The federal deficit will fall again this year before taking off in the second half of the decade, Congress’ in-house budget agency projects.
The Congressional Budget Office, the official nonpartisan budget scorekeeper, said Monday in updated projections that the federal deficit will fall slightly in 2015 and 2016 to $468 billion and $467 billion, respectively, down from $483 billion officially in 2014.
But then annual budget shortfalls will begin increasing again in 2017. At that time, the government’s aggregate debt, which is already high by historical levels, also will begin increasing again as a share of the economy.
The CBO expects the debt held by the public to increase from 74 percent in 2014 to nearly 79 percent in 2025.
The budget and economic projections released Monday incorporate spending and revenue and economic data through early December. With job growth accelerating while falling oil prices boosted economic growth toward the end of the year, the CBO now sees the economy and budget healthier in the short run, but with growth slower in the longer term.
The federal government will run up debt trying to pay for the retirement of the baby boomer generation and the rising costs of federal healthcare programs, as well as the mounting expense of interest payments on the debt.
Those factors will drive up government spending from 20 percent of U.S. gross domestic product currently to 22 percent in 2025, even as spending on non-entitlement programs such as national defense and anti-poverty programs gets crammed down to the lowest levels since 1940.
Tax revenue, on the other hand, is supposed to edge up from 17.5 percent of GDP today to 18.3 percent in 2025. That increase will not be enough to keep pace with spending.
The result: The country is headed toward a fiscal reckoning beyond the 10-year budget window examined by the CBO. U.S. debt is projected to exceed the size of the economy in 25 years if current trends continue, risking the possibilities that policymakers will be forced to constrain the funding of some government programs and that investors might begin to doubt the government’s ability to repay its debts, causing interest rates to spike.
The U.S. labor market will finally recover from the cyclical downturn that began during the financial crisis by the end of 2017, the CBO expects. Then, long-term growth will level out at 2.2 percent annually, slower than in the 1980s and 1990s.
The slowing economic growth is mostly a factor of demographics, including the retirement of the Baby Boom generation but also federal policies such as taxes that discourage labor. But it also reflects productivity slowing, meaning that businesses and labor are less efficient at innovation and creating growth.
