progress towards deficit reduction so far and the relatively encouraging medium-term fiscal trajectory.

“While we still have more work to do, the $2.4tn in deficit reduction we enacted over the past two years has moved us closer to stabilising the debt and responsibly scaling back the deficit,” said Patty Murray, chairman of the Senate budget committee.

Republicans focused on the dire long-term outlook. Paul Ryan, chairman of the House budget committee, called it “yet another warning that we need to get our spending under control”, while Jeb Hensarling, chairman of the House financial services committee, said America was “continuing down the path to national bankruptcy”.

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