Quiet Before the Storm: CBO Reports $642 Billion Deficit in 2013
Romina Boccia /
At $642 billion, the Congressional Budget Office (CBO) reports, the 2013 deficit will be lower by $200 billion than previously forecast.
In February, the CBO projected a deficit of spending over revenue of $845 billion, but a large and temporary boost in revenues is pushing that figure down.
Like the quiet before a storm, lawmakers should not take this as a signal to grow yet more complacent about reining in exploding spending, especially on the nation’s entitlement programs. The nation’s long-term spending trajectory remains on a fiscal collision course. Spending on Social Security, Medicare, Medicaid, and Obamacare is on track to overwhelm the federal budget. The unfunded obligations in Social Security and Medicare alone are three times the size of the current outstanding national debt—and they’re growing.
Among the factors temporarily reducing the deficit are:
- Expiration of the payroll tax holiday, which raised taxes for the average earner making $50,000 a year by $1,000 in 2013;
- Tax increases on upper-income earners that went into effect with the fiscal cliff deal in January and led some earners to realize income late in 2012 ahead of higher tax rates, pushing up receipts in fiscal year 2013;
- Higher revenues from corporate income taxes;
- Higher payments to the Treasury from Fannie Mae and Freddie Mac, as their net worth appreciated this year; and
- Lower spending on certain benefit programs, such as lower disability benefits (as fewer people are applying) and minor technical reductions in Medicare and Medicaid.
The CBO now predicts that revenues will climb to 17.5 percent of gross domestic product (GDP) in 2013, reaching 18.3 percent by 2014 and 18.9 percent on average for the decade. But this assumes about a $1 trillion tax increase under the CBO’s baseline projections from a number of tax provisions that are set to expire but that Congress has mostly extended every year. Without this massive tax increase, revenues would still reach 18.5 percent on average through 2023. Reaching this historically normal average level under current policy is a strong indicator that tax revenues are not the source of Washington’s budget woes.
Instead, higher revenues continue to chase ever-higher spending. Assuming that there is no “doc fix” in future years and that sequestration is allowed to take its course, spending would grow from $3.5 trillion (21.5 percent of GDP) in 2013 to $5.9 trillion (22.6 percent of GDP) in 2023, an increase of 69 percent. And deficits would begin growing again by 2017, reaching close to a trillion dollars by 2023.
If lawmakers failed to enforce sequestration’s spending reductions—as Senate Appropriations Committee Chairwoman Barbara Mikulski (D–MD) is proposing—spending and deficits would be significantly higher than under the CBO’s baseline. Under the alternative fiscal scenario, the total deficit from 2014 through 2023 would increase from $6.3 trillion to $8.8 trillion. This would drive the publicly held debt from the already high level of 74 percent of GDP in 2023 to 83 percent—a high last seen in 1948.
The U.S. government will hit its debt ceiling deadline on May 19, providing lawmakers with a reminder to arrive at substantive spending reforms by the fall, when borrowing would hit a hard limit after the Treasury exhausts its toolset of extraordinary measures to continue spending. Congress should not raise the debt ceiling without first putting spending on a path to balance within 10 years. Deficits may fall in the very short term, but the U.S. budget outlook is still very much in distress. A storm is brewing under lawmakers’ noses.