The U.S. budget deficit will fall to a seven-year low as a share of the economy, driven downward by stronger economic growth that has boosted tax revenue and helped contain spending, according to the Congressional Budget Office.
The fiscal 2014 deficit will narrow to $514 billion, or 3 percent of gross domestic product, from $680 billion last year, the CBO said today in Washington. The projected gap is down from 9.8 percent of GDP in 2009, the widest in records dating back to 1974, and is close to the average of the past four decades, the agency said. The budget was in surplus from 1998 to 2001.
Revenue that’s forecast to grow this year more than three times as fast as spending is helping the U.S. narrow a deficit that reached a record $1.4 trillion in 2009. While the CBO report showed a short-term improvement, it also sees deficits swelling again over the next decade as a result of rising health-care costs and interest payments on government debt.
“We have near-term term deficit reduction but long-run fiscal challenges,” said Michael Brown, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina.
The shortfall will exceed $1 trillion again starting in 2022 and reach $1.074 trillion, or 4 percent of GDP, in 2024, the report said. That will push publicly held debt to $21.3 trillion, or 79.2 percent of GDP, by 2024 from $12.7 trillion, or 73.6 percent, this year.
U.S. stocks rose, with the Standard & Poor’s 500 Index rebounding after the biggest drop since June, as Treasuries retreated. The S&P 500 climbed 0.8 percent to 1,755.70 at 1:39 p.m. in New York. The yield on 10-year Treasury notes climbed five basis points to 2.63 percent.
Narrowing deficits didn’t stop a political fight over raising the debt limit that contributed to a 16-day partial government shutdown in October. House Republicans tried unsuccessfully to attach policy provisions curbing the health-care law and promoting the Keystone XL pipeline in exchange for raising the debt cap and funding the government.
Today’s report further underscored the split between Democrats and Republicans over nation’s fiscal health.
Senator Patty Murray, a Washington Democrat who is chairman of the Senate Budget Committee, said the CBO numbers are “encouraging evidence that our near-term fiscal outlook continues to improve, although there is much more we need to do to tackle our long-term budget challenges.”
House Speaker John Boehner, a Republican from Ohio, said the report “confirms what the American people already know: further action is necessary to address the drivers of our debt.”
A suspension of the federal debt limit, enacted by Congress in October, is scheduled to expire Feb. 7. Treasury Secretary Jacob J. Lew has repeatedly urged Congress to act quickly to raise the cap, saying the government’s ability to meet its obligations will run out before the end of this month.
President Barack Obama and Senate Democrats insist they won’t negotiate on the debt limit increase this time. Senator John Thune of South Dakota, the third-ranking Republican, said his party probably will provide enough votes to pass an increase in that chamber without conditions.
Speaking yesterday at the Bipartisan Policy Center in Washington, Lew said the U.S. economy is “poised for growth in 2014,” and Congress should avoid another “manufactured crisis” over the debt ceiling.
The CBO’s projections support that forecast. Growth will accelerate this year and next as the Federal Reserve holds interest rates low until the second half of 2015, the agency said. The economy will expand 3.1 percent in the fourth quarter of 2014 from the same period last year.
“Economic activity will expand at a solid pace in 2014 and the next few years,” the nonpartisan agency’s report said. “Beyond 2017, CBO expects that economic growth will diminish to a pace that is well below the average seen over the past several decades.”
The CBO projects the jobless rate will be at 6.7 percent in the fourth quarter of 2014 and 6.3 percent in the final three months of next year. The rate fell to 6.7 percent in December, a five-year low, as people left the labor force.
The Fed will end its program of buying long-term Treasuries and mortgage-backed assets in the second half of this year, the agency predicted. The federal funds rate, which has been near zero since December 2008, will stay there until the second half of 2015 before rising “at a rapid clip,” reaching 3.9 percent by the end of 2017.
“During the next few years, considerable slack will persist in the labor market, and inflation will stay below the Federal Reserve’s goal, so monetary policy will continue to support economic growth,” the CBO said.