The deficit — the annual gap between taxes and spending — is projected to fall to $845 billion this year, the first time it has come in under $1 trillion since 2008.
The improvement in the 2013 deficit is due in large part to tax increases adopted Jan. 1 and to the automatic spending cuts, known as the “sequester.” Together, the CBO said, those policies are expected to shave about 1.25 percentage points off economic growth this year and to cost the nation about 1.5 million jobs.
Obama said that he is committed to a broad effort to restrain the national debt and that past White House proposals to rein in Medicare costs and increases in Social Security benefits “are still very much on the table” as part of that effort.
But with the sequester due to hammer the fragile economic recovery in less than a month, the president said Congress should take quick action on a short-term measure to replace it, giving policymakers more time “to finish the job of deficit reduction.”
“Congress is already working towards a budget that would permanently replace the sequester. At the very least, we should give them the chance to come up with this budget instead of making indiscriminate cuts now that will cost us jobs and significantly slow down our recovery,” Obama said during an appearance in the White House briefing room.
“So let me just repeat: Our economy right now is headed in the right direction, and it will stay that way as long as there aren’t any more self-inflicted wounds coming out of Washington.”
The CBO expects the recovery to be more robust in 2014, with economic growth approaching 3.5 percent by the end of the year. But an economy subdued by government austerity is likely to have a jobless rate above 7.5 percent for a sixth straight year, the CBO said — the longest period in 70 years with unemployment above that level.
“As we look across the economy, we see momentum building,” CBO Director Douglas Elmendorf told reporters. But this year spending cuts and tax increases are forecast to “offset most of that gathering strength in the economy.”
Replacing the sequester for one month, without increasing deficits, would require about $12 billion in alternative savings. Obama declined to outline his proposal, immediately drawing fire from Republicans. The president has made clear that he expects wealthier Americans and industries with special tax advantages to shoulder some of the burden.
House Democrats have proposed replacing this year’s sequester cuts, worth about $85 billion through the end of September, with equivalent savings spread out over the next decade. Those include tax increases on millionaires and oil and gas companies, as well as cuts in farm subsidies. Senate Democrats are working on a similar plan.
Many Republicans also want to replace the sequester, particularly about $45 billion in cuts to the Pentagon in 2013 that defense officials say would devastate the military. A report last week found that the economy contracted in the fourth quarter of 2012, in part because of sharp reductions in defense spending amid concerns about the sequester.
But House Speaker John A. Boehner (R-Ohio) said Tuesday that the GOP would oppose any effort to replace the cuts with tax increases.
“There is a better way to reduce the deficit, but Americans do not support sacrificing real spending cuts for more tax hikes,” Boehner said in a statement.
The likelihood that they would have to compromise with Democrats to replace the sequester has led to a growing inclination among Republicans to simply pocket the savings and move on to other battles.
House Budget Committee Chairman Paul Ryan (R-Wis.) has predicted that the sequester will hit on schedule, making it easier for conservatives to approve a plan later in March to prevent a government shutdown. Tuesday, a parade of conservative lawmakers took to the House floor to argue for that outcome.
Chris Chocola, a former Republican lawmaker who now heads the influential Club for Growth, said in a statement: “Republicans and Democrats voted for the debt limit deal that included the sequester, and President Obama signed it into law. They should keep their promise to the taxpayers. The cuts that were promised in the sequester should be done, in whole, this fiscal year.”
Caps as well as cuts
The sequester was adopted as part of the 2011 battle to raise the federal debt limit. Lawmakers agreed to two forms of spending cuts: caps that would trim agency budgets by $1 trillion over the next decade, and automatic cuts of $1.2 trillion that would slice every government account equally, across the board, unless policymakers could agree on a broader and more sensible debt-reduction plan.
The debt-limit deal, along with tax increases enacted Jan. 1 and other spending cuts, has reduced the projected accumulation of debt over the next decade from about $10 trillion to about $7 trillion, according to the CBO, and will stabilize borrowing at around 76 percent of the overall economy by the end of this year.
But these steps still leave the U.S. debt at its highest level in history, except for the period after World War II. And the CBO predicts that the debt will begin rising rapidly again in the next decade absent sharply higher taxes or major changes to the big drivers of future borrowing: Medicare, Medicaid and Social Security.
Meanwhile, the cuts adopted so far may prove hard to sustain, the CBO said. The “fiscal cliff” deal postponed the sequester for two months by making unspecified future cuts to agency budgets and counting revenue from a tax gimmick involving Roth IRAs.
Even without the sequester, the budget caps adopted in 2011 require lawmakers to shrink agency spending to 5.8 percent of GDP in 2023 — the lowest level since at least 1962, when such data were first recorded.
“While it’s critical for us to cut wasteful spending, we can’t just cut our way to prosperity,” Obama said Tuesday. “Deep, indiscriminate cuts to things like education and training, energy and national security will cost us jobs, and it will slow down our recovery.”