CBO: Federal Budget Deficit to Decline through 2015, Then Rise

February 4, 2014 04:39 AM

The federal budget deficit will total $514 billion in fiscal year 2014, according to the Congressional Budget Office's (CBO) outlook for 2014 to 2024. This equates to roughly 3% of U.S. gross domestic product (GDP), which is near the average percentage of GDP for the past 40 years. This figure is also substantially below the $1.4 trillion budget deficit in 2009; the federal budget deficit has declined notably in recent years and is expected to continue its decline in the year ahead.

Looking ahead to 2015 and assuming a continuation of current laws governing federal taxes and spending remain unchanged, CBO projects the deficit will decrease again in 2015 to $478 billion, or 2.6% of GDP. Thereafter, however, CBO expects an increase in deficits -- both as a dollar amount and relative to the nation's economic output. CBO's outlook for the next 10 years calls for increases in deficits to outpace advances in economic output.

Spending is expected to rise due to "the aging of the population, the expansion of federal subsidies for health insurance, rising health care costs per beneficiary, and mounting interest costs on federal debt." Outside of these categories, however, CBO says projected federal spending is expected to drop to its lowest percentage of GDP since 1940 (the earliest year for which comparable data is reported).

Large budget deficits in recent years have "substantially" increased federal debt, according to CBO. Therefore, the amount of federal debt is now historically high relative to the size of the economy. CBO projects that the federal debt held by the public will equal 74% of GDP at the end of 2014 and 79% of GDP at the end of the projection period in 2024.

"Such large and growing federal debt could have serious negative consequences, including restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis," according to CBO analysis.

01 04 14 Federal debt held by public

CBO projects the economy will grow at a "solid" clip through 2017. Real GDP is expected to rise 3% between the fourth quarter of 2013 and the corresponding quarter of 2014, with similar growth expected over the next several years. "Nevertheless, CBO estimates that the economy will continue to have considerable unused labor and capital resources (or "slack") for the next few years," the office explains.

Therefore, CBO expects the unemployment rate will remain above 6% until late 2016. The labor force participation rate is also expected to move only slowly back toward where it would normally stand.

Past 2017, CBO projects economic growth will diminish to a pace well below the norm of the past several decades, largely due to slower growth in the labor force due to an aging population. Inflation is expected to remain at or below 2% over the next decade, while interest rates on Treasury securities are projected to rise over the next few years from their exceptionally low levels.

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