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U.S. Budget Gap Narrows to Smallest Since 2007, CBO Says

By Kasia Klimasinska
August 27, 2014 12:14 PM EDT 278 Comments

The U.S. budget deficit will narrow less than forecast this year even as it falls to the lowest level since 2007 as a share of the economy, according to the Congressional Budget Office.

The projected shortfall will be $506 billion in the 12 months ending Sept. 30, compared with an April prediction for $492 billion and a $680 billion gap posted last year, the nonpartisan CBO said today in a report. In 2015 it’s projected to shrink for a sixth straight year, to $469 billion, capping the longest stretch of fiscal improvement since 2000, near the end of an era of surpluses.

A declining jobless rate that’s lifting individual and corporate tax revenue will help narrow the gap next year to about a third of the record $1.4 trillion deficit reached in 2009, according to CBO data. The report today shows a fiscal picture that’s improving in the near term before starting to deteriorate, with deficits swelling again starting in 2018.

“The federal budget deficit has fallen sharply during the past few years and is on a path to decline further this year and next,” CBO Director Douglas Elmendorf said at a press conference in Washington today. “But later in the coming decade, under current law, the gap between spending and revenues would grow again relative to the size of economy, and federal debt would climb.”

The deficit will be 2.9 percent of gross domestic product this year and 2.6 percent next year, the CBO said. In 2007, it was 1.1 percent of GDP.

Lower Yields

U.S. Treasuries advanced as the collapse of yields in Europe prompted investors to reach for higher-yielding U.S. debt. The Treasury 10-year yield dropped three basis points, or 0.03 percentage point, to 2.37 percent at 12:11 p.m. New York time, according to Bloomberg Bond Trader data.

The CBO report predicted the economy will expand 1.5 percent in the fourth quarter of this year compared with the same period in 2013, less than half the 3.1 percent growth the CBO predicted in February.

“The economy will grow slowly this year, on balance, and then at a faster but still moderate pace over the next few years,” the CBO said.

Unemployment this year will average 6.2 percent before declining to an average of 5.9 percent next year, it said. Slack in the labor market “is expected to largely disappear by the end of 2017,” the CBO said.

The CBO projects the rate on three-month Treasury bills will remain near zero until the second half of 2015, and increase to an average of 2.1 percent in 2017. The yield was 0.03 percent at 12:10 p.m. today.

Inflation Outlook

Monetary policy will “continue to support an improvement in economic growth during the next few years because some slack will persist in the labor market and inflation will stay below the Federal Reserve’s goal,” the CBO said.

The U.S. budget deficit over the first 10 months of this fiscal year was $460.5 billion, 24 percent slimmer than it was during the same period a year earlier, according to Treasury data released earlier this month. Revenue over that period rose 8 percent compared with a year earlier, while spending gained 1.2 percent, the Aug. 12 report showed.

To contact the reporter on this story: Kasia Klimasinska in Washington at kklimasinska@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net Brendan Murray

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