How a Shrinking Deficit Means More Gridlock

A U.S. budget that's inching out of the red may make lawmakers even more obstinate.

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The U.S. budget is inching out of the red, according to two new reports released this week. On Thursday, the Treasury announced that the nation posted a $117 billion surplus in June. This came two days after the Congressional Budget Office announced that in the first nine months of this fiscal year, the budget posted a $512 billion deficit – nearly $400 billion smaller than the same period one year ago..

The declines in deficits are due to both economic improvement and belt-tightening. According to the CBO, fewer people receiving unemployment benefits meant fewer outlays. But sequestration also cut the deficit, with defense spending falling by $32 billion. In addition, government-sponsored mortgage giants Fannie Mae and Freddie Mac have been posting stronger numbers recently thanks to a recovering housing market, and paid $82 billion to the government thus far this fiscal year. Last week, the government reported receiving $66.3 billion in dividend payments from the companies.

The reasons for the smaller deficits are mixed, as are the opinions on whether all this deficit-cutting is either bad or good for the economy. But experts agree that the improved numbers bode poorly for a long-term fix to the nation's budget problems.

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"[T]he improved budget situation reinforces our view that a grand bargain is unlikely. The improved fiscal situation takes pressure off lawmakers to act boldly," writes Brian Gardner, senior vice president of Washington Research at investment bank Keefe, Bruyette, & Woods, in a commentary on the latest CBO figures. "Washington acts when there is a crisis and the improved budget situation gives the appearance of a lack of a crisis, at least in the short-term."

That means the latest indications of smaller deficits may be used as ammunition for anyone hoping to avoid budget compromise, says one expert.

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"Unfortunately, I think people who don't want to enter into a grand bargain will seize on anything that's out there to justify inaction," says Alan Viard, a resident scholar at the American Enterprise Institute and economist on George W. Bush's Council of Economic Advisors.

Of course, a crisis is not the only prerequisite to getting lawmakers to come together; one need look no further than the planned crisis of the fiscal cliff and subsequent sequestration cuts for proof of that. There also needs to be common ground, says one budget expert.

"I would say [a grand bargain] is unlikely because there's nothing that everyone could agree on," says Stan Collender, senior partner at Qorvis Communications and a former staffer of both the House and Senate Budget Committees. He believes that because of the gridlock on Capitol Hill, as well as between Republicans and the White House, fresh blood in Washington will be necessary to reach any lasting, long-term budget agreement.

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Even with the manufactured crisis of the debt ceiling looming again this fall, Collender thinks there is "zero chance" of any budging from either party on long-term budget measures.

"You probably won't see one until after the 2016 election," he says.

And once 2016 rolls around, one massive, long-standing budget problem will still be waiting to be solved.

"The problem is one that existed before the Great Recession – the growth of entitlement spending is slated to substantially exceed the growth of revenue," says Viard.

The latest numbers don't inspire any confidence on that note, he adds: "Nothing that we're seeing here changes that one way or the other."

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