CBO projects $170 billion decline in deficit

This chart shows federal budget deficits in terms of annual tax revenues
 and government spending as a percentage of the U.S. GDP

Talk about a mixed bag – the updated CBO Budget and Economic Outlook report that was released this morning has a little bit of everything.

Projecting out to 2024, the nonpartisan Congressional Budget Office says the economy will grow at a reasonable rate and inflation will be held in check. But the rapid decline in the federal budget deficit will come to an end and the cost of entitlement programs will put a major squeeze on the rest of the budget.

Here are a few excerpts, but for policy wonks there’s a whole lot more in the full report ...

The federal budget deficit has fallen sharply during the past few years, and it is on a path to decline further this year and next year. However, later in the coming decade, if current laws governing federal taxes and spending generally remained unchanged, revenues would grow only slightly faster than the economy and spending would increase more rapidly, according to the Congressional Budget Office's (CBO's) projections. 

Consequently, relative to the size of the economy, deficits would grow and federal debt would climb.

CBO's budget projections are built upon its economic forecast, which anticipates that the economy will grow slowly this year, on balance, and then at a faster but still moderate pace over the next few years. The gap between the nation's output and its potential (maximum sustainable) output will narrow to its historical average by the end of 2017, CBO expects, largely eliminating the underutilization of labor that currently exists. 

As the economy strengthens over the next few years, inflation is expected to remain below the Federal Reserve's goal, and interest rates on Treasury securities, which have been exceptionally low since the recession, are projected to rise considerably.

The Budget Deficit Continues to Shrink in 2014, but Federal Debt Is Still Growing

The federal budget deficit for fiscal year 2014 will amount to $506 billion, CBO estimates, roughly $170 billion lower than the shortfall recorded in 2013. At 2.9 percent of gross domestic product (GDP), this year's deficit will be much smaller than those of recent years (which reached almost 10 percent of GDP in 2009) and slightly below the average of federal deficits over the past 40 years.

However, by CBO's estimates, federal debt held by the public will reach 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.

Outlays
Spending is expected to rise by about 2 percent this year, to $3.5 trillion (see table below). Outlays for mandatory programs, which are governed by statutory criteria and not normally controlled by the annual appropriation process, are projected to rise by about 4 percent. That increase reflects growth in some of the largest programs—including a 15 percent increase in spending for Medicaid and a roughly 5 percent increase in spending for Social Security.

In contrast, CBO estimates, net spending for Medicare will increase by only 2 percent in 2014, and spending for some mandatory programs will fall; in particular, outlays for unemployment compensation are expected to drop by nearly 40 percent, primarily because the authority to pay emergency benefits expired at the end of December 2013.

Discretionary spending, which is controlled by annual appropriation acts, is anticipated to be 3 percent less in 2014 than it was in 2013. Nondefense discretionary spending is expected to be about the same this year as it was last year, but defense spending is likely to drop by about 5 percent.

… Between 2014 and 2024, annual outlays are projected to grow, on net, by $2.3 trillion, reflecting an average annual increase of 5.2 percent. Boosted by 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, spending for the three fastest-growing components of the budget accounts for 85 percent of the total projected increase in outlays over the next 10 years:

* Annual spending for Social Security is projected to grow by almost 80 percent. Under current law, outlays for that program would climb from 4.9 percent of GDP this year to 5.6 percent in 2024, according to CBO's estimates.

* Annual net outlays for the government's major health care programs (Medicare, Medicaid, the Children's Health Insurance Program, and subsidies for health insurance purchased through exchanges) are projected to rise by more than 85 percent. Outlays for those programs would grow from 4.9 percent of GDP to 5.9 percent, CBO anticipates.

* Outlays for net interest in 2024 are projected to be more than triple those in 2014 -- the result of both projected growth in federal debt and a rise in interest rates. Net interest outlays would rise from 1.3 percent of GDP this year to 3.0 percent by the end of the coming decade, CBO expects.