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Deficits have been shrinking for years. The CBO says that's about to change.

CBO Director Doug Elmendorf and his office say the age of shrinking deficits is nearly over.
CBO Director Doug Elmendorf and his office say the age of shrinking deficits is nearly over.
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The federal budget deficit has been shrinking for years. But a new report from the Congressional Budget Office suggests that's about to change.

According to the CBO, the deficit will soon plateau, and then start growing. The nonpartisan office projects that the deficit in 2015 will be $468 billion, down slightly from 2014. That translates to 2.6 percent of GDP, down from 2.8 percent in 2014. The deficit will hit its smallest point relative to GDP in 2016 and 2017 — 2.5 percent of GDP — but as baby boomers retire and interest rates go up, deficits will tick back up.

deficit

(Congressional Budget Office)

And that will drive up our debt load. Debt as a share of GDP is expected go grow from 74.1 percent in 2014 to a projected 78.7 percent in 2025. And that rising federal debt, the CBO argues, could threaten economic growth in coming years.

debt

(Congressional Budget Office)

"Such large and growing federal debt would have serious negative consequences, including increasing federal spending for interest payments; restraining economic growth in the long term; giving policymakers less flexibility to respond to unexpected challenges; and eventually heightening the risk of a fiscal crisis," the report says. (However, it's worth noting that a number of economists disagree that long-term budget balance is necessary.)

The main driver of future deficits is entitlement growth. Social Security spending will be driven upward as more baby boomers retire, as will Medicare. The Affordable Care Act will increase spending on Medicaid expansion and insurance subsidies. So far, Congress has mostly tried to cut the deficit by slashing discretionary, non-entitlement programs, as with the 2013 budget sequestration. But addressing the national debt will eventually require either cutting or ensuring more tax revenue for mandatory spending, particularly healthcare spending.

Intriguingly, Obamacare is costing much less than the CBO originally estimated. Since March 2010, the office has revised its estimates of the costs of the ACA downward significantly — by 20 percent — for the five years ending in 2019.

Other takeaways from the new CBO report:

  • Revenues from individual Americans will grow in the coming years now that the economy's improving and people's incomes are growing again. But revenues from the corporate income tax are expected to fall relative to GDP.
  • But the CBO is also getting more pessimistic about economic growth. In August, it had projected that GDP growth would average 2.7 percent per year from 2014 through 2018. Now, the estimate is 2.5 percent. That means GDP will be 1 percent smaller in 2024 than previously estimated — a small percentage change, but a huge deal dollars-wise in a $17 trillion economy.
  • Worse, that worsened estimate comes because the CBO reduced its estimation of potential output — the maximum amount of growth the economy could achieve right now. One major factor in that is persistently slow productivity in the economy. That could be due to any number of things: businesses being slow to adopt new technologies is one possibility the CBO lists, along with lower spending on research and development.

Of course, these are all 10 year projections. A lot can happen in 10 years — new laws are passed, and unexpected crises or economic booms can happen. But these CBO reports do provide a basic look at where we stand and what lawmakers have to work with as they plan for the future.