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U.S. Racks Up Smallest Deficit Since 2007

Spending Caps, Post-Recession Growth Mark Landscape as Budget Talks Approach

Rep. Brad Wenstrup (R., Ohio) said he’d like to see the deficit continue to shrink. “I want to see our country get on a course where there is a potential for a balanced budget down the road and that we don’t leave the next generation more and more debt.”

The U.S. last year racked up its smallest budget deficit since 2007, marking an economic shift of fortunes as President Barack Obama and congressional Republicans prepare to face off over legislative priorities this year.

Capped off by a $2 billion surplus in December, the government ended the calendar year with a deficit of $488 billion, $72 billion less than the 2013 tally, according to data from the U.S. Treasury. The federal government uses a fiscal year that begins in October; on that basis, the 2014 fiscal year ended in September saw a deficit of $483 billion, also the lowest of Mr. Obama’s presidency.

The government’s fiscal outlook has improved markedly since the 2007-09 recession, when government tax revenues withered as the national unemployment rate climbed toward 10%. The Obama White House responded to the economic collapse with a more-than-$800 billion stimulus package, designed to defibrillate the economy even as it added further to the deficit.

That combination of falling taxes and increased spending caused annual deficits to balloon to 10% of the economy’s gross domestic product in 2009, a level not seen since World War II.

Since that peak deficit-to-GDP ratio, repeated partisan fights over how to reduce the deficit rattled markets and led to a credit-rating downgrade in 2011. But those debates ended with measures that capped and even reduced many federal outlays.

“This hysteria and crisis that surrounded the discussion in 2010 and 2011 have thankfully dissipated,” said Joel Friedman, the vice president for fiscal policy at the Center for Budget and Policy Priorities, and a former Democratic staffer on the Senate Budget Committee. Mr. Friedman said that lawmakers have an opportunity to focus on near-term priorities such as infrastructure, education or national security, and no longer worry only about slashing spending.

The result of the twin forces of rising payroll employment and the spending caps has been a steady improvement in the country’s fiscal balance sheet. Also driving improvement has been the Federal Reserve, which stepped in with unprecedented monetary policies, holding rates near zero and launching a bond-buying program aimed at restoring economic growth.

“The improvements in the short-term deficit are positive, and importantly, reflect the improving economy,” said Maya MacGuineas, the president of the Committee for a Responsible Federal Budget. “But the longer-term debt situation remains unsustainable, and policy makers should not take the short-term respite as an excuse to hide from these issues.”

Though still large in absolute terms, government spending and deficits have both decreased dramatically since 2010 as a share of the nation’s economy. The deficit in 2014 was just under 3% of GDP, using the most recently available figures for the size of the economy. That’s below the average since the 1980s.

The recent budget numbers are among several signs of an improving economy that could boost prospects for legislative cooperation this year on trade and other fronts. The economy last year recorded its best year of job growth in 15 years, helping push government revenue above $3 trillion for the first time as more Americans with jobs lead to more revenue in income taxes.

Doug Holtz-Eakin, a former director of the Congressional Budget Office, said lawmakers should use the improvement in the deficit picture to take such steps as changing the country’s tax code and addressing spending on benefit programs that would prevent deficits from rising in the future.

“But there’s nothing driving action now. It would require a proactive approach,” Mr. Holtz-Eakin said.

The White House and Congress will face a litany of budget fights in coming months as soon as Mr. Obama submits his plans for 2016 spending. Congress must also wrestle with continued funding for the Department for Homeland Security and another vote to raise the federal debt limit. Republicans have vowed to propose a range of spending cuts in their own budget resolution this spring.

Mr. Obama met Tuesday with congressional leaders from both parties to discuss legislative priorities a week before the annual State of the Union address. While the White House and Republicans have already clashed over policy, their debates have centered on the Keystone XL pipeline, immigration policy and changes to the Affordable Care Act, not how to rein in deficits.

Though the discussion may be less heated, wrangling over deficits is unlikely to fade from Washington’s agenda. The cumulative national debt has climbed above $18 trillion, according to the Treasury.

Rep. Brad Wenstrup (R., Ohio) said he’d like to see the deficit continue to shrink. “I want to see our country get on a course where there is a potential for a balanced budget down the road and that we don’t leave the next generation more and more debt.”

Meanwhile, the nonpartisan Congressional Budget Office has projected the deficit for 2015 will narrow even further but begin widening again in 2016 due to increased spending on Social Security and health care as the U.S. population ages.

In its most recent projections, the CBO forecast that under current policies the annual deficit will climb to $960 billion in 2024. The CBO has said that “the large and increasing amount of federal debt would have serious negative consequences,” including the burden of higher interest payments, an increased risk of fiscal crisis, and a lack of flexibility for lawmakers to respond to unexpected challenges.

—Siobhan Hughes contributed to this article.

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