Economic Outlook: Budget matters

The Congressional Budget Office said the U.S. deficit had dropped considerably since 2009 but it will rise by the end of the decade.

For the current fiscal year that ends Sept. 30, the deficit is projected to fall to $845 billion, dropping to less than $1 trillion for the first time in five years and reaching a level that is about half of what it was in 2009.

This year, the deficit will fall to 5.3 percent of the gross domestic product, a significant drop from last year's 7 percent. It is expected to improve further, the non-partisan agency said.

Then, as it turns out, the other shoe will drop and the reasons behind some of that cannot be helped. Baby boomers are aging and they present an increasingly expensive burden on the budget. There is no getting around that one.

At the same time, any deficit adds to the nation's debt, which is the sum total of all the annual deficits plus interest payments. By 2023, the CBO said Tuesday, the debt will reach 77 percent of the gross domestic product, if there are no changes to current law.

The CBO is careful to say it does not predict; it only projects. It looks at current law and extrapolates the numbers, spelling out some options, but not predicting whether Congress will alter spending or revenue. This is a "buyer-beware" report. With no changes ahead, the U.S. debt is headed toward unsustainability, the CBO said. Further, as borrowing costs grow, there will be less cash on hand to deal with a fiscal crises, to pay for the unexpected or to control borrowing.

Things get worse at an exponentially increasing rate, which points to what some would consider obvious: This is a tough pill to swallow, but it will become increasingly more painful to fix if steps are not taken now.

In the short term, the same rules apply. The CBO said January's tweak of the tax code, increasing taxes on individuals making $400,000 per year or more and households with incomes of $450,000 or more and the cessation of the payroll tax cut would have immediate ramifications. There will be less incentive for businesses to hire given the erosion of discretionary funds for middle class wage earners and for the wealthy, who, as they should, generally outspend everyone else.

Without predicting outcomes, the CBO pointed to three immediate decisions that could change the game. One is the $85 billion in across-the-board spending cuts that are set to kick in March 1. Budget hawks will try to increase that figure or leave it untouched. President Barack Obama Tuesday offered to postpone some of the cuts, with Republicans ready to agree so long as an equal level of cuts are penciled in elsewhere.

Congress is set to decide March 27 whether to raise the debt ceiling, which would allow the government to keep paying its bills. While that would seem to be a non-issue, Republicans now see the measure as a convenience tool for pressuring the White House on other budget decisions.

Then, by April 15, lawmakers must agree on the U.S. budget, at least in outline.

In international markets the Nikkei 225 index in Japan soared 3.77 percent while the Shanghai composite index in China was flat, up 0.06 percent. The Hang Seng index in Hong Kong added 0.47 percent while the Sensex in India shed 0.1 percent.

The S&P/ASX 200 in Australia gained 0.78 percent.

In midday trading in Europe, the FTSE 100 index in Britain lost 0.06 percent while the DAX 30 in Germany gave up 1.45 percent. The CAC 40 in France dropped 1.44 percent while the Stoxx Europe 600 shed 0.58 percent.
ANTHONY HALL || United Press International

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