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Spending cuts not expected to dent $1.5 trillion deficit

The $38 billion in spending cuts agreed to last week won't prevent this year's budget deficit from setting another record high, estimated at $1.5 trillion.
/ Source: The Associated Press

The $38 billion in spending cuts agreed to last week won't prevent this year's budget deficit from setting another record high, estimated at $1.5 trillion.

Most of the agreed-to spending cuts either affect future budgets or amount to accounting gimmicks that won't reduce actual spending.

The Treasury Department reported Tuesday that the deficit already totals $829.4 billion through the first six months of the budget year — a figure that until 2009 would have been the biggest ever for an entire year. For March alone, the government ran a deficit of $188 billion.

President Barack Obama and congressional Republicans averted a government shutdown last week by agreeing to the largest-ever spending cuts for a single year. But David Wyss, chief economist at Standard & Poor's in New York, said those cuts amount to a "rounding error" in this year's deficit.

The cuts include unspent money from the 2010 census, which is completed, and $2.5 billion from the most recent repeal of highway programs that can't be spent because of restrictions set by other legislation. They also include $3.5 billion in unused bonuses for states that enroll more children in a health care program for lower-income families.

Wyss expects the deficit will surpass the record of $1.41 trillion hit in 2009. The nonpartisan Congressional Budget Office raised its estimate earlier this year from $1.1 trillion to $1.5 trillion. A tax-cut package negotiated in December by Obama and Republicans, which includes a one-year reduction in the Social Security payroll tax, prompted the CBO to raise its estimate.

The ballooning deficit is certain to give Republicans leverage in future spending debates, starting with the upcoming vote to raise the government's borrowing authority above $14.3 trillion.

The Treasury has told Congress that it must vote to raise the debt limit by summer. Without an increase, the government would not be able to meet its current debt payments, resulting in an unprecedented default on its debt.

Leverage for Republicans
Republicans hope to use vote on the debt limit to force Obama to accept long-term deficit-reduction measures. A big fight looms over the 2012 budget, which will center on House Republicans' plan to cut $5.8 trillion over 10 years by making sweeping changes to Medicare and Medicaid.

Obama is scheduled to deliver a speech Wednesday in which he will outline his own goals to achieve long-term deficit reductions.

Some analysts see the House spending plan, put forward by House Budget Chairman Paul Ryan, R-Wis., and Obama's speech as the opening salvos in a battle that will likely extend through the 2012 presidential campaign. There is little expectation that major changes in the government's entitlement programs will occur until after the upcoming election.

However, both parties will likely stake out their ground and seek to convince voters that they have the best formula for getting the country out of its current deficit malaise.

The outcome of that debate could set the country's budget course for many years to come.

"I think the debate has shifted and there is significant momentum now for making real progress in addressing our fiscal problems," said Mark Zandi, chief economist at Moody's Analytics.

Other analysts are not as optimistic that the government's deficit problems are any closer to being resolved.

"Nobody wants to face the facts," Wyss said. "We can't continue promising people more government spending than we are willing to pay for."