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Falling US deficit renews austerity or growth debate

Projections indicate the US deficit will return to its lowest level in five years during fiscal 2013
Austerity or growth? Europe's struggling economies have faced the question without fully answering it in recent years, but the United States is on track to do both.

Austerity or growth? Europe's struggling economies have faced the question without fully answering it in recent years, but the United States is on track to do both.

Projections unveiled this week by the Congressional Budget Office indicate the US deficit will shrink more than 40 percent during fiscal 2013, returning to its lowest level in five years.

The figures would likely be viewed with envy in European capitals as they reflect an outlook based on a US economy that continues to grow -- in stark contrast to a eurozone that has been in recession for six consecutive quarters.

The cocktail of US growth and a recovery in its accounts is, paradoxically, the result of endless political wrangling over the federal budget, though the improvement in the nation's prospects may also be ephemeral.

US Treasury Secretary Jacob Lew, alluding to the deep, automatic sequester cuts that began in March despite White House opposition, conceded Friday that "bad policy is driving down the deficit more quickly than anyone intended."

A for sale sign is seen in front of a home on April 29, 2013 in Miami, Florida
A for sale sign is seen in front of a home on April 29, 2013 in Miami, Florida. Austerity or growth? Europe's struggling economies have faced the question without fully answering it in recent years, but the United States is on track to do both.

The "harsh consequences," stemming from those reductions are "something we should replace with balanced spending and revenue measures over the medium and long-term," Lew told Bloomberg Television.

US tax revenues were boosted by a hike in personal tax rates in January, while public spending has been kept in check largely because of the automatic cuts that started in March, much to the chagrin of the Obama administration.

The government received a further boost in early May with the real estate lender Fannie Mae, saved from bankruptcy by a bailout in 2008, would pay back close to $60 billion to public coffers.

Barry Bosworth, a former presidential advisor and now expert on fiscal and monetary policy at the Brookings think tank in Washington, said the United States finds itself in a much better place than envisaged.

"The tax increases and the sequestration, that was a lot to absorb and there were worries that it could push the economy back down," he said, remarking that an improving private sector "will be enough to offset the fiscal restraints".

Unemployed people wait at the Cypriot government's labour office on May 14, 2013 in the Aglangia district of Nicosia
Unemployed people wait at the Cypriot government's labour office on May 14, 2013 in the Aglangia district of Nicosia. Austerity or growth?

But doubling down on cuts would backfire, according to Bosworth.

"It would a big mistake to go further, the economy was more resilient but it doesn't mean you can do that again," he said.

The epicenter of the 2008 crisis -- the US property market -- has picked up pace again, with the number of building permits for new homes surging in April to more than 35 percent more than 12 months ago.

According to Joel Naroff, president at Naroff Economic Advisors, falling deficits are good news for the US economy, especially given the perennial row between Republicans and Democrats on whether to cut or increase taxes.

"It will ease the pressure on budget cuts" which could have harmed economic recovery, Naroff said.

"A lower deficit will remove the argument that we need to cut spending further," he added.

Despite the recent good news, the US economy is not immune to catching a cold; unemployment is still high at 7.5 percent in April -- many Americans have completely given up their search for work.

The International Monetary Fund and the Federal Reserve have also cited concern at the sequester, with estimates that it could shave up to 0.5 percent off US gross domestic product this year.

"It doesn't mean that all of a sudden things are great and that the economy is doing well," said Gregory Daco, of IHS Global Insight.

"The revision is mostly due to one time events," he added.

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