A new report from the Congressional Budget Office (CBO), released Feb. 5, reveals that the federal budget deficit is now on track to drop below $1 trillion for the first time in several years. It is expected to drop further for several more years without any additional efforts at deficit reduction. However, this drop has been bought at a significant cost, including substantially reduced economic growth and higher unemployment.

According to the report, the deficit will drop below $1 trillion to $845 billion in 2013, eventually reaching a low of $430 billion in 2015 before increasing again in the latter half of the decade. As a share of the economy, the deficit will drop from a high of 10.1 percent in 2009 to 5.3 percent in 2013 (a drop of almost half). It is projected to drop further to 2.4 percent of GDP by 2015.

This progress has come at a price. According to the report, economic growth in 2013 will be just 1.4 percent, substantially lower than the average 1.8-2.4 percent growth experienced over the past three years. This slower growth will affect unemployment, which is projected to rise back to 8 percent in 2014 before declining again.

These projections reflect several improvements in the economy, including gains in the housing sector, higher stock prices, and increased availability of credit. However, those changes have been substantially offset by contractionary budget policies.

According to the report, "CBO estimates that economic growth in 2013 would be roughly 1½ percentage points faster than the agency now projects if not for the fiscal tightening." Moreover, "Although CBO anticipates faster economic growth after this year, output is likely to remain below its potential (or maximum sustainable) level until 2017—almost a decade after the recession started in December 2007."

CBO's estimates are based on current law. According to the report, deficit reduction in the short-term will be due partly to an increase in tax revenues, both because of improvements in the economy (compared to recession levels) and because of the cancellation of Bush-era tax cuts for the wealthiest Americans, which was included in deficit reduction legislation signed into law in early January. According to the report, federal revenues will increase by roughly 25 percent between 2013 and 2015. As a share of the economy, they will rise from 15.8 percent in 2012 to 19.1 percent in 2015.

Spending, meanwhile, is projected to decline over the next several years, from 22.8 percent of GDP in 2012 to 21.5 percent by 2017, before slowly growing again. This overall number, however, masks a significant drop in discretionary spending (this covers all non-entitlement spending, including education, environmental programs, transportation, and much more). According to the report, this spending will drop steadily from 8.3 percent of the economy in 2012 to 5.5 percent by 2023, a drop of one-third. This projection assumes current law is fully implemented, including across-the-board spending cuts (called sequestration) that are slated to begin starting March 1.

These cuts in discretionary spending are offset, however, by a slight increase in entitlement spending during that same period, from 13.1 percent of GDP in 2012 to 14.1 percent by 2023, and a much larger projected increase in net interest on the debt (from 1.4 to 3.3 percent of GDP), due primarily to substantially higher projected interest rates.

Because the report shows deficits increasing again in the latter half of the decade, deficit hawks are likely to cite this report as proof that further deficit reduction is needed. But a closer examination reveals that substantial progress has already been made – and at significant cost to the nation in lost economic growth and lost jobs.

Simply put, now is not the time for more austerity. To the extent they remain problems, the federal deficit and debt are long-term problems demanding long-term solutions. Those solutions should be focused primarily on containing the rising costs of health care (in both the public and private sectors) and raising revenues to levels last seen during the Clinton years, which was the last time the federal government experienced a budget surplus.

But those solutions can wait until the economy has recovered. Moving too quickly may put our current economic recovery – already anemic – in serious jeopardy.

Image by flickr user 401(K) 2013, used under a Creative Commons license.