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Improving U.S. budget may temper zeal for more cuts

Improving U.S. budget may temper zeal for more cuts

BUDGET BATTLE: The Congressional Budget Office is expected to revise downward its deficit forecasts over the next 10 years. Many analysts believe that major deficit reduction is highly unlikely before President Barack Obama leaves office in 2017, and lower deficit forecasts could reinforce that view. Photo: Reuters

By David Lawder

WASHINGTON (Reuters) – New U.S. budget deficit estimates due on Tuesday will likely show a rapidly improving fiscal picture over the next few years, contributing to a waning appetite in Washington for further budget cutting.

The Congressional Budget Office is expected to revise downward its deficit forecasts over the next 10 years. Many analysts believe that major deficit reduction is highly unlikely before President Barack Obama leaves office in 2017, and lower deficit forecasts could reinforce that view.

The CBO in May last year forecast a $560 billion deficit for fiscal 2014, which ends September 30. That matches the median estimate from 29 private economists polled by Reuters in January, but some of those forecasts came in as low as $400 billion.

The fiscal 2013 U.S. deficit fell to $680 billion after four straight years of $1 trillion-plus deficits.

An improving economy coupled with strong stock market gains and corporate profits last year are expected to boost spring tax collections as Afghanistan war costs and unemployment-related outlays wane. A recovering housing market also may increase contributions from government-controlled mortgage finance firms Fannie Mae and Freddie Mac.

The new budget estimates also may reflect slower growth in health care costs, which could reduce projected costs for big federal programs such as the Medicare health program for older Americans.

But these trends start to reverse later in the decade as more members of the massive Baby Boom generation retire and draw benefits.

“In the short run, the numbers have significantly improved,” said Shai Akabas, an economist at the Bipartisan Policy Center. “But that reverses in the long run because of the growing cost of the entitlement programs” such as Medicare and the Social Security retirement program.

By 2022, deficits could be back near $900 billion, according to the last CBO estimates – a trend which is not expected to change with the latest forecast unless Congress raises taxes or cuts benefits.

“I worry if these numbers look better, it’s going to lead to complacency,” said Greg Valliere, an analyst with Potomac Research Group, which advises investors on Washington politics. “The problem would be ignored for two to three years.”

BUDGET RHETORIC COOLS

After three years of bitter budget fights that culminated in a 16-day government shutdown over funding last October, the budget rhetoric already is cooling.

Republicans in the House of Representatives have thus far refrained from making any major demands over a debt limit increase that the U.S. Treasury maintains is needed by late February.

At a retreat last week, House Republicans agreed on the need to raise the borrowing limit, but did not settle on any specific demands, a party aide said, adding, “The general feeling was that no one wanted it to be a showdown like last time.”

On Monday, Treasury Secretary Jack Lew said that the improvement in the U.S. fiscal outlook had bought Washington time to deal with the larger, structural problems.

“I’m not sure this is the year for the long-term fiscal challenge to be dealt with,” Lew said at a Bipartisan Policy Center event. “We have a little time to deal with the longer-term.

Ethan Siegal, who heads the Washington Exchange and also advises institutional investors, predicted there would be no debt ceiling crisis and said fiscal issues were “pretty much a non-event” for 2014.

His advice for those still hoping for a “grand bargain” to reduce federal benefits costs or raise tax revenues: “Take a chill pill and wait until 2017. Nobody is truly interested in taking on the Medicare program.”

(Reporting By David Lawder; Editing by Caren Bohan and Lisa Shumaker)

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