Government Deficit Report Inflames, Illustrates Budget Debate

A report showing the government will run a budget deficit of more than $1 trillion for the fourth consecutive year inflamed a debate over the federal shortfall that’s unlikely to be resolved before the November election.

The Congressional Budget Office said yesterday it expects this year’s gap between spending and revenue to total $1.1 trillion, down from last year’s $1.3 trillion. It attributed the decline to stronger tax revenue and the smallest increase in spending in years.

The report illustrates the stakes in the presidential and congressional elections. It shows that future deficits may vary widely depending on budget decisions lawmakers are unlikely to make until after the November vote.

“How much and how quickly the deficit declines will depend in part on how well the economy does over the next few years,” the report said. “Probably more critical, though, will be the fiscal policy choices made by lawmakers as they face the substantial changes to tax and spending policies that are slated to take effect within the next year.”

Lawmakers have disagreed over what to do about income-tax cuts, first enacted during George W. Bush’s presidency, that are scheduled to expire at the end of this year. At the same time, $1 trillion in automatic spending cuts will begin taking effect in January 2013 if Congress doesn’t intervene.

“The elections are going to clarify a lot of this,” said Senator John Thune, a South Dakota Republican. “There’s going to be a very clear contrast this fall.” He added, “I hope there is a clear mandate from the American people” against the approach of President Barack Obama and congressional Democrats.

Borrowed Money

This year’s deficit may be larger than $1.1 trillion if lawmakers decide not to finance a continuation of a payroll tax break and expanded unemployment benefits with savings elsewhere in the budget. Senator Ben Cardin, a Maryland Democrat and a member of a House-Senate panel trying to negotiate an extension, said he supports financing jobless benefits with borrowed money.

“We don’t have to pay for all this,” Cardin told reporters yesterday. Lawmakers don’t typically offset the cost of unemployment assistance, and doing so would reduce the stimulative effect on the economy of the benefits, he said.

The economy will expand this year by 2 percent, CBO said, while the unemployment rate will probably climb to 8.9 percent from the current 8.5 percent.

Trading Blame

Lawmakers traded blame over the budget deficit.

“This report from the Congressional Budget Office serves as a harsh indictment of President Obama’s failed policies,” House Budget Committee Chairman Paul Ryan, a Wisconsin Republican, said in a statement. The Republican-controlled House has “fought to put the brakes on the president’s spending spree and continues to advance pro-growth solutions.”

Senate Budget Committee Chairman Kent Conrad said Obama “called for a balanced approach to reducing the debt with both spending cuts and new revenue.” Conrad added, “Republicans must be willing to put revenue on the table and accept a tax code where everyone, including the wealthiest, pay their fair share.”

Obama is scheduled to release his latest budget request to Congress on Feb. 13.

If lawmakers permanently extend the Bush-era tax cuts, abandon the automatic spending cuts and continue to protect doctors from scheduled cuts in Medicare (NHEXNHMD) payments, the CBO said, the deficit will total at least $900 billion annually for the foreseeable future.

$1.5 Trillion

The deficit would reach $1.5 trillion by 2022, CBO estimated, and the debt would reach levels unseen since the government was paying off its World War II expenses.

If all of the scheduled tax increases and spending cuts are allowed to take effect, CBO said, the deficit would shrink to $200 billion by 2018. The agency said that would be a blow to the economy that would drive the jobless rate to 9.2 percent by the fourth quarter of next year.

Three government trust funds, meanwhile, are projected to run dry in coming years, the CBO said. A highway trust fund financing road projects will run out sometime next year. The Social Security disability program’s trust fund will be exhausted in 2016. Six years later, a Medicare trust fund that makes payments to hospitals also will be depleted, CBO said.

Spending this year will grow by 0.1 percent, or $3 billion, partly as a result of a budget agreement reached last year. That compares with last year’s 4 percent increase; in the decade before that, expenditures rose by an average 7 percent annually, CBO said.

Defense Spending

Defense (USBODEFN) and non-defense discretionary spending will fall this year by 3 percent, the report said. So-called mandatory spending on entitlement programs will rise by 2 percent, in part because of cost-of-living adjustments provided to Social Security (USBOSOCS) beneficiaries.

The projected cost of the government’s bailout of the financial industry, known as TARP, probably will climb, CBO said. That’s because investments the Treasury Department still holds in General Motors Co. and insurer American International Group Inc. have declined in market value.

To contact the reporter on this story: Brian Faler in Washington at bfaler@bloomerg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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