BudgetFederal budget deficit falling fast – perhaps too fast, some economists say

In each of the last four years the federal budget has exceeded $1 trillion dollars every year. This year, however, the government’s annual deficit is falling faster than anyone thought it would. Some economists say  it may be falling too fast.

The Wall Street Journal reports that in a report release Tuesday, the Congressional Budget Office (CBO)  estimates that the deficit for the 2012-13 fiscal year, which ends 30 September, will drop to about $642 billion, of 4 percent of GDP — $200 billion lower than what the agency estimated in February.

The CBO report says that if the trend continues and the deficit continues to fall at the same rate, then  by 2015 the federal budget deficit could be just 2.1 percent of the gross domestic product, which most economists say would be easy to sustain in the long run.

In FY2009-10, the deficit was more than 10 percent of GDP.  

“Revenues have been strong as the economy has outperformed a bit,” Joel Prakken, a founder of Macroeconomic Advisers, a forecasting firm based in St. Louis, told the New York Times.

The drop in the deficit is a result of the government’s tax revenue increases as well as cuts in domestic and military programs. Analysts say that the fact that economy continues to perform below expectations, and that unemployment is still high, are inications that the deficit could be falling too fast.

“It’s good news for the budget deficit and bad news for the jobs deficit,” Jared Bernstein of the Center on Budget and Policy Priorities, told the Times. “I’m more worried about the latter.”

The $200 billion reduction is a result of higher than expected tax payments from businesses and individuals, as well as higher payments from Fannie Mae and Freddie Mac, which were taken over as part of federal bailouts.

Other analysts believe the deficit will remain a challenge due to rising health care spending and debt service payments.

“It takes a little heat off, and undercuts the sense of fiscal panic that prevailed one or two years ago when the debt-to-GDP ratio was climbing,” Prakken, told the Times. “These revisions probably release some pressure to reach a longer-term deal, which is too bad, because the longer-term problem hasn’t gone away.”

Many economists argue that the spending cuts and tax increases Congress agreed to are slowing the recovery, preventing economic growth from occurring at a more accelerated pace.

This is also the view of the International Monetary Fund (IMF), which said the U.S. pace of deficit reduction is “overly strong,” and that Washington should delay some of its budget cuts, thus allowing for a quicker pace of recovery, ad focus instead on fashioning a longer-term strategy to reduce or eliminate future deficits.

The CBO report, noting the spending on health care has slowed, is also revising down, by hundreds of billions of dollars, the projected government spending on health care in the next ten years.