Obama Sees 2013 Deficit Lowest in Five Years, GDP Growth at 2.0%

The Obama administration projects that the federal budget deficit will drop to the lowest level in five years, $759 billion for the year ending Sept. 30, as the economy improves and tax collections increase.

The Office of Management and Budget said in an update of its forecasts that the economy may grow 2 percent this calendar year. That’s slower than the 2.3 percent growth rate predicted three months ago. The median forecast of 86 analysts surveyed by Bloomberg is for a 1.9 percent gain.

Next year, the administration projects the economy will grow by 3.1 percent, down from 3.2 percent seen in April. Analysts surveyed by Bloomberg forecast a median increase of 2.7 percent in 2014.

While the deficit figures released yesterday are lower, that’s “only temporary,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a Washington-based group that seeks lower deficits. “The long-term situation, however, remains as dismal as it’s been.”

In a 60-page report to Congress by budget director Sylvia Burwell, the administration partly blamed $81 billion in automatic spending cuts, known as sequestration, for being “a drag on growth in recent months.” The White House also cited slow growth in Europe and China.

Dying Headwinds

“As a consequence, the economy was under additional fiscal pressure during the first half of 2013, leading to a reduction in the forecast for growth,” the report said. “As various headwinds die down, and the proposed budget replaces sequestration, the administration expects more rapid growth.”

Unemployment may average 7.5 percent this year, down from the 7.7 percent the administration predicted in April. “Unemployment is now projected to decline somewhat more rapidly than in the budget projections,” the report said.

Increased tax collections of $65 billion more than was expected in April helped to reduce the deficit forecast, the White House budget office said.

Rising income and a shrinking shortfall also take the heat off Congress and the White House to achieve any kind of “Grand Bargain” on dealing with spending, deficits or automatic budget cuts.

President Barack Obama hosted five private dinners with lawmakers from March to May to try to coax a sweeping budget deal, yet there’s been no action, suggesting the momentum for any accord is fading.

Congressional Impasse

In Congress, the standoff over spending and taxes continues. The House passed a blueprint in March that Republicans said would achieve a surplus in a decade by cutting spending. Senate Democrats have refused to consider the measure and have prepared a separate blueprint that restores spending cuts and raises taxes.

“It doesn’t seem like they’re trying to come to any sort of budget agreement,” said Bob Bixby, head of the Concord Coalition, which promotes balanced budgets.

MacGuineas said that while the budget figures “are definitely an improvement, we’re still clearly on an unsustainable path” with rising costs in Medicare and Social Security in the years ahead. In a reference to sequestration, she said “the bulk of the savings have come from an abdication of responsibility.”

Though the White House opposes the automatic spending reductions, the calendar is working against any reversal, with the government’s fiscal year ending on Sept. 30.

‘Wide Differences’

“Wide differences in Senate and House budget plans and corresponding differences in appropriations levels make it increasingly likely that come Sept. 30, Congress will resort to another” catchall spending bill and sequester, said Christopher Payne, an analyst at Bloomberg Government.

In the budget review, the forecast for a deficit of $759 billion translates to 4.7 percent of the gross domestic product. That compares with a deficit estimate by the nonpartisan Congressional Budget Office on May 14 of $642 billion this year, or 4 percent of the economy, less than half the shortfall in fiscal 2009 when it was 10.1 percent of GDP.

In a blog posting, Burwell said deficits will be reduced to less than 3 percent of the economy by 2017 and continue to fall to about 2 percent by 2023. Economists generally agree that the deficit shouldn’t exceed 3 percent of the GDP in a country with a stable economy.

Washington’s top priority must be spurring job creation and strengthening the middle class,” Burwell said in the blog.

Shrinking deficits may postpone until October or November the deadline this year for raising the government’s debt ceiling of $16.7 trillion.

The Congressional Budget Office normally issues its version of a mid-session budget review in July or August but no date has been set, the agency said in an e-mail.

To contact the reporter on this story: Roger Runningen in Washington at rrunningen@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

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