Don't Get Too Excited About the New, Smaller Deficit

The CBO report is yet another reason to focus on boosting the economy instead of cutting debt. 

The Congressional Budget Office announced today that the projected budget deficit for fiscal year 2013, which ends September 30, has fallen by more than 20 percent: Instead of $845 billion, it will be just $642 billion, or 4 percent of GDP. And by 2015, the deficit should be down to 2.1 percent of GDP, a sustainable level.

This is great news about this year. But it doesn't say very much about the long-term fiscal outlook. CBO's revisions cut this year's deficit by 1.3 percent of GDP, but they only shrink the next 10 years' projected deficits by 0.3 percent of GDP.

That's because the main factors cutting this year's deficit are one-time effects. Half of this year's deficit reduction comes from Fannie Mae and Freddie Mac, the mortgage giants that have been under federal conservatorship since 2008. They will make unexpectedly large dividend payments to the government this year, but that won't happen again.

The other half of this year's change comes from higher-than-expected revenues, which are also mostly a one-time spike. CBO believes that high tax receipts in April 2013 were due to high-income taxpayers shifting income into 2012 to get ahead of tax rate increases. Corporate tax receipts were also stronger than expected, which the CBO attributes to faster-than-expected reversion of corporate tax payments to normal after the recession, not to a sustained increase in corporate profits. As such, the CBO raised its revenue forecast by $105 billion for this year, but only by an average of $9.5 billion for each of the next 10 years.

There are some long-term improvements in the CBO report. It cut its forecast for Medicare and Medicaid spending by $162 billion over 10 years due to slowing growth in medical and long-term care expenses. It anticipates $86 billion less in Social Security spending because fewer people will go on disability insurance. And it expects $173 billion in reduced debt-service costs because this year's windfalls and the modestly better fiscal picture for the following decade will reduce government borrowing.

Broadly, the fiscal outlook is about the same as it was when the CBO last projected it in February: The deficit is declining toward sustainable levels in the medium term, while demographic and health-care cost challenges will cause it to grow too large in the long term if we do not make adjustments. The most important takeaway is that the rapid growth in government debt is ending; the CBO expects that we will spend all of the next decade with debt-to-GDP in a range of 71 to 76 percent.

Deficit doves are right to look at this report say it shows that deficit panic is unwarranted, and that policymakers should focus on boosting the economy instead of cutting debt. But they were right to say that before the report came out, too.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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    Josh Barro

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