In its annual Budget and Economic Outlook, released Jan. 26, the Congressional Budget Office (CBO) estimates that the federal budget deficit for this fiscal year will amount to $468 billion, slightly less than the deficit in 2014.
At 2.6 percent of gross domestic product (GDP), this year’s deficit is projected to be the smallest relative to the nation’s output since 2007 but close to the 2.7 percent that deficits have averaged over the past 50 years.
CBO projects the federal budget deficit, which has fallen sharply during the past few years, will hold steady relative to the size of the economy through 2018. After that, CBO projects the gap between spending and revenues will grow, further increasing federal debt relative to the size of the economy, which CBO notes is already historically high. The deficit in 2025 is projected to be $1.1 trillion, or 4.0 percent of GDP.
The report projects that spending will rise from a little more than 20 percent of GDP this year, about the average over the past 50 years, to slightly more than 22 percent in 2025. Four key factors underlie this increase:
The retirement of the baby-boom generation;
The expansion of federal subsidies for health insurance;
Increasing health care costs per beneficiary; and
Rising interest rates on federal debt.
Consequently, under current law, spending will grow faster than the economy for Social Security; the major health care programs, including Medicare, Medicaid, and subsidies offered through insurance exchanges; and net interest costs.
CBO expects that federal debt held by the public will amount to 74 percent of GDP at the end of this fiscal year, more than twice what it was at the end of 2007 and higher than in any year since 1950. By 2025, CBO projects the federal debt to rise to nearly 79 percent of GDP.
The current 10-year projections do not significantly change the long-term budget outlook. When CBO issued long-term budget projections in July 2014, it estimated that, under current law, debt would exceed 100 percent of GDP 25 years from now and would continue on an upward trajectory thereafter, a trend that could not be sustained.
CBO cautions that 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.