The federal budget deficit will drop below $1 trillion for the first time in President Barack Obama's tenure in office, a new report said Tuesday.
The Congressional Budget Office analysis said the government will run a $845 billion deficit this year, a modest improvement compared to last year's $1.1 trillion shortfall but still enough red ink to require the government to borrow 24 cents of every dollar it spends.
The agency projected that the economy will grow just 1.4 percent this year if $85 billion in across-the-board spending cuts take effect as scheduled March 1. Unemployment would average 8 percent. Obama wants to ease the cuts by replacing them with new tax revenue and alternative cuts, but a clash is looming with Republicans who insist that last month's tax increase on wealthier earners will be the last tax hike they permit.
The report predicted the deficit would dip to $430 billion by 2015, the lowest since the government posted a $459 billion deficit is former President George W. Bush's last year in office. That would be a relatively low 2.4 percent when measured against the size of the economy.
But as more and more baby boomers retire and claim Medicare and Social Security and as Obama's health care law takes effect, deficits would move higher and again reach near $1 trillion in the latter portion of the 10-year window — despite the recently enacted tax increase on family income exceeding $450,000 and automatic spending cuts of about $100 billion a year. The package of spending cuts and tax increases are punishment for Washington's failure to strike a long-term budget pact.
"We need to continue working to cut spending responsibly, protect and strengthen programs like Medicare, and raise revenue by closing tax loopholes that the wealthiest Americans and biggest corporations take advantage of," said Senate Budget Committee Chairman Patty Murray, D-Wash.
Over the coming decade, the deficit would total $7 trillion but would move higher if lawmakers extend expiring business tax breaks and rescue doctors from cuts to their reimbursements under Medicare.
The report provided fresh fodder for Washington's familiar battles over the budget, deficits and debt. Obama inherited an economy in crisis and first-ever deficits exceeding $1 trillion. The 2009 deficit, swelled by the costs of the Wall St. bailout, hit a record $1.4 trillion, while the deficits of 2010 and 2011 both registered $1.3 trillion.
Economists say that too-high deficits and debt are a drag on the economy and could eventually precipitate a fiscal crisis like many European countries are experiencing.
"The CBO's report is yet another warning that we need to get spending under control. The deficit is still unsustainable," said House Budget Committee Chairman Paul Ryan, R-Wis. "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 promises his upcoming budget plan will balance by 2023, but that would require spending cuts of almost $1 trillion in that year alone.
The economy will grow slowly in 2013 and more rapidly next year, with unemployment projected to stay high, according to the report.
This year's growth is being hampered by a tax increase enacted in January and by automatic spending cuts scheduled to take effect this spring. CBO projects the economy will grow by just 1.4 percent this year but recover to 3.4 percent next year.
Unemployment is projected to stay above 7.5 percent through next year. That would be the sixth straight year above that level, the longest period of such high unemployment in 70 years, the report said.
Without the government's fiscal tightening, which includes the expiration of Obama's two-year, 2 percentage point cut in payroll taxes and the imposition of the automatic spending cuts, economic growth would be about 1.5 percentage points higher this year, the report said. However, CBO warns that future growth would be constrained if the government doesn't reduce future deficits.
The report warns that actual deficits could easily be higher since CBO is required to assume Congress sticks to the letter of the law.
The report says that health spending will continue to grow as Obama's health care law takes full effect. CBO said spending on major health care programs will surpass Social Security in 2014, as Obama's push to cover the uninsured goes into high gear. Major health care programs include Medicare, Medicaid, children's health insurance and the new subsidies to help uninsured Americans get coverage.
Although health care costs remain a major problem for the budget, a slowdown in the growth of medical spending is helping take away some of the immediate pressure. In 2012, federal spending for Medicare and Medicaid was about 5 percent below what CBO had projected only two years earlier. As a result, the agency has trimmed its long-range cost projections.
CBO also estimates that fewer uninsured people will get coverage under the health care overhaul — about 4 million fewer Americans. And about 7 million fewer will be covered by job-based health plans.
Tuesday's estimate says the health care law will reduce the number of uninsured by about 27 million people in 2022, as compared to last year's estimate of around 30 million fewer uninsured. CBO said it expects some people will be slow to take the new coverage when it becomes available in 2014, but that demand will pick up within a few years.
CBO also said it expects more employers to get out of the business of providing health insurance, particularly for low-wage workers, and instead pay fines to the government. Although employer-provided coverage will remain the mainstay for most employees, in 2022 there will be 7 million fewer covered by job based plans, the agency said.