Pressure Easing for Deficit Cutting After CBO Report, Economists Say

Published May 15, 2013. By Robert Schroeder.

Bank of America Merrill Lynch analysts see a possible easing of political pressure about raising the government’s debt limit and reining in the deficit, on the heels of fresh estimates about the reduction in the size of the government’s red ink.

On Tuesday, the Congressional Budget Office cut its estimate of the current year’s deficit by $200 billion to $642 billion, thanks to higher-than-expected revenues and an increase in payments to the Treasury by mortgage-finance companies Fannie Mae and Freddie Mac. The new estimate represents a deficit- to-GDP ratio of 4%, and the smallest deficit since 2008.

The B of A analysts said the lower deficit figures widen the scope of compromise for a budget deal between Democrats and Republicans, “since lower deficits increase the ability to include in the bargaining process provisions that otherwise might modestly widen the deficit.” Separately, Joseph Lavorgna of Deutsche Bank said that the improving finances increase the probability that the automatic spending cuts known as the sequester will be “watered down.”

But while members of both parties hailed the improvement in the short-term deficit, they stuck to their talking points even after the CBO report came out. Republicans demanded more spending cuts and Democrats called for “balanced” deficit reduction – meaning spending cuts and tax increases.

“The good news from today’s CBO report is that the near-term deficit is improving, but much of the improvement is a result of temporary factors,” said Rep. Chris Van Hollen of Maryland, the top Democrat on the House Budget Committee. “We must avoid austerity measures that would slow job growth in the short term, as we also work to reduce the long-term deficit in a balanced way.”

Sen. Jeff Sessions of Alabama, the top Republican on the Senate Budget Committee, said the country still faces a long-term problem. “Rather than having higher taxes chase ever-higher spending, Congress must commit to balancing the budget over the next 10 years through prudent reductions in the growth rate of spending.”

The lower deficit and a later deadline for raising the debt ceiling will almost certainly postpone a crisis atmosphere in Washington about the debt and deficit. Lawmakers frequently act when faced with immediate deadlines, as last year’s fiscal cliff battle and several fights over “continuing resolutions” have shown.

Some budget experts, meanwhile, are urging Congress to act now.

“Conventional wisdom seems to be that nothing will happen until the debt limit brings on another crisis later this year,” said Robert Bixby, executive director of the Concord Coalition. “That reckless strategy is likely to end in another short-term ‘fix’ that accomplishes little other than political face-saving.”