The Congressional Budget Office (CBO) projects the 2013 ”baseline” federal budget deficit will be $845 billion, $244 billion lower than in 2012 ($1.086 trillion).  If the 2013 deficit projection is achieved, it would mark the first deficit below $1 trillion since 2008.

The decline in the 2013 deficit reflects an 11 percent increase in estimated revenue (+$259 billion), while outlays are projected to rise only .4 percent (+$15 billion). 

Higher revenue from individual income taxes and social insurance taxes spurs revenue growth in 2013.  The American Taxpayer Relief Act of 2012 included higher tax rates and a new surtax on investment income for higher income taxpayers beginning in 2013.  The Act also returns the employee contribution for Social Security benefits to 6.2 percent in 2013.  The rate had been 2 percentage points lower (4.2 percent) in 2011 and 2012.

The CBO projections show 2013 total outlays ($3.553 trillion) essentially unchanged from 2012 ($3.538 trillion).  Total mandatory spending in 2013 ($2.116 trillion) is projected to rise by 4 percent (+$85 billion) over 2012.  Increased outlays for Social Security (+$36 billion) and health care ($60 billion), principally for Medicare and Medicaid, are somewhat offset by a $38 billion decrease in outlays for the Troubled Asset Relief Program (TARP) due primarily to Treasury sales of its AIG stock.

CBO projects total discretionary spending in 2013 ($1.213 trillion) will decline by $72 billion.  Automatic spending reductions from the Budget Control Act will lower federal discretionary outlays by $71 billion and spending on overseas contingencies (primarily for the war in Afghanistan) will drop by $27 billion.  On the other hand, spending related to Hurricane Sandy assistance is projected to rise by $50 billion.

The CBO report also includes deficit estimates for 2014 through 2023.  These estimates show baseline deficits declining to $430 billion 2015 and then beginning to rise again reaching almost $1 trillion in 2023 as health care costs and interest payments outpace revenue growth over the period.

The much lower deficit estimates projected by CBO may understate what actually happens to the deficit because CBO’s baseline projections assume a continuation of current law for both expenditures and revenue.  CBO cautions that its “baseline” projections are not meant to “be a forecast of budgetary outcomes.“  Rather, they “provide a neutral benchmark that policymakers use to assess the potential effects of policy changes.”

Underlying CBO’s baseline deficit projections are economic assumptions that expect the economy to make a steady recovery.  The Gross Domestic Product (GDP) is projected to grow only 1.4 percent in 2013, but by an average of 3.6 percent between 2014 and 2018 (fourth quarter to fourth quarter).  After that, growth drops to an average of 2.2 percent.  CBO expects the annual unemployment rate to average slightly less than 8 percent until 2015.  The projected unemployment rate drops to average of 6.1 percent between 2015 and 2018 and then declines to an average of 5.4 percent from 2019 to 2022.