* CBO sees $845 bln deficit for FY 2013, $616 bln for FY
* Deficits to start to grow again by mid-decade; debt keeps
* CBO forecasts assume automatic spending cuts happen as
By David Lawder
WASHINGTON, Feb 5 The U.S. budget deficit will
dip below $1 trillion this year for the first time during Barack
Obama's presidency, the Congressional Budget Office said on
Tuesday, but it warned that debt will swell to unsustainable
levels without further action by lawmakers.
CBO forecast that the deficit for fiscal 2013, which ends
Sept. 30, will shrink slightly to $845 billion after four
straight years above $1 trillion. The reason is an improving
economy and higher taxes paid by wealthy Americans.
The CBO analysis, which will feed into Congress' bitter
debate over how to tame deficits, assumes that $85 billion in
automatic spending cuts will launch as scheduled on March 1.
It said the fiscal tightening from these across-the-board
cuts and from higher taxes will slow economic growth to an
anemic 1.4 percent by the end of 2013, causing the unemployment
rate to edge higher to 8.0 percent by then from about 7.9
The analysis is the first from the non-partisan budget
agency to incorporate the New Year's deal to avert the "fiscal
cliff," which restored pre-2001 tax rates on income above
$450,000 for couples and let a temporary payroll tax reduction
expire. The automatic spending cuts were only delayed for two
months until March 1.
But after absorbing these headwinds, the economy will regain
momentum in 2014 and fill federal coffers at a faster pace, even
without further spending cuts or tax hikes, CBO said. It
forecast a $616 billion deficit in fiscal 2014 and a $430
billion deficit in fiscal 2015, equivalent to 2.4 percent of
U.S. gross domestic product at that time, a level that many
economists view as sustainable.
But deficits will rise steadily from mid-decade, nearing $1
trillion again by 2023, according to the forecast. The 10-year
cumulative deficit is forecast at $6.958 trillion.
"Deficits are projected to increase later in the coming
decade, however, 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
federal debt," the CBO said in the report.
DEBT LOAD MOUNTS
The CBO warned that U.S. debt held by the public would
continue to mount, staying at the highest levels as a percentage
of GDP since about 1950 through the next decade, reaching 77
percent of GDP by 2023.
It argued that this would crowd out private investment and
seriously limit lawmakers' flexibility to deal with challenges
such as a new recession or a future war.
"Such a large debt would increase the risk of a financial
crisis, during which investors would lose so much confidence in
the government's ability to manage its budget that the
government would be unable to borrow at affordable rates," the
Republicans seized upon the report as evidence that their
worst fears -- a European-style debt crisis - will come true
without deep spending cuts to expensive health care programs
such as Medicare and Medicaid.
"The CBO's report is yet another warning that we need to get
spending under control. The deficit is still unsustainable,"
Paul Ryan, the House Budget Committee Chairman and former
Republican vice presidential candidate, said in a statement.
"By 2023, our national debt will hit $26 trillion. We can't
let that happen. We need to budget responsibly, so we can keep
our commitments and expand opportunity," Ryan said.
Democrats put the emphasis on the progress made in reducing
deficits and in fostering economic recovery.
"The report confirms that the economy has made important
progress over the last few years, but there is clearly more to
do," said Representative Chris Van Hollen, the top Democrat on
the House Budget Committee. "Our first priority must be putting
Americans back to work, but unfortunately, congressional
Republicans have blocked progress at every turn.
The report comes as President Barack Obama called for
another temporary delay in the automatic spending cuts, an
overture that was quickly rebuffed by House Republicans.
If Congress were simply to cancel the cuts with no savings
to offset them, that would add about $1.2 trillion to the
cumulative projected 10-year deficit, pushing it to over $8
Republicans in the House of Representatives are preparing a
budget that aims to achieve balance within 10 years - a
phenomenon not seen since 2001.
In a separate report, CBO said that would require about $4
trillion in additional fiscal tightening through tax hikes,
spending cuts or both over the next decade -- while leaving in
place or replacing the automatic sequester cuts.
It forecast that if $4 trillion in additional 10-year budget
savings were achieved, output would be reduced by 0.6 percentage
point in 2014 compared with its current-law "baseline." But it
would add 1.7 percentage points to growth in 2023 by reducing
debt service costs and freeing up investment capital.
It noted that finding such savings would be difficult
without directly affecting tax and other incentives to work and
A more modest deficit reduction plan of $2 trillion also
would have some near-term pain and long-term gain, reducing 2014
growth by 0.3 percentage point, while adding 0.9 percentage
point to 2023 growth.