Gov't fiscal outlook improving but only for now

By Tom Raum

Associated Press

Published: Tuesday, March 12 2013 12:00 a.m. MDT

FILE - The co-chairmen of the president's deficit reduction commission, Erskine Bowles, right, and Alan Simpson talk to reporters outside the White House in Washington, in this April 14, 2011 file photo after their meeting with President Barack Obama in the Oval Office. The $2.3 trillion less that Washington will be borrowing over the next decade takes the government much of the way toward the $4 trillion, 10-year goal set by Obama and the co-chairmen of his deficit commission, former Republican Sen. Alan Simpson and former Democratic White House staff chief Erskine Bowles.

Carolyn Kaster, File, Associated Press

Enlarge photo»

WASHINGTON — Despite constant budget wrangling and finger-pointing by the nation's policy-makers, the government's short-term fiscal outlook isn't all that bad. It's actually getting better — at least for now.

Washington is borrowing about 25 cents for every dollar it spends, down from over 40 cents just a few years ago.

The federal budget deficit will drop to $845 billion this year after topping $1 trillion for four straight years, the nonpartisan Congressional Budget Office projects. Even if Congress does nothing further to cut spending or raise tax revenues, deficits will continue to shrink — to $430 billion by fiscal 2015, the CBO said.

But, barring a major fix by the president and Congress, the government's finances will start to worsen again as the three major entitlement programs — Social Security, Medicare and Medicaid — become more and more expensive and unmanageable under the increasing weight of retiring baby boomers.

Recent budget improvements were helped along by increasing tax revenues as corporate America and many better-off Americans snapped back from the economic downturn and paid more in taxes. Stocks are setting new multi-year levels and corporate profits are soaring.

Yet the recent improvements on corporate and government ledgers haven't been shared by millions of working-class Americans. It's almost as if there were separate side-by-side economies.

Unemployment is still a high 7.7 percent nearly four years after the worst recession since the Great Depression officially ended, still far above the pre-recession levels of around 5 percent. Companies feel little pressure to raise wages since the pool of job seekers is large. Those with jobs are pressed to work harder, increasing productivity for corporations.

Companies also have benefited from the Federal Reserve's easy-money policies over the past four-plus years.

In keeping interest rates near zero and flooding financial markets with newly printed dollars, the Fed has helped drive up stock prices — partly at the expense of many retired people and other savers who've seen interest earnings on their bank accounts dwindle.

"The private economy is doing very well and is steadily improving," said Mark Zandi, chief economist at Moody's Analytics. "Earnings are at record levels, profit margins have never been wider. That's particularly true for large companies whose stock is traded."

Looking ahead, Zandi said: "I'm hopeful things will simmer down in Washington, and that the deficit will stabilize by the end of the decade and into the next decade. After that, it will start rising again."

Even before the $85 billion in automatic cuts started kicking in on March 1, government spending was shrinking because of the expiration of federal stimulus and other recession-fighting programs of Presidents George W. Bush and Barack Obama.

Steven Rattner, Obama's former "car czar," has criticized Obama for exaggerating in depicting the $85 billion sequester cuts as a disaster imperiling the nation. Obama has since toned down his rhetoric and reached out to congressional Republicans. That pleased Rattner.

"I said he should stop just saying the sky is falling, which he's done," Rattner tweeted.

Legislation passed by Congress over the past two years will reduce deficits by roughly $2.3 trillion over the next decade — two-thirds of it from spending cuts and one-third from more tax revenues.

The increased flow of cash to the government includes higher marginal income taxes on wealthy Americans from the New Year's "fiscal cliff" deal and the ending of the tax break for all workers on Social Security payroll taxes.

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