Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, a non-profit organization committed to analyzing and influencing fiscal policy, says the next five months are critical for budget reform.

In an interview at the Milken Institute's 2013 Global Conference, MacGuineas argues that Washington needs to replace the sequester with a bigger debt deal – one that tackles the “real problem areas of the budget” such as health care, aging and an outdated tax code. The budgets for defense and domestic spending were cut by roughly 8% in early March because of the sequestration.

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MacGuineas, a longtime deficit hawk who has excoriated both Democrats and Republicans for not coming up with viable deficit-reduction solutions, says Congress and the White House cannot squander another opportunity to solve the nation’s underlying budget issues.

“The real risk is [budget reform] won’t happen and it would be a terrible determent to the economy if we don’t put something in place this year,” she adds. “The fundamental problems are politically hard” and politicians “want to duck these problems. The political system is not healthy right now.”

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The Treasury Department reported earlier this week that it would pay down debt in the third quarter for the first time in six years. The $85 billion in sequestration cuts, the expiration of the payroll tax holiday and higher tax revenues are helping to shrink the federal budget deficit. The deficit had grown to more than $1 trillion every year between 2008 and 2012. Before the recession the deficit had never exceeded half a trillion dollars.

Economists at Goldman Sachs are forecasting that the deficit will continue to shrink over the next three years. The economics team reduced its 2013 deficit projections to $775 billion from earlier projections of $850 billion and $900 billion. By December 2014 the deficit could drop to $600 billion and $475 billion by 2015 – or about 2.7% of economic output -- according to Goldman.

In a note to clients the team wrote that “spending in the fiscal year to date is lower than a year ago and the nominal growth rate is lower than it has been in decades. Revenues have also exceeded expectations, with a 12 percent gain fiscal year to date. What is more notable is that the strength in revenues preceded the payroll tax hike at the start of the year, and the spending decline does not seem to reflect sequestration, which has just started to take effect.”