Spending cuts narrow U.S. deficit to less than $1T

U.S. government spending cuts are having their desired effect at narrowing the country's deficit, but they're also slowing the economy, the agency in charge of budget estimates says.

While deficit is shrinking, so is economic growth, budget office says

The potential cost to America's economy of spending cutbacks in the decade to come has been estimated as half America's current GDP. (Gary Cameron/Reuters)

U.S. government spending cuts are having their desired effect at narrowing the country's deficit, but they're also slowing the economy, the agency in charge of budget estimates says.

The Congressional Budget Office says the U.S. government is on track to post a deficit of $845 billion this year. That's down from $1.1 trillion last year and enough to shrink the figure to its smallest point since 2008.

But the cost of that belt-tightening is that the economy is not going to grow as quickly as it otherwise would. The non-partisan CBO says the U.S. economy will only expand by 1.4 per cent this year, less than the current inflation rate.

The round of spending cuts already underway or scheduled to be enacted in the coming months will serve to reduce consumer spending, cutting into business profits and cause them to hire fewer people.

Sluggish growth

When the impact of all the cutbacks are added up, the CBO says the total impact on America's potential output between 2017 and 2027 will be as much as half of the entire U.S. economy's size last year.

The CBO expects 2014 will mark the sixth consecutive year that America's unemployment will remain higher than 7.5 per cent — the longest period of time it's been that high in more than 70 years.

At that level, the deficit would be 5.3 per cent of the country's GDP. That's half the size it was in 2009, at the nadir of the global economic slowdown. As it stands, the U.S. is borrowing 24 cents for every dollar it spends.

Even with the current moribund U.S. economy, the CBO expects that ratio will keep dropping, to 2.4 per cent by 2015. But then the combination of increasing health care costs and higher interest payments to pay down the existing debt will see the deficit tick higher again.

If the U.S. stays on its current path, the agency projects that America's total debt-to-GDP ratio will be at 77 per cent in a decade's time. As recently as 2007, America had a debt-to-GDP ratio of 37 per cent. For comparison purposes, Canada's current ratio is about 33 per cent, while several European nations have a ratio in excess of 130 per cent.

Higher revenues possible

"Such high and rising debt would have serious negative consequences," the CBO said Tuesday. "Federal spending on interest payments would increase substantially … and total wages would be lower than they would be if the debt was reduced."

On the revenue side, the outlook for the U.S. economy is a little bit brighter. Mainly because of tax hikes implemented in late 2012, federal revenues will increase by roughly 25 per cent between 2013 and 2015 under current law, the CBO projects.

The report may prove to be fresh fodder for America's ongoing acrimonious debate over balancing the books.

"The CBO's report is yet another warning that we need to get spending under control. The deficit is still unsustainable," failed Republican vice-presidential candidate Paul Ryan said. "By 2023, our national debt will hit $26 trillion. We can't let that happen. We need to budget responsibly, so we can keep our commitments and expand opportunity."

 Patty Murray, the Democratic Senator from Washington countered: "We need to continue working to cut spending responsibly, protect and strengthen programs like Medicare, and raise revenue by closing tax loopholes that the wealthiest Americans and biggest corporations take advantage of."