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Budget deficits shrinking but set to grow after 2015

The Congressional Budget Office said Tuesday that higher tax revenues and restrained spending will produce smaller budget deficits in the next few years, but after 2015 deficits will start rising again. That will happen because federal spending will grow more quickly than the economy will.

Unveiling the agency's annual budget and economic forecast, CBO director Douglas Elmendorf told reporters, “The projections today make clear that the fundamental challenges of the federal budget remain. The fundamental challenge is that the aging of the population and the rising cost of health care now abetted by an expansion of federal subsidies for health insurance -- those changes are putting a huge upward pressure on the cost of a handful of large federal programs.”

By 2024, the end of its ten-year forecasting period, a surge of Medicare, Medicaid and Social Security spending will push federal debt held by the public to nearly 80 percent of GDP -- “eventually increasing the risk of a fiscal crisis” in which investors would demand  higher interest payments to buy federal debt, the CBO said in its annual budget report.

For the current fiscal year, spending will grow by 2.6 percent, while tax revenues will grow more than three times faster, by about 9 percent, the budget office said.

The CBO said the deficit for the current fiscal year, FY 2014, which ends on Sept. 30, will be $514 billion, or 3 percent of the nation’s economic output, or Gross Domestic Product (GDP). That level will be close to the average for the past 40 years.

CBO’s projected deficit for FY 2014 is down from a deficit of 4.1 percent of GDP in 2013, and represents a huge improvement from the recession year of 2009, when the deficit reached 10.1 percent of GDP.

Beyond 2017, the budget office is forecasting that economic growth will be less than the average growth over the past several decades, in part due to an aging population and slow-growing labor force.