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In U.S., budget crises surge while deficits shrink

AFP-JIJI

It is an American paradox: The U.S. public deficit shrank this year at the fastest pace in nearly half a century, driven more by budget crises than real political will.

The numbers published Wednesday in Washington were enough to turn European countries operating austerity budgets at least a little greenish with envy.

The U.S. deficit for fiscal 2013, which ended Sept. 30, narrowed 37.5 percent from a year earlier, shaving the deficit to 4.1 percent of gross domestic product.

The deficit-to-GDP ratio was 7.0 percent in 2012 after hitting more than 10 percent in 2009, when the government was spending heavily to counter the worst recession in decades.

The Obama administration, however, has kept a low profile on the improving deficit. The Democratic president himself has said little about it, leaving his Treasury secretary to deliver the sales pitch.

“Under President (Barack) Obama, the nation’s deficit has fallen for the past four years, the fastest pace of decline over a sustained period since World War II,” noted Treasury chief Jacob Lew.

But he offered no forecast for the deficit in the new 2014 fiscal year.

The reasons for the discretion are simple: The administration did not want such a big drop in 2013, for fear it would snuff out the still-fragile growth in the economy and weaken the slowly recovering jobs market. But in fact it hardly has any choice.

Lacking a budget agreement between Republicans and Democrats, federal spending has been slashed in automatic, massive cuts since March, known as sequestration. Conceived in mid-2011 during the previous debt-ceiling crisis, the spending cuts were to be an unthinkable option that would force the two sides to strike a deal. But a compromise did not materialize ahead of the deadline.

The result: Public spending in fiscal 2013 fell 2 percent, notably in defense and education.

“The administration has been saying all along that it’s too big of a cut this year and that they were not happy about that,” said Joseph Gagnon, a former Treasury official.

Jacob Kirkegaard, a researcher at the Peterson Institute for International Economics, takes a broad view. According to him, the forced austerity cure could almost be seen as a victory for opposition Republicans who are constantly seeking a reduced role for the federal government.

“In some ways you can argue that the Republicans in Congress have won the debate . . . they have succeeded in reducing the U.S. federal deficit quite dramatically against the express wishes of the Obama administration,” he said in an interview.

The Democratic camp is standing firm. A Maryland lawmaker in the House, Rep. Chris Van Hollen, the top Democrat on the Budget Committee, said Thursday a “key priority” of budget negotiations that resumed this week should be “replacing the job-killing sequester and adopting top-line budget numbers.”

In October, the U.S. scraped through a bitter budget and debt-ceiling battle that threatened to send the country into default and forced the 16-day partial federal government shutdown, but only by using stopgap measures that pushed the battle deadlines forward.

If a fresh budget deal is not found by Jan. 15, when the temporary funding expires, a new round of sequester spending cuts will hit, a potentially damaging action warned against by the Federal Reserve as well as the International Monetary Fund.

That would be the worst outcome, Gagnon said, pointing out the temporary budget fix should at least allow the U.S. to find something better.

“We did a stupid thing and we survived,” he said. “It’s certainly like if you had to do something unpleasant and painful, maybe you did it in the wrong way, you did it too fast.

“But once it’s done at least you can relax a bit and now the future looks better because we don’t have to do that again.”