Budget battle ends up with slashed deficit, no recession

Challenges still ahead for Congress, Obama

The federal deficit is down 37.6 percent so far this fiscal year, according to Treasury Department statistics released Monday, showing the government has made progress in stanching the spread of red ink while managing to avoid a double-dip recession.

Both sides of the political aisle had warned that austerity would doom the nascent economic recovery. Republicans predicted that higher taxes would snuff out growth, while President Obama and fellow Democrats said lower government spending would choke off stimulus.

But through the first 10 months of fiscal year 2013, the deficit has dropped to $607.4 billion, down from $973.8 billion at this point in 2012, and leaving Mr. Obama poised for the first sub-$1 trillion deficit of his tenure.

“It seems we’ve been able to lower the deficit without killing the economy,” said Robert L. Bixby, executive director of the Concord Coalition, a budget watchdog. “One can argue about if it’s holding back the economy or not, but the economy continues to grow about the same pace it was.”

In achieving that success, the U.S. has avoided the kinds of problems that have plagued the United Kingdom and some other European countries that have tried austerity budgets.

While tax increases, spending cuts and higher receipts from economic growth are all part of the improved deficit picture, analysts said it’s too early to pinpoint how much each has contributed.

Still, Romina Boccia, who studies the federal budget for the Heritage Foundation, said given the state of the economy, it’s likely that the rise in the payroll and upper-income tax rates Jan. 1 played a bigger role than economic growth.

“We do know that the economy is growing very slowly. We also know that job growth is not where it should be — growing too slowly. Given that we still have a depressed economy, I think the tax hikes play a big role,” she said.

Total receipts have grown $278.5 billion, or 13 percent, to reach $2.287 trillion so far this fiscal year, which ends Sept. 30.

On the other side of the ledger, the government is no longer pumping money into Fannie Mae and Freddie Mac. Instead, the mortgage finance giants are paying dividends to the U.S. Treasury, marking an $87 billion swing toward the positive so far in 2013.

The good news, however, shouldn’t obscure the challenges ahead, Mr. Bixby said.

“We’re still, with all that, running a deficit that’s going to be between $600 and $700 billion, around 4 percent of the economy, and that’s pretty substantial,” he said. “It’s not going to keep coming down that fast. We’ve got structural issues in place like the retirement of the boomers.”

It’s not clear how, or whether, Congress and Mr. Obama will grapple with those challenges.

Mr. Obama has argued for higher taxes and higher spending, arguing that the government needs the revenue and that spending it on infrastructure and education will help bolster the economy in the long term.

Republicans have balked, saying the last round of stimulus spending failed to salvage the economy. They also say they have raised taxes as far as they can after the “fiscal cliff” deal at the beginning of this year caused payroll taxes to rise for all workers, and income tax rates to rise for the wealthiest.

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