The Congressional Budget Office said Tuesday that higher tax revenues and restrained spending will produce smaller federal budget deficits in the next few years.
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 in its annual budget and economic forecast.
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.
But the CBO also warned that after 2015 deficits will start rising again because federal spending will grow more quickly than the economy will.
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.
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 report said.
The government is now benefiting from extraordinarily low interest rates which mean that only 6.5 percent of federal spending goes to paying interest on money the government has borrowed.
The improving fiscal picture in the short run is due largely to faster economic growth, the Budget Control Act of 2011, which is restraining spending, and the tax bill signed which Congress and President Barack Obama agreed to at the end of 2012, which, combined with tax increases in the 2010 health care overhaul, has led to higher tax payments, especially from upper-income people.
On the contentious issue of the effects of the Affordable Care Act, or Obamacare, the CBO estimated that Obamacare will cut the total number of hours worked by between 1.5 percent to 2 percent from 2017 to 2024.
“Workers will choose to supply less labor,” the report said, both because of new taxes imposed by the law and because of the benefits some people will receive – for example, with the expansion of Medicaid under the Affordable Care Act, millions of non-working people will get health coverage. The effect of the law will mean a decline of about 2.5 million full-time equivalent workers by 2024, the CBO estimated.