The federal debt is set to explode over the next decade even as the budget deficit is projected to reach its lowest level of the Obama presidency, the Congressional Budget Office said Monday.
The annual deficit should total $468 billion for the 2015 fiscal year, which will end Sept. 30, the nonpartisan budget office said. That’s a tad better than the $483 billion in fiscal 2014, and it amounts to about 2.6 percent of the overall economy, the smallest percentage since 2007 and just a hair under the 50-year average.
The improving deficit numbers are temporary, however. Budget deficits are projected to begin going up again in 2018, and to nearly double by 2024 as retiring baby boomers strain the health and retirement systems, the economy grows more slowly and interest on the nation’s outstanding debt rises.
By 2025, the annual budget deficit is forecast to hit 4 percent of the overall economy, much higher than the 2.7 percent historical average.
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Every year’s deficit adds to the debt, which already stands at $18 trillion by one measure and which would be much higher if not for the historically low costs of borrowing, which have allowed the U.S. government to retire or roll over debt with unusually low costs. Think of it as the government refinancing existing debt.
The Federal Reserve is set this year to start gradually ratcheting up lending rates across the economy, and that will eventually translate into higher borrowing costs for the government as well. CBO Director Douglas Elmendorf cautioned in a news conference Monday that interest “payments by the government have been quite low.”
The federal government is expected to spend $277 billion on interest on the debt in the current fiscal year. That’s projected to soar to $827 billion by 2025. As a percentage of the economy, it would more than double from 1.3 percent in 2015 to 3 percent in 2025.
Simply put, it will cost the government more to borrow in coming years to pay bills already incurred. Consequently, the $13.4 trillion in debt held by the public projected for 2015, which would be akin to 74 percent of the overall economy, is projected to swell to $21.6 trillion by 2025, when it would total 79 percent of the economy. As recently as 2007, before the Great Recession, it was equal to about 35 percent of the economy.
It’s as if for every $100 you earn, you have outstanding debts equal to almost $80.
“Federal debt remains greater relative to the (overall economy) than at any time since just after World War II,” the CBO report says.
The CBO looked at federal debt held by the public, which excludes obligations under Social Security, Medicare and government pensions. When those are all factored in, it’s called gross debt and that number is now north of $18 trillion.
Particularly challenging about the costs of long-term debt and the projected return to higher deficits is that they’re driven by hard-to-cut entitlement programs for the elderly, such as Social Security and Medicare, as well as Medicaid, the state-run health program for lower-income Americans.
The past two presidents have had special commissions recommend fixes, only to be ignored by Congress and the White House.
“A debt this large doesn’t come overnight. We make promises we pay for with gimmicks and IOUs,” said Sen. Michael Enzi, R-Wyo., the new chairman of the Senate Budget Committee. “It will be a challenge, but I want to change that. The habit of spending now and paying later is deeply ingrained. As a country we aren’t paying it forward.”
The rising deficits and debt come despite what the CBO said was good budget news from the Affordable Care Act, shorthanded as Obamacare.
“We had a significant downward revision to the (projected) costs over the next decade,” said Elmendorf, the CBO chief.
Revising an earlier revision, the CBO now thinks that the cost of the health care law, for its first five years of existence, will be about 20 percent lower, or $139 billion, than anticipated in March 2010, when the act became law. Its expected costs over this period are also 7 percent lower than projected just last April.
Opponents of the health care law will surely point to the CBO’s projections of surging enrollment in Medicaid and the Children’s Health Insurance Program: 13 million to 16 million new participants per year from 2016 to 2025. The CBO also projects fewer people having employer-provided health care, and moving into self-purchased insurance or Medicaid.
The CBO report cautioned, however, that a new program by definition doesn’t have a lot of data to pull from, and the health care projections are preliminary.
The CBO now projects that in 2025 there will be 24 million to 27 million fewer uninsured Americans than there would be in the absence of the health care law. Still, roughly 1 in 9 U.S. residents under 65 would remain uninsured in that year.