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CBO 2013 Outlook: Slow Growth, Smaller Deficits

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Three weeks to go before the ax begins to fall on $85.3 billion in discretionary spending this year if Congress and the White House can’t agree on an alternate budget deal. Among the programs on the cutting block: defense, food safety inspections, Head Start and more.

Neither political party wants these cuts to take effect even though both agreed to them in a 2011 budget deal, and Tuesday President Obama Obama called on lawmakers to substitute the so-called “sequestration” cuts with a package of limited spending cuts and tax reforms.

Republicans didn’t bite. “The president’s proposal is nothing more than another tax hike to pay for more Washington spending,” said Dave Camp, chairman of the House Way and means committee.

Also on Tuesday the Congressional Budget Office released its latest Budget and Economic Outlook, which showed the deficit falling below $1 trillion for the first time in five years. The CBO also said the 2013 deficit will shrink as a share of GDP to 5.3% — the smallest percentage since 2008— and continue shrinking to 2.4% of GDP by 2015 before it begins to grow again.

Related: 'Fiscal Cliff Was a Head-Fake, Budget Woes are HEre to Stay: David Stockman

Growth was projected at 1.4% this year, rising to 3.4% in 2014 and averaging 3.6% from 2015 through 2018. All these CBO numbers assume the sequestration cuts will take effect.

Former CBO Director Douglas Holtz-Eakin, who served president George W. Bush, says the CBO report may suggest why President Obama has so far refused to agree to big cuts in Medicare or Social Security — which Republicans favor. “If you look at what the CBO said this president can make it through 2016 with deficits coming down because of the economic recovery, with debt to GDP coming down because of that recovery, but his successor and those after that face a real problem.”

Related: Fiscal Cliff Woes Caused GDP Contraction: Heidi Moore

Holtz-Eakin, now president of the American Action Forum, says the CBO report also shows why entitlements will have to be cut eventually. Even after $600 billion in tax increases agreed to by the president and Congress the CBO is projecting $7 trillion in deficits over the next 10 years. “That really illuminates the limits of what has been done on that side of the ledger…and there’s not a great appetite for more. That means things have to happen on the spending side.”

Related: Health Care Spending Cuts are Key to Controlling the Deficit: Alan Blinder

Holtz-Eakin says revenues could be part of the political solution if raising revenue comes from comprehensive tax reform with a broader base and lower rates, but not if it comes from raising rates or just closing loopholes. He admits that there has been progress on the deficit but “only in the most near-term sense and at a very slow pace [but] zero progress on our long-term term structural problems. That’s the big challenge.”

It's as much a political challenge as an economic one.

The President and Democratic congressional leaders argue for more revenues from eliminating corporate loopholesand deductions for higher-income taxpayers. Republicans are loathe to raise revenues without broader tax reform that lower rates and favor more spending cuts especially in big entittement programs like Medicare and Social Security to instead.

That leaves the budget debate in Washington pretty much where it's been for years, except now the deficit is smaller in the short-term.

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