US Budget Deficit Lower, But ‘Fiscal Cliff’ Looms

According to the latest data from the Congressional Budget Office (CBO), the US budget deficit for the fiscal year ending September 30th is now forecast at $1.1 trillion. That’s lower than the deficit forecast of $1.2 trillion that CBO made in March. Some other facts from the CBO:

At 7.3 percent of gross domestic product (GDP), this year’s deficit will be three-quarters as large as the deficit in 2009 when measured relative to the size of the economy. Federal debt held by the public will reach 73 percent of GDP by the end of this fiscal year—the highest level since 1950 and about twice the share that it measured at the end of 2007, before the financial crisis and recent recession.

And that’s the good news. The bad news is that unless Congress does something to forestall the tax and spending policies due to take effect on January 1st, the picture gets worse fast.

The CBO considers the effect on the federal budget of the looming ‘fiscal cliff’ and concludes that the deficit will shrink to $641 billion in 2013 and that “[s]uch fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession.” Real GDP growth would only rise by 0.5% and the unemployment rate would rise to about 9% by the end of 2013. The CBO expects both inflation and interest rates to remain low even if the US economy falls off that fiscal cliff.

Under a different scenario where the expiring tax cuts are “extended indefinitely,” AMT is indexed for inflation after 2011, Medicare payments to doctors are frozen, and automatic spending cuts due in January do not occur, the federal deficit in 2013 would total $1 trillion. The upside is that the economy would grow by 1.7% and the unemployment rate would fall to about 8% by the end of 2013.

That’s the choice: bigger deficits or a recession. It’s not a pretty sight.

Paul Ausick