Budget Office Says Obama Plan Would Cut Deficit by $1 Trillion

But the proposal, which was released just last month, has already been mostly forgotten in Washington. Senate Democrats and House Republicans have not agreed to come to the table to split the difference between their budgets, either. After two years of knock-down, drag-out fights over taxes and spending, the budget has been put on the back burner, at least for now.

In part that is because the gap between spending and revenue has started to shrink substantially, in response to earlier tax increases, spending cuts and a strengthening economy. Earlier this week, the budget office sharply cut its estimate of the current fiscal-year deficit by more than $200 billion, on higher-than-anticipated tax receipts and big payments to the Treasury from Fannie Mae and Freddie Mac, the mortgage financiers. Were Congress to do nothing and the economy avoid running into a ditch, the deficit would fall to just over 2 percent of economic output in 2015.

It is also because the series of automatic cuts, ceilings and self-imposed crises have for the most part ended. The so-called fiscal cliff was avoided when at the beginning of the year Congress managed to pass a more-moderate package of tax increases and cuts. The $85 billion in cuts to domestic and military programs known as sequestration has already hit, with lawmakers doing little to change them.

That has left nothing on the horizon to force Congress’s hand until it needs to raise the debt ceiling, a statutory borrowing limit. But because of strong tax receipts and the sequestration spending cuts, it might not need to tackle that issue until October or even later.

Separately, lawmakers and the White House have focused their attention on other priorities, particularly gun laws, immigration reform and a series of scandals. This week, for instance, it was a fracas over the revelation that Internal Revenue Service employees targeted conservative groups seeking tax-exempt status.

But some members of Congress, along with President Obama, are still vowing to tackle the country’s long-term deficits even though there is no imminent threat. Without Congressional action, the deficit, as measured as a proportion of economic output, could start rising again in the latter half of the decade, the Congressional Budget Office warned again this week. If health care spending starts rising again sharply and debt payments soar as interest rates rise, many experts fear that those costs will eventually crowd out financing for the government’s other priorities.

“It is encouraging to see that the president’s proposals would indeed begin to reduce the debt, and to lower levels than originally thought,” said Maya MacGuineas of the Committee for a Responsible Federal Budget, a budget watchdog, in a statement responding to the new budget office estimate. “Regardless, additional reforms will be needed over the long-term, especially to slow the growth of health care programs and shore up Social Security,” she said.

On some issues, Republicans and Democrats are closer than their heated rhetoric might let on. For instance, Mr. Obama included in his budget proposal cuts to Social Security and Medicare that are anathema for many Democrats, showing a willingness to spread the political pain as part of a larger budget deal in a bid to encourage Republicans to bargain. One major change would alter the calculation used to ensure that Social Security payments kept up with the pace of inflation, providing less money to seniors over time.

His proposal also includes almost $1 trillion in tax increases, by further limiting the deductions and exclusions high-income families can claim, increasing taxes on tobacco and introducing the so-called Buffett Rule, a new minimum tax on income over $1 million. Republicans have refused to consider changes to increase revenue, arguing that money raised from closing loopholes should be used to bring down overall tax rates.

Mr. Obama’s proposal would widen deficits slightly in the fiscal years 2013 through 2015, the budget office said, but trim them later on. Starting in 2014, his tax increases would lift revenue gradually from about $27 billion to $155 billion a year. Spending would increase by as much as $142 billion a year until 2018, when it would decline beneath the levels indicated by current law.

The two parties are principally at odds over priorities like infrastructure, science, agriculture and education, and on Medicaid, the health care program for the poor and disabled.

In 2023, the House Republicans plan would put the level of Social Security and Medicare spending very close to where the White House would — about 8.7 or 8.8 percent of economic output, according to an analysis by Douglas W. Elmendorf, the director of the budget office. Mr. Obama is calling for modestly smaller military spending, at 2.4 percent of economic output, compared with the House Republicans’ 2.7 percent.

The White House would spend 7.7 percent on everything else, including housing programs, unemployment insurance, Medicaid, health insurance subsidies and education. The House would spend just 5.2 percent.

The Congressional Budget Office does not analyze Congressional budget resolutions. The House and Senate budget committees put forward revenue and spending estimates of their own plans based on Congressional Budget Office data, but both plans lack a lot of detail.

When it released its plan, the Obama White House claimed that it saved $1.8 trillion over 10 years. The divergence between its estimate and the budget office’s stems from the fact that the White House assumed the $85 billion in automatic budget cuts would be repealed or replaced with a new policy. The budget office did not.

Other than that, the independent office’s assessment of how the budget proposal would affect spending and revenue differs only marginally from the White House’s own.

DealBook: Behind an Estimated $30 Trillion Drain on Banks, a Lot of Hypotheticals

Cliff Owen/Associated PressWarren E. Buffett, the chief of Berkshire Hathaway. In the face of new margin rules, the company said it won’t be entering any big new derivatives bets.

Imagine a situation in which the world’s banks have to find as much as $30 trillion to comply with just one new regulation. That might be something of a stretch, given that the gross domestic product of the United States is only $15.8 trillion, and the world’s 10 largest banks hold only $25 trillion of assets.

Yet a banking industry group recently looked into a new rule and sketched out a possibility in which banks were forced to come up with as much as $30 trillion in cash.

The potential cash call is outlined in a letter the International Swaps and Derivatives Association sent in September to regulators. It is the latest eye-popping number that lobbying firms and banks have produced to support their view that many new regulations will be enormously expensive — and the big, scary numbers seem to be gaining traction.

Some of the concern may be warranted, especially in Europe, where certain stressed banks have had trouble borrowing regular amounts in the markets. But a deeper look at the industry association’s $30 trillion figure suggests that many of the worries might be overdone.

The gargantuan sum relates to the market for derivatives, which are financial contracts that banks and investors use to bet on interest rates, stock prices, creditworthiness of corporations and the like.

Derivatives played a central role in the 2008 financial crisis. The market for many contracts was opaque, which stoked panic when certain players started to falter.

Before the financial crisis, big participants like large Wall Street banks were often able to avoid following certain rules intended to make the market safer. One of those practices involves something called initial margin. This is the cash or easy-to-sell assets that parties have to set aside at the outset of a derivatives trade. If one side can’t pay up, the other side can make a claim on the initial margin.

Now, regulators want to tighten up the margin rules. To do so, they are introducing regulations aimed at pushing derivatives trades through entities called central clearinghouses. These organizations effectively agree to pay out if one side of the original trade cannot pay.

Because of that pledge, clearinghouses have to make sure they can pay out if one party defaults. One way they do this is to demand margin from the parties that trade through them.

But a large number of derivatives trades won’t necessarily go through clearinghouses, even after the overhaul is in place. Such trades will still be done directly between two financial firms.

Regulators have proposed rules that force firms to supply initial margin on these so-called bilateral trades, too. These rules, which won’t apply to pre-existing trades, may not come into effect until late 2013 in the United States.

The International Swaps and Derivatives Association and many others want to stop or water down those margin rules on bilateral trades. In its paper, the association argued against initial margin rules, saying they were “likely to lead to a significant liquidity drain on the market, estimated to be in the region of $15.7 trillion to $29.9 trillion.” In other words, it believes there is a possibility that the rule could cost $30 trillion.

So, how likely is such a drain? A clue can be found in the $14 trillion range in the association’s estimates.

Under its lower estimate, the industry group assumes that many banks calculate their derivatives exposures in an advantageous manner sanctioned by the proposed regulations. Specifically, the rules allow banks to offset certain trades with each other. This has the effect of reducing a bank’s overall derivatives exposure for the purposes of calculating margin.

The upshot: Less margin is needed. At one stage in its analysis, the derivatives association says using this approach might reduce by half the overall amount of derivatives in the calculation.

But why wouldn’t the reduction be far more than $14 trillion, or roughly 50 percent? After all, net exposure can be reduced quite sharply by using the offsetting method. For instance, a bank may have $50 billion on trades betting that stocks go up and $49 billion on trades betting stocks go down, leading to a $1 billion net exposure for the bank.

Steven Kennedy, a spokesman for the association, says it chose 50 percent based partly on its estimates of how many firms might have the required technology to carry out offsetting. In essence, the numbers involve a lot of hypothetical assumptions.

This weakness applies to other, lower-margin estimates from opponents of the new rules.

Last year, the Office of the Comptroller of the Currency, a federal bank regulator, estimated that initial margin rules could lead to a $2 trillion burden for banks, a smaller but still alarming figure. The number was cited in several letters and studies from lawyers and lobbyists arguing against the margin rule. The comptroller listed three factors that might lead to banks posting less than $2 trillion. But, the study added, “at present, we are unable to estimate the mitigating effects of these three factors.”

Bryan Hubbard, a spokesman for the comptroller, said the paper reflected the comptroller’s best analysis at the time. He added, “The O.C.C. is likely to update the analysis when a final rule is issued.”

Other opponents of initial margin rules have been similarly vague when gauging factors that might reduce the burden. JPMorgan Chase sent a letter last year to regulators criticizing the initial margin rule, saying it might need to collect $1.4 trillion from its trading partners if it did not use the offsetting approach. The letter did say an offsetting approach might “produce smaller initial margin amounts.” Still, it didn’t specify how much smaller.

The initial-margin rules may prompt some firms to stop doing bilateral derivatives trades. Some financial companies have even started down that path.

In the face of new margin rules, Berkshire Hathaway said this year that it would not be entering any big new derivatives bets. “We shun contracts of any type that could require the instant posting of collateral,” Warren E. Buffett, the company’s chief executive, wrote in its latest annual report.

Federal Deficit for 2012 Fiscal Year Falls to $1.1 Trillion

WASHINGTON — The federal deficit fell to $1.1 trillion in the 2012 fiscal year, down from about $1.3 trillion a year earlier, the Obama administration said on Friday.

That is the smallest deficit since 2008 but represents the fourth year in a row that the deficit has exceeded $1 trillion. Before the recession, which prompted huge federal spending and large tax cuts, the deficit had never exceeded half a trillion dollars.

The gap between government receipts and government spending — about 7 percent of economic output in the 2012 fiscal year, down from 8.7 percent in the 2011 fiscal year — has become a heated election-year political issue.

Republicans have hammered the Obama administration for not doing enough to control deficits and aid growth. “We’ve had four budgets, four trillion-dollar deficits,” Representative Paul D. Ryan of Wisconsin said during the vice-presidential debate on Thursday evening. “A debt crisis is coming. We can’t keep spending and borrowing like this. We can’t keep spending money we don’t have.”

Democrats have argued that the economy needs near-term support as well as long-term deficit reduction and have cautioned that too-severe budget cuts would unravel the social safety net.

“The president has put forward a balanced proposal to further strengthen the economy and reduce the country’s future deficits,” Timothy F. Geithner, the Treasury secretary, said in a statement on Friday. “It is time for Congress to act on these necessary steps that will help create sustainable economic growth for years to come.”

Releasing budget details for the full fiscal year that ran from last October through this September, the Treasury Department and the White House budget office said that the deficit was $238 billion less than it had forecast in the February budget proposal by the White House. Over all, government outlays were $3.5 trillion in the 2012 fiscal year, and receipts totaled about $2.45 trillion.

The shrinking deficit was a result of both higher tax receipts and lower government spending. Government receipts climbed 6.4 percent year-over-year as the economy grew stronger and certain tax breaks expired. Corporate income taxes were a “major contributor” to the rise in overall receipts, the administration report said, climbing to $242 billion, from $181 billion in 2011.

Moreover, outlays dropped $61 billion year-over-year because of falling military spending on Afghanistan and Iraq, tapering stimulus spending and the strengthening economy. “The largest decreases relative to the prior year came from the Department of Defense, unemployment insurance and Medicaid,” the report said.

The report comes as members of Congress struggle with the so-called fiscal cliff — huge tax increases and across-the-board spending cuts set to hit next year that might cut the deficit in half but would also risk throwing the country into a recession.