US deficits to shrink, but debt to deepen

WASHINGTON - The US budget deficit will drop 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 those 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 percent currently.

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 US 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 US 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 CBO said.

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.