Unexpected Deficit Reduction Could Stall Budget Talks

Friday, 10 May 2013 10:40 AM

By Melanie Batley

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The federal deficit is shrinking faster than expected after news Thursday that mortgage giants Fannie Mae and Freddie Mac would start repayment of their bailout loans.

An increase in tax revenues, as well as modest economic growth, is also giving government finances a boost, The Wall Street Journal reported Friday.

Fannie Mae and Freddie Mac, both of which received taxpayer aid during the financial crisis, have announced they will repay the government $59.4 billion and $7 million respectively at the end of June, according to the Journal.

Tax hikes at the beginning of the year have also brought in roughly 16 percent more in revenues. According to Congressional Budget Office projections, the deficit is $231 billion less than this time last year, buying the government more time before it hits the debt ceiling.

The news of a shrinking deficit is expected to relieve the urgency to negotiate another budget agreement by early summer, because the deadline at the end of this month for borrowing to help pay the nation's debt has now been pushed back until at least October.

"The debt ceiling is the catalyst here," Chris Krueger, a policy analyst at Guggenheim Securities, told the Journal.

"Absent a catalyst, it sure doesn't seem like anything is going to happen. You need basically a forcing mechanism. I hate to say it, but you need another fiscal cliff for action."

Sen. John McCain shares that view. The Arizona Republican said the shifting debt-ceiling deadline "may lessen the sense of urgency between now and October, but we're all aware we've got to act" eventually.

In the interim, the parties could become even more entrenched in their opposing approaches to deficit reduction.

Democrats are pushing for a slower reduction of the deficit by raising taxes and slowing the growth of entitlement benefits over decades. They also propose cancelling the sequester cuts.

Republicans, however, want to stay the course on the across-the-board cuts imposed by the sequester, and were hoping to use the debt ceiling deadline this month to force the Democrats to accept even more spending cuts without raising taxes. They also planned to work toward more fundamental changes in entitlement spending along with an overhaul to the tax system, the Journal reported.

"It would be nice to wrap [debt-ceiling talks] up before we are at the end, but I'm not holding my breath," said House Budget Committee Chairman Paul Ryan.

But the Wisconsin Republican added that he doesn't "want to draw any ridiculous lines in the sand on a timeline."

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