10/05/2011 08:24 am ET Updated Dec 05, 2011

CBO: Deficit Would Be One-Third Lower If Economy At Full Potential

By Kristina Peterson of the Wall Street Journal

The U.S. federal deficit in fiscal year 2012 would be about one-third lower if the economy were operating at its full potential, the Congressional Budget Office said in a letter to a member of the bipartisan deficit-reduction committee, released Tuesday.

The official budget score-keeper said the deficit would only be about 4% of gross domestic product, instead of CBO’s 6.2% projection for 2012, if the economy was not under-utilizing capital and labor resources, according to the letter answering a Sept. 27 request from Rep. Chris Van Hollen (D., Md.).

If the economy were stronger, incomes would be higher, sending more tax revenue to the government and unemployment would be lower, reducing the cost of some government benefits, CBO said in its letter. These “cyclical factors” contributed about $340 billion to the roughly $973 billion deficit projected for 2012, the nonpartisan agency said.

Van Hollen, the top Democrat on the House Budget Committee, is also one of 12 lawmakers on the Joint Select Committee on Deficit Reduction, which must find a way to curb the federal deficit by at least $1.2 trillion over 10 years or automatic spending cuts will be triggered.

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