The Congressional Budget Office's updated budget report, which was released Tuesday, could alter both the substance and psychology of this year's fiscal debate, injecting even more uncertainty into the coming budget battle.
In its new report, the CBO said it expects the fiscal year 2013 budget deficit to fall to $642 billion, sharply below the $845 billion it estimated in February, and dramatically lower than the $1.1 trillion deficit in FY'12.
"The decline in the projected deficit for 2013 stems largely from a boost in estimated revenues as well as from expected payments to the Treasury by Fannie Mae and Freddie Mac," the CBO report said.
The CBO report shows markedly lower deficits over the entire decade than did its last report in February. But the CBO emphasized the nation's fiscal challenges are far from over.
"Budget shortfalls are projected to increase later in the coming decade, reaching 3.5% of GDP in 2023, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt," the CBO report said.
The CBO report seems likely to affect the fiscal debate in two specific ways.
First, on a practical level the improved fiscal outlook is certain to delay when the nation will have to increase its statutory debt ceiling. Various lawmakers and budget experts have said the debt ceiling will not need to be increased at least until September or October.
Debt ceiling legislation has long been assumed to be the next deadline that will trigger a debate and specific legislation on fiscal matters.
Second, the CBO report seems certain to affect the psychology of the fiscal debate. While the report makes it clear that long-term fiscal challenges remain almost as severe as ever, some lawmakers will seize on the dramatically improved deficit numbers as evidence that current policies are working and there is no need for another round of deep spending cuts.
House Speaker John Boehner has in recent briefings hinted that he might link debt ceiling legislation to tax reform rather than another round of spending cuts.
In its report, the CBO estimates deficits of $560 billion in FY'14, $378 billion in FY'15, $432 billion in FY'16, $482 billion in FY'17, and $542 billion in FY'18. Looking further ahead, the CBO estimates deficits of $648 billion in FY'19, $733 billion in FY'20, $782 billion in FY'21, $889 billion in FY'22, and $895 billion in FY'23.
According to CBO, for the FY'14 through FY'18 period, the U.S. will have $2.39 trillion in total deficits and for the FY'14 through FY'23 period, the cumulative deficits will total $6.34 trillion.
In its February report, the CBO estimated cumulative deficits from FY'14 through FY'18 to be $2.66 trillion and $6.95 trillion for the FY'14 through FY'23 period.
Several budget groups have warned that the new CBO deficit estimates should not be taken as evidence that the U.S.'s fiscal challenges have changed in a fundamental way.
"This is a good sign, as it shows an economic recovery that is beginning to truly take hold," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, in a statement.
"However, the rosier-than-expected near-term projections do not change the fact that rising health care costs, an aging population, Social Security's looming insolvency, and ever increasing interest payments will greatly expand the national debt as a share of the economy," she said.
Bob Bixby, the executive director of the Concord Coalition, also warned against fiscal complacency.
"A lower deficit is good news but hardly the end of the story. For the most part, it reflects a recovering economy and other factors that do not affect the long-term structural mismatch between spending and revenues," Bixby said in a statement.