The Congressional Budget Office (CBO) released an update to its annual Budget and Economic Outlook yesterday. According to CBO’s projections, deficits will continue falling for the next two years but will then begin to grow again near the end of the decade. Federal debt held by the public is expected to rise from 74 percent of gross domestic product (GDP) this year to 77 percent in 2024. As CBO’s recent Long-Term Budget Outlook demonstrated, the real concern arises in the second and third decades, when this already elevated level of debt would begin to rise at an accelerated pace as the baby boomers grow older and health care costs continue to increase. CBO projects that real GDP will increase by 1.5 percent in calendar year 2014, a significant decrease from their February projection of 3.1 percent growth.
CBO projects that federal deficits will rise from 2.9 percent of GDP ($506 billion) in 2014 to 3.6 percent of GDP ($960 billion) in 2024. Spending growth over the decade is projected to be driven by almost 80 percent growth in Social Security, growth of 85 percent on federal health spending (for Medicare, Medicaid, Children’s Health Insurance Program, and subsidies for health insurance purchased through the exchanges), and a tripling of spending on interest on the debt. Federal revenues are expected to remain relatively constant as a percentage of GDP but will increase in nominal terms as GDP grows over the ten-year window.
CBO made a downward revision to the size of the cumulative deficit (over ten years) of about 5 percent from the last estimate in April. The main reason for the lower estimate is a downward revision of interest rate projections through the decade.
CBO projects that the economy will grow relatively strongly in the next few years (at an annual average rate of 3.4 percent from 2014 to 2016) and then moderate through the latter part of the ten-year window. They project that the shortfall between actual and potential economic output will narrow from 4 percent last year to its historical average of about 0.5 percent by the end of 2017.
Alex Gold served as a policy analyst for BPC’s Economic Policy Project.