WASHINGTON -- The federal budget deficit will shrink slightly to $468 billion this year, the Congressional Budget Office said Monday, but the agency warned that the mounting level of federal debt over the next decade would mean a tripling of interest payments and new spending constraints.
The projected deficit, equivalent to 2.6 percent of the size of the economy, would be the smallest since 2007 and close to the 2.7 percent average deficit over the past 50 years.
The budget shortfall has shrunk from a record-high 9.8 percent of GDP in 2009. The budget was in surplus from 1998 to 2001.
While those deficits would remain stable through 2018, the budget office warned that they would rise after that.
Interest payments are also set to rise, both because of an expected increase in interest rates from the recent historic lows and because of increasing government debt, which the budget office said would hit 100 percent of the GDP in 25 years. The interest payments alone are expected to hit $227 billion this year, more than double to $480 billion by 2019 and more than triple to $722 billion by 2024.
"The large amount of debt might restrict policymakers' ability to use tax and spending policies to respond to unexpected future challenges, such as economic downturns or financial crises," the nonpartisan agency said.
The official scorekeeper of Congress projects solid economic growth for the next few years, with unemployment dropping slightly.
"In CBO's estimation, increases in consumer spending, business investment and residential investment will drive the economic expansion this year and over the next few years," the report states.
Meanwhile, the budget office said the cost of the Patient Protection and Affordable Care Act continued to come in substantially below the March 2010 estimates. Because the program gets more expensive over time, the 10-year cost estimates have risen. But costs compared year by year remain lower.
In March 2010, the budget office and Joint Committee on Taxation projected that the act would cost the federal government $710 billion during fiscal years 2015 through 2019. The newest projections put the cost at just $571 million over those years, about 20 percent lower than the original estimates, the budget office said in its report. The latest projections for the cost in 2019 are $132 billion, or 23 percent less than the original projection.
The budget office said the Affordable Care Act had reduced the number of uninsured people by 12 million in 2014 and would reduce the number by 19 million in 2015. It said that between 2016 and 2025, the legislation would reduce the number of uninsured by 24 million to 27 million people. That would still leave 31 million people uninsured in 2025: about 30 percent of them "unauthorized immigrants," about 10 percent in states that have chosen not to expand Medicaid coverage, 15 percent to 20 percent of whom would be eligible for Medicaid and choose not to use it, and about 40 percent to 45 percent of whom would have access to insurance but choose not to use it.
The budget office last revised its budget forecasts in August 2014, and the new figures were little changed. The agency reduced its estimates of outlays this year by $94 million, but it also lowered its estimate of revenue by $93 billion. It trimmed its projections for deficits over the next decade by $175 billion.
2015 projections
The budget office said it expects the economy to grow more rapidly than its potential, gradually eliminating slack in the economy by 2017. The budget office used data from early December and said more recent data -- lower oil prices and faster economic growth than anticipated -- would accelerate those estimates slightly.
A decline in oil prices will boost real GDP by 0.3 percent at the end of 2015, according to the report. That will help bolster consumer spending, which the budget office projects will advance 3.3 percent in 2015, more than the 2.2 percent gain in the last three months of 2014 compared with a year earlier.
Real disposable income is projected to "grow solidly" in 2015, driven by growth in employee compensation. Purchasing power will also be helped by lower energy prices, the budget office said.
The budget office projects that the economy will grow at an annual rate of 3 percent in both 2015 and 2016.
The budget office said that federal spending would rise from 20.3 percent of GDP in 2015 to 22.3 percent in 2025 largely because of the aging population and increases in Social Security and Medicare programs. By 2025, annual budget deficits could once again top $1 trillion, unless Congress acts.
At that point, Social Security benefits would account for one-quarter of all federal spending, Congressional Budget Office Director Douglas Elmendorf said.
"The underlying point is that we have a handful of very large federal programs that provide benefits to older Americans," Elmendorf said. "And with the rising number of older Americans and a rising cost of health care, those programs get much more expensive."
But the budget office also said that there would be "a significant projected decline in discretionary spending relative to the size of the economy." Unless Congress chooses to alter spending caps in current budget law, that would result in a squeeze on a variety of programs, including defense, education, homeland security and a host of other areas.
President Barack Obama inherited an economy in recession when he took office. The annual deficit topped $1 trillion for each of his first four years in office, including a record $1.4 trillion in 2009.
The federal budget deficit became a big issue during Obama's early years in office. In 2011, Obama and congressional Republicans struck a deal that resulted in significant spending cuts at many government agencies. At the start of 2013, Obama persuaded Congress to further address the deficit by raising taxes on top earners.
Declining budget deficits, however, could reduce pressure on Congress to continue addressing the government's finances.
"Over the last few years, as deficits have fallen, so too has the effectiveness of Republican rhetoric about a 'big government' boogeyman," said Sen. Charles E. Schumer, D-N.Y. "Now is the time for Republicans to join with Democrats to invest in constructive programs that help middle-class Americans climb the ladder and achieve the American dream."
Republicans, however, signaled that they aren't done cutting spending.
"Thanks to Republicans' efforts to cut spending, this year's deficit is projected to be smaller, but in order to balance the budget, we must address the true drivers of our debt," said Cory Fritz, a spokesman for House Speaker John Boehner, R-Ohio. "Real, robust economic growth won't occur until we solve our government's spending problem."
The budget office projects the jobless rate will average 5.5 percent this year, lower than the 5.9 percent projected in August. The rate fell to 5.6 percent in December, the lowest since 2008, after the best year of job growth since 1999.
"CBO's report is important, but it only tells us part of the story," said Sen. Bernie Sanders, a Vermont independent and the ranking minority-group member of the Senate Budget Committee. "What we must never forget is that tens of millions of Americans today are struggling to keep their heads above water economically while the disparity between the rich and everyone else is growing wider every day."
The budget agency bases its budget projections on current law, assuming that temporary provisions will be allowed to expire. However, many temporary laws are routinely extended, including dozens of temporary tax breaks and a provision that prevents steep cuts in Medicare payments to doctors.
Future budget deficits would be higher if those provisions are continued. For example, if dozens of temporary tax breaks are extended, they would add $1 trillion to the deficit over the next decade.
Information for this article was contributed by Steven Mufson of The Washington Post, by Jeanna Smialek of Bloomberg News and by Stephen Ohlemacher of The Associated Press
A Section on 01/27/2015