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By Jason Lange and David Lawder
WASHINGTON, May 20 (Reuters) - The chances of a deal between Democratic and Republican lawmakers that would overhaul the U.S. tax system, trim government spending and reform safety net spending programs appear to be fading.
A sudden improvement in the outlook for the U.S. government deficit over the next decade has alleviated some of the pressure on lawmakers to act. And a spate of scandals, involving the Internal Revenue Service, security for the U.S. mission in Benghazi and the seizure of phone records from the Associated Press news agency, has distracted Congress and the White House.
For those who believe there needs to be radical reform to put the U.S. budget on a more balanced long-term course, or who want a simpler tax system, congressional inaction might be disheartening.
"Both sides have hardened in their positions and fiscal fatigue seems to have taken over," said Steve Bell, a Republican who is a senior director at the Bipartisan Policy Center.
The numbers "put out the fire among the hair-on-fire crowd," said Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities and former economic adviser to Democratic Vice President Joe Biden. But, he said, "the chances that this Congress does anything useful, which were already low, are even lower."
"Probably, if you're in the White House, you're more worried about the IRS," Bernstein said. Last week, media reported that the agency scrutinized conservative groups seeking tax exemptions.
The news about the shrinking deficit came Tuesday, when the Congressional Budget Office slashed its deficit forecast for 2013, projecting it will be equivalent to 4 percent of America's economic output, less than half its 2009 level, and will drop to 2.1 percent, based on current projections, by 2015.
But the report said the deficit would start widening again in 2016 and continue on an upward path with "serious negative consequences" on the economy, increasing "the risk of a fiscal crisis."
The differing reactions to the figures were telling.
"I'm gonna smile for this," White House Press Secretary Jay Carney said at his daily briefing on Wednesday by pointing to the projections for the next 10 years.
The Republican-controlled House Budget Committee, chaired by Wisconsin Representative Paul Ryan, put out a statement calling the figures "a fresh reminder of Washington's out-of-control spending," calling attention to the fact that long-term projections by the CBO remained dismal.
Lawmakers had taken notice of the shift in the fiscal dynamic before that report.
They have been doing little, for example, to bridge the gap between budgets passed in March by the Democrat-controlled Senate and the Republican-controlled House of Representatives. No conference committee has been formed to reconcile deep spending cuts in the Republican plan with nearly $1 trillion in tax hikes in the Democratic version.
Any attempt by Obama to shift attention from the controversies to getting a budget agreement may be resisted by Republicans who want to deny him a victory ahead of the 2014 congressional elections. And members of his own party argue the improving deficit outlook is a reason to reject steep spending cuts.
Obama, who made little headway in convincing his party to support cuts to future Social Security benefits, will have an harder time now, Bernstein said.
Last week, several liberal Democrats from the House of Representatives said they supported expanding the program's benefits for people with disabilities.
"We do not have to cut benefits to ensure that Social Security will be there for generations to come," said Rep. Jan Schakowski, a Democrat from Illinois.
DEBT STABILIZING OVER NEXT DECADE
The CBO report showed that government debt, which rose rapidly since 2009 and led to fears of a debt crisis overwhelming the U.S. economy, will essentially stabilize over the next 10 years.
If the United States experienced another recession, which could hit tax revenues hard, the situation could get worse.
Based on the new deficit numbers, the government will need to borrow less, pushing back the likely timeframe for a congressional fight over the government's legal limit on borrowing to as late as November.
"It's one more reason for Congress to do nothing," said Ethan Siegal, a budget analyst at The Washington Exchange, who sees some possibility of corporate tax reform.
For some, the continued budget gridlock, now less threatening, is good news. The reduction in political uncertainty in Washington has helped U.S. stock prices to reach record highs in the past few weeks.
The quick drop in the deficit "should definitely reduce people's fears of instability," said Alec Phillips, a Washington-based economist for Goldman Sachs, who tracks fiscal policy for the Wall Street bank.
"It just seems that there's less of an emergency here," said John Sides, a political scientist at George Washington University. "The deficit goes out the window relatively quickly."
But battles over the debt ceiling, while unsettling to Wall Street, have provided the impetus and crisis atmosphere that produced the tax hikes on the wealthy introduced in January, and the across-the-board budget cuts, known as the "sequester," that are being imposed now.
Those tax increases and the sequester, along with the improving housing market and economy, are largely responsible for the good news, the CBO said in its report on Tuesday.
The government received $1.6 trillion in taxes in the first four months of the year, a record high for this time period.
In March and April, when a wave of congressionally mandated budget cuts first took effect, the 12-month average of spending was lower than in the same period in 2011.
Republican deficit hawks worry that the clock will run out on the possibility of reform of so-called entitlements, like Medicare, the government health insurance program for seniors, and Social Security.
"Just because the patient is getting better for a while, doesn't mean we shouldn't act," said Representative Tom Cole, an Oklahoma Republican who sits on the House Budget and Appropriations committees.
"This is going to be much more difficult in 2014, so now seems an auspicious time to act," he said, referring to the mid-term elections. (Additional reporting by Fred Barbash; Editing by Fred Barbash, Martin Howell and Stacey Joyce)