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CBO: Deficit will shrink to 2007 levels but then rise again soon

The U.S. deficit will shrunk to its lowest level since 2007, but it will rise again after 2018.
The U.S. Treasury on Pennsylvania Avenue in Washington, D.C. (Photo by Mandel Ngan/AFP/Getty)
The U.S. Treasury on Pennsylvania Avenue in Washington, D.C.

The U.S. deficit will fall to its lowest level since 2007, but it is expected to begin rising quickly after 2018, according to a new report from the Congressional Budget Office. 

The difference between federal spending and revenue will fall to $468 billion or 2.6% of GDP this fiscal year, which is the lowest level since 2007, the CBO says. The deficit will continue to fall slightly in 2016 and hold steady in 2017. But then it will begin rising once more, reaching 3.0% of GDP in 2019 and 4.0% in 2025.

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Federal debt is also projected to grow from 74% of GDP this year to 79% in 2025. While that's not a dramatic increase, debt is "already high by historical standards," the CBO says, noting that the debt-to-ratio was just 35% of GDP in 2007. The CBO also revised it economic forecast downward, projecting that the economy would grow an average of 2.5% per year from 2014 to 2018, 0.2 percentage points lower than its estimate in August.

A few key factors are behind the government's rising debt, the CBO says: Retiring Baby Boomers, who will drive up Medicare and Social Security costs; increasing health care costs; Obamacare's new federal subsidies for health insurance; and rising interest rates on the federal debt. The shrinking labor force also means less revenue to offset the new spending. 

If these fiscal issues remain unaddressed, they could seriously impede economic growth in the decades to come During the Obama administration, Congress and the White House struggled to come up with a "Grand Bargain" to address the country's long-term fiscal problems. Deadlocked over Republicans' refusal to raise taxes—and Democrats' refusal to cut entitlements unless they did so—lawmakers instead agreed to short-term budget cuts, imposing austerity measures that do little to rein the country's long-term debt.

Ongoing political gridlock—and an smaller short-term deficit—have lowered expectations for a long-term budget deal even further. Republicans didn't even mention the debt or deficit once in their response to the president's State of the Union address.