As President Obama pointed out in his State of the Union last week, deficits have been shrinking over the last few years and will continue to be low for the next few years. But that will not last for long. The Congressional Budget Office (CBO) released its newest Budget and Economic Outlook earlier today, and projects that deficits will remain modest through 2018 but will then surge through the latter part of the decade to over $1 trillion in 2025.
In 2014, the federal government spent $483 billion more than was collected in tax revenue. That deficit, which amounts to 2.8 percent of gross domestic product (GDP), is relatively low compared to deficits that exceeded $1.4 trillion as recently as 2009. Since then, abnormally low interest rates have kept payments on our debt manageable and a rebounding economy has increased tax revenue and decreased spending on automatic fiscal stabilizers like unemployment insurance.
But these low deficits will not last forever. According to this year’s projections, which are very similar to last year’s, the budget deficit in 2015 is projected to be a relatively healthy 2.6 percent of GDP and to remain at or below that level through 2018. Starting in 2019, deficits are projected to rise as a percentage of GDP. Revenues, which are already below spending, are projected to grow more slowly than spending. Revenues are expected to rise by only 0.6 percent of GDP from 2015 to 2025, while spending is projected to increase by a full 2 percent of GDP over that same time. In 2025, the deficit is projected to be 4 percent of GDP and the national debt is projected to break $21 trillion, which is nearly 79 percent of GDP.
Though the last few years have shown a welcome and unexpected slowdown in the growth of healthcare costs, we still have a fundamental mismatch between our inefficient tax system and our expensive entitlement programs like Social Security and Medicare, which will be increasingly costly as the Baby Boomers make the switch from contributors to beneficiaries. Between 2015 and 2025, the cost of all mandatory programs, including Social Security, Medicare, and Medicaid, is projected to rise from 12.5 percent of GDP to 14.2 percent of GDP.
Thus far, Congress’s response to our fiscal problems has been the Budget Control Act of 2011 and the sequester that came with it. As BPC has repeatedly detailed, the sequester will not have a major impact on the upward march of federal debt, but will serve to imperil the nation’s defense posture and limit our economic growth. While efforts like the Murray-Ryan deal that partially alleviate the sequester’s impact are a good start, this newest CBO outlook reiterates that a plan to closer align our tax revenue and entitlement spending is what we really need as a nation.
Alex Gold served as a policy analyst for BPC’s Economic Policy Project.